Thomas Costerg, Senior US Economist Pictet Wealth Management.

1. Current polling suggests the Democratic party could lose its House of Representatives majority in Congress in the November mid-term elections.
2. High inflation is a millstone around the neck of Democrats, especially as incomes have not caught up with price increases.
3. A gridlocked Congress could complicate policy responses and delay much-needed support in the case of a hard recession (not our main scenario).
4. The elevated political polarisation in the US could mean more battles around debt-ceiling deadlines and federal budget rollovers if the Republicans re-take the House.
5. The Federal Reserve is likely to keep tightening monetary policy after the midterms as it continues to focus on stubborn core CPI inflation and resilient employment growth. The risk of a policy error is high given the lagged effect of interest-rate increases on GDP growth as well as the evaporation of market liquidity due, in part, to quantitative tightening (QT).
6. Historically, equity markets tend to see a midterm boost after the elections. But this effect fades if one looks in isolation at election periods when the Fed is in rate-hiking mode.