Did you know that since 2000, Mexico's economy has shifted from being oil-dependent to relying more on manufacturing exports, particularly due to nearshoring?

Diversification in industries can strengthen an economy, but political upheaval can still pose a risk for investors.

Here’s what we’ll cover in today’s edition:

• Why You Can Have Rate Cuts and Strong Earnings Growth: First, we’ll be challenging outdated economic assumptions 💰

• Mexico Pushes Through Judicial Reform—More Bad News for Mexican Stocks Could Be Coming: Next, political uncertainty in Mexico is shaking investor confidence as sweeping reforms threaten economic stability 📉

• Elections Matter: Finally, a reminder of something that should never be forgotten 🗳️

Stay informed and ready to act in today’s market conditions. Let’s go!

Why You Can have Rate Cuts And Strong Earnings Growth 💰

There is a lead article in Barrons this week that quotes Wall Street Equity Strategists who argue that it's unlikely that the Fed will be able to cut interest rates aggressively while corporate America is posting strong earnings.

According to these strategists, only if the economy is weak, the Fed will be able to reduce interest rates, and if the economy is weak, corporate earnings will also be weak.

And if corporate earnings are strong, then the economy will be strong, which would prevent the Fed from cutting interest rates very much.

These ideas are outdated and do not at all reflect what we’ve experienced since the mid-1990s ❌

A credible Fed is able to keep inflation at 2% while the economy is running at potential.

This is especially true in the context of high productivity growth, which allows wages to be strong without spilling over into high inflation.

The Fed will be cutting interest rates and corporate earnings growth will be strong after all 💪

Mexico Pushes Through Judicial Reform—More Bad News For Mexican Stocks Could Be Coming 📉

Investors were worried after Claudia Sheinbaum won June’s Mexican presidential election by a landslide—and now those concerns are bearing out as Andrés Manuel López Obrador (AMLO), Sheinbaum’s mentor and the outgoing president, pushes through controversial constitutional changes.

Mexico’s legislature passed a constitutional amendment allowing for the replacement of all federal judges.

The judicial system overhaul drew protesters who stormed the Mexican Senate and is likely to further rattle investors and companies looking to Mexico as an alternative to China ✊

AMLO is taking advantage of the supermajority that the Morena Party won in June, using the transition between Congress getting sworn in this month and Sheinbaum’s inauguration in October to push through a series of changes he was unable to achieve earlier in his term because he lacked a supermajority.

Sheinbaum has supported the judicial overhaul as a tool to fight corruption, telling investors they have nothing to worry about.

Mexico’s ETF, EWW, is down 24% this year.

Even with some bad news reflected in the market, more risk lies ahead 😨

There are roughly 20 constitutional amendments up for consideration in Congress, mostly around reforms to overhaul the welfare system and shore up social security, which could put mandatory minimum wage hikes to keep pace with inflation and free universal healthcare into the constitution.

These reforms threaten the economy, potentially entrenching inflation and taking a toll on Mexico’s fiscal health when finances are already under pressure.

Even worse, checks and balances on presidential power are quickly being eroded.

This raises major questions about the positive case for Mexico that had drawn investors to the country in the last couple of years, as foreign direct investment flooded in 💼

Mexico has become a destination for companies trying to diversify their supply chains away from China, or “nearshoring.”

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Elections Matter 🗳️

The developments in Mexico detailed in the story above should remind global investors that elections matter.

Tampering with the process of the US Supreme Court, as advocated by many in the Democratic party and the sitting president himself, would dramatically weaken checks on presidential power, and such attempts should be avoided.

Voters beware 👀

Inner Circle Global Macro Update 🔍

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