The current US economy presents a typical dichotomy of "strong macroeconomic data but extremely poor consumer sentiment," with many key indicators continuing to weaken, forming the core pressure base of this cycle. On the inflation front, the US CPI rose 3.4% year-on-year in August, a slower pace of decline than market expectations. The year-on-year price increase has exceeded the growth rate of hourly wages for five consecutive months, indicating a continued shrinking of consumer purchasing power. The University of Michigan Consumer Sentiment Index, released simultaneously, plummeted, rapidly escalating market concerns about economic slowdown and sticky inflation. Despite strong performance in employment, overall economic growth, and the AI industry, these factors have failed to offset the negative sentiment on the consumer front. On the energy front, geopolitical shocks have further worsened the inflationary environment. Escalating tensions between the US and Iran pushed Brent crude oil prices to $110 per barrel, the average price of gasoline across the US approached $4.3 per gallon, and diesel prices broke through $6 per gallon, reaching a record high. This directly increased costs in logistics, transportation, and the physical supply chain, creating imported inflationary pressure. Inflationary pressures are forcing interest rates and the bond market to tighten further, creating a chain of negative feedback. The Federal Reserve's benchmark interest rate is currently maintained in the 3.25%-3.75% range, and the market's probability of a rate hike this week has risen to 88%. The 10-year Treasury yield has broken through 4.9%, reaching a new high since 2023. The rise in long-term interest rates has directly driven the 30-year mortgage rate to 6.8%, a 15-month high, and institutions predict it is highly likely to exceed 7% this year, with housing cost pressures continuing to climb. Coupled with the US federal debt exceeding $40 trillion, the pressure of debt payments is surging. Treasury Secretary Bessenter's bond repurchase operations to stabilize the market have had little effect, and the pressure from the bond market continues to be transmitted to the capital market and households.

Economic fundamentals constrain the midterm elections: Republicans face natural headwinds in the polls.

The combination of high inflation, high oil prices, high mortgage rates, and low consumer confidence has become the core negative factor constraining the Republican Party in the midterm elections, completely reversing its economic advantage. Voters' primary criteria for voting are the cost of living and affordability, not macroeconomic data. The continuously rising daily expenses have significantly weakened public approval of the current governing team. From an election fundamentals perspective, the Republicans face immense pressure to defend their seats. All 435 seats in the House of Representatives are up for re-election, leaving the Republicans with only a narrow majority and extremely little room for error—these are the seats the Republicans most desperately need to win. In the Senate, 35 seats are up for re-election, of which the Republicans need to defend 22, exposing a high proportion of seats to election fluctuations. Current market pricing fully reflects the economic headwinds: the Democrats have an 86% probability of winning the House and a 48% probability of winning the Senate. High inflation and pressure on people's livelihoods are the biggest electoral constraints that the Republicans will find difficult to overcome in this round.

The core importance of the midterm elections: determining the landscape of US policy and industry regulation over the next two years.

This November midterm election is a crucial policy watershed for Trump's remaining term. Control of Congress will directly determine the direction of legislation, regulation, and investigative powers over the next two years, impacting all aspects of government, business, technology, finance, and fiscal policy. If the Democrats win either the Senate or the House, all of Trump's subsequent legislative agendas will essentially stall. If they win both houses, large-scale special investigations will be launched into Trump's family businesses, leading technology institutions, and large financial institutions, significantly increasing industry regulatory uncertainty and affecting the core interests of various groups. At the industry level, the policy game in two capital-intensive sectors is highly dependent on the election results. In the technology sector, billions of dollars have been used for lobbying to push for industry-friendly legislation and relaxed compliance constraints. This sector is highly aligned with the Republican camp; if the Democrats control Congress, the industry's policy benefits will quickly fade, and expectations of tighter regulation will rise. While the AI sector has invested heavily in the election, data center expansion continues to face resistance from voters of both parties and local governments, and a trend towards strong regulation in the medium to long term has gradually been established. In addition, the Republican fiscal hawks have significantly weakened, and both parties have avoided the thorny issue of debt reform, further solidifying the high debt situation in the United States. At the same time, the rapid rise of the Democratic Party's left wing, with the primary winners advocating for high taxes and strong corporate regulation, will pave the way for the 2028 presidential election and introduce variables into the long-term policy environment.

Authorities' efforts to maintain stability and mitigate risks: Trump's team proactively addresses the economic and election dilemmas.

To counter the electoral pressures from high inflation and interest rates, and to stabilize public opinion and economic expectations, the Trump team implemented multiple measures to proactively break the deadlock. On the macro level of interest rates, they continued to publicly pressure the Federal Reserve to significantly cut interest rates, countering market expectations of rate hikes and attempting to reduce household credit and housing costs. On the energy front, they actively mediated the Middle East geopolitical situation, attempting to stabilize crude oil and refined oil prices and alleviate the pain points of inflation affecting people's livelihoods. On the campaign front, to win back swing voters and retain a majority in Congress, Trump made a significant promise: if the Republicans successfully retain control of both the House and Senate, they would provide a $5,000 cash subsidy to all American citizens, directly addressing public anxiety about the cost of living through this beneficial policy. On the fiscal front, Treasury Secretary Bessant continued to push forward with Treasury bond repurchase operations, attempting to lower long-term yields and alleviate the pressure on US Treasury bonds and debt. Overall, these measures all revolved around "stabilizing inflation, stabilizing interest rates, stabilizing public opinion, and securing the election," but constrained by geopolitical conflicts and the stickiness of inflation, the room for substantial short-term improvement is limited.

Key areas of focus for investors: closely monitoring marginal changes in the election and evolving policy expectations.

The economic, policy, and regulatory expectations triggered by the midterm elections will continue to dominate asset pricing. Investors need to focus on core marginal variables, avoid short-term disturbances, and grasp trend changes. First, continuously track economic data such as CPI, Michigan consumer confidence, and oil and gas prices, as data fluctuations will directly rewrite election probabilities and simultaneously affect the trends of US Treasury bonds, gold, and commodities. Next, closely monitor the Federal Reserve's interest rate decision and the effects of US Treasury bond repurchase agreements, as interest rate expectations are a core pricing factor for growth assets, gold, and real estate-related assets. Overall, observations suggest that this round of midterm elections involves numerous interest groups, and at a crucial juncture with the rapid development of AI and Trump's own industries in the US, understanding the intentions and direction of large funds and national will will be a crucial anchor for constructing investment strategies.