Top of the Morning: Election Watch 2026 - Something old, something new
The desk interprets the discussion by UBS on key electoral issues as a significant signal for fiscal and regulatory policy trajectories that could impact FX markets. Per the full note , the juxtaposition of traditional concerns like Social Security with emergent topics such as Artificial Intelligence reveals underlying voter sentiment that may drive policy decisions in 2025 with substantial implications for economic stability. These concerns could lead to volatility in government policies affecting currency valuations, particularly if major shifts occur in capital allocation or regulatory frameworks. Additionally, the themes outlined indicate a potential need for traders to recalibrate expectations around the US dollar as the political landscape evolves leading into the mid-term elections.
What the desk is arguing
The UBS commentary highlights how two pivotal issues—Social Security and Artificial Intelligence—can shape electoral dynamics, which in turn may influence economic policy and ultimately FX markets. Concerns about the sustainability of financial systems, including Social Security, are intertwined with the uncharted territories posed by advancements in AI. This scenario provides a backdrop for traders to re-evaluate risks and opportunities in a changing political environment.
Historically, shifts in public policy, particularly around entitlement programs, can evoke substantial market reactions. The desk expects that such legislative debates could stir investor sentiment and dollar dynamics as they may precede significant shifts in fiscal policy indices. Particularly, fluctuations in capital investment trends could emerge depending on how candidates position their platforms on these issues.
Where it sits in our coverage
The current consensus target for the USD/EUR pair sits at 1.075, reflecting moderate growth expectations amid political transformations. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Given the backdrop of increasing fiscal discourse, the desk's interpretation aligns closely with jpmorgan's bullish outlook, while diverging from bofa's more subdued target, suggesting a potential upward pressure on the USD under favorable political outcomes.
How other firms see it
Overall, jpmorgan appears aligned with our view, emphasizing a stronger dollar narrative, while bofa presents a contrary stance that posits potential downside risks against the dollar stemming from fiscal policy concerns. The evaluation of Social Security and AI initiatives could set the tone for how these positions evolve leading into the midterms.
Additionally, implications observed in pairs like USD/JPY may reflect cross-border capital flows influenced by these imminent discussions surrounding policy adjustments that could reshape trade dynamics. Observing the interplay between fiscal policies resulting from these electoral issues will be critical for understanding market movements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Key voter issues include Social Security stability and emerging AI policies.
- 02Concerns may lead to volatility in USD positioning as mid-term elections approach.
- 03Market reactions historically correlate with shifts in public policy and entitlement programs.
- 04Debates over fiscal policy could reshape trader sentiment and dollar valuation.
Market implications
Watch for USD strength if Social Security reforms align with favorable regulatory interpretations of AI. Key levels to monitor will include the USD/EUR pair around the consensus target of 1.075 to gauge investor sentiment against evolving political agendas.
Risks to this view
A marked shift in voter sentiment or unexpected policy outcomes could invalidate this outlook, especially if AI regulations lead to unforeseen economic strains or if Social Security reforms face significant pushback, which could weaken the dollar significantly.
Hi everyone, Dan Cassidy here, welcome back to Top of the Morning on the UBS Market Moves podcast channel. Election Day is just under two months away and there is a variety of policy issues top of mind for voters. On today's episode, my guests reference the latest Election Watch publication and discuss the two most consequential policy questions for this election cycle.
Joining me here today, glad to welcome back Kurt Reiman, Head of Fixed Income Americas from the UBS Chief Investment Office within UBS FSI, as well as Shane Lieberman, Senior Governmental Affairs Advisor from Governmental Affairs U.S. here at UBS. Kurt, Shane, it's great to be back with you both. As we are speaking here on Tuesday, September 8th, we are getting closer and closer to Election Day and there is much to talk about, including the top of mind policy questions that we will be covering on today's episode.
So let's get right into it. Kurt, the opening letter of the latest Election Watch publication is titled Something Old, Something New, which does evoke a familiar wedding tradition and also describes two of the most consequential policy questions for this election cycle. Kurt, can you provide our listeners with some context behind that title meaning and these two questions?
What policy items are indeed top of mind for voters as we quickly head toward Election Day? Yeah, we probably could have used the whole thing, Something Old, Something New, Something Borrowed, maybe even Something Blue. But we stuck with the first two just to keep it simple.
It captures the two very different policy challenges that are at the heart of this election watch and likely also the policy debate from not just the midterms but through even the next presidential election. Those two are social security and artificial intelligence. So the Something Old, it's obviously social security.
It celebrated its 90th anniversary last year and it remains the country's largest entitlement program. It's more than $1.5 trillion in annual outlays, which is over one-fifth of federal spending. It's central to household finances.
Nearly two-thirds of retirees rely on it as a major – they call it a major source of income. But the program's trust fund is projected to be depleted in 2032, which is the – that's the timeline for the senators that will take office in the next Congress in January. So without legislative action, the incoming revenue would cover only about 78 percent of scheduled benefits and that means a 22 percent reduction in benefits.
That's if nothing is done. So policymakers are facing an increasingly urgent, politically difficult choice of either raising taxes, reducing benefits, borrowing more or some combination of those three. Something new is AI and that's about AI investment right now.
I mean it's already adding about a half a percentage point to US economic activity. But while that may be good, public concern is rising around job displacement, cybersecurity risks, data use, the electricity demand and the impact that might have on household electricity prices and more broadly, the local impact of data centers. We've done some work on this separately, but that work informed this section, but it's much broader.
It's not just about data centers. The challenge though, it's how do you address the risks around AI without undermining America's leadership position in this really strategically important technology? So these issues are top of mind and it's not because they're identical but because both expose the same political tension.
Politicians broadly agree that there's a problem, but the parties disagree over who should bear the costs and how government should respond. And with narrow majorities and likely divided government, progress on either issue is going to require a bit of a political marriage. We'll see if that comes to fruition.
Yeah. You know, bipartisan concerns are going to have to be matched with bipartisan compromise. So we'll see where we get.
Well, Kurt, from hearing that, these policy issues, very complex and seem to require bipartisan cooperation in order to address. Let's dive into these policy questions one by one, perhaps beginning with social security. Shane, social security approaching insolvency does illustrate the difficulty of turning broad support into agreement on how to pay for the program.
Kurt did point out a moment ago how social security will be insolvent comes 2032. So when you think about social security reform, Shane, what do Republican and Democrat approaches to a solution look like? That's right.
Social security is starting to really come into focus. And what I mean by that is, you know, I've been in Washington now for 25 years and it was something over the horizon, you know, during that time. You know, it was something that lawmakers knew would have to be dealt with eventually.
But it was always far enough away that, you know, wasn't prime time yet for them to start a real serious conversation about it. And now we have the annual trustees report that says that social security will become insolvent at the end of 2032. So you're now seeing it come into focus.
Think of it from just this simple way, which is senators that are elected this November will likely be here for that moment when social security is reformed or, you know, something happens to it to sustain it for the next generation. Right. So it is becoming a higher profile issue and with more serious conversations.
I think what you're starting to see, obviously, some of the old politics of, you know, Republicans going one way and Democrats go another way. But you're also seeing some kind of earnest conversations about, well, how should we do this? You know, it's probably going to be bipartisan at the end of the day because no one's probably going to have that super majority in the Senate.
So you're seeing even simple conversations like in the early 80s when social security was reformed, it was done by a commission and then Congress voted on that commission's suggestions. And that commission was chaired by Alan Greenspan, so it's known as the Greenspan Commission. So you're seeing some members stand up now and say, hey, we're six years away.
It's now time to actually have a commission in place and start thinking about different ways we can attack this problem. There are other lawmakers that say, hey, we were allowed to do this ourselves. Let's start having the conversation.
And you're starting to see some softening of positions. You know, there was one Republican senator from Ohio, Bernie Moreno, who has come out against increasing the minimum age to collect social security. You know, Republicans have generally been open to that.
He has come out as a hard no. He's also spoken in support of raising taxes on upper income earners who are cut off at a certain point from paying the payroll taxes that fund social security. So he is kind of leading the way of starting to soften so, you know, others can hopefully join in and have more serious conversations about how to save social security.
But I think what you're seeing in general is, you know, there are only a few different options, right? Increased revenue into the program, so higher taxes. benefits structure, which may, you know, mean changes and reduce benefits or even higher benefits. I think that we generally believe that the way this would play out is that any changes in benefits would not be for those who are already receiving social security, would probably be for future generations.
And that way it would be a little bit smoother transition. But it's six years away, so we'll see how this all plays out. You know, it is remarkable now to see more serious conversations on social security start to happen.
Can I add just a point on this, which is really essential to the whole current environment with the fixed income market bond yields rising and part of it over concerns of US fiscal sustainability. And there seems to be this idea that Congress is not going to act unless the bond market sends a signal and tells it to do something. And so that leaves everyone with this feeling of there's paralysis.
And Shane's point, which I think is really critical, is there's a deadline and members of Congress, legislators, are already talking about ways to fix social security. And by the way, social security is one of those programs, a pretty big one, that's adding to the deficit. So if they can sort out the fiscal concerns around social security, they're making a big step towards achieving something better on the fiscal sustainability front.
So I don't think we should all just assume that as bond market participants that we should throw up our hands and say nothing's going to get done until the 30 year is, you know, over 7%. So, yeah, this is, I think, a really critical piece that Shane lays out here. Clearly, Kurt, from hearing that widespread concerns on a matter that transcends partisanship seems to require a bipartisan solution.
And that holds true as well for concerns mounting over artificial intelligence and data center development. Kurt, what factors are driving these concerns? A few moments ago, you had mentioned job displacement, cybersecurity among those on the list.
So how would a Republican and Democrat response to these concerns at the federal level differ? The concerns are clearly bipartisan, yet there will probably be a red versus blue debate. But a clean Republican versus Democratic policy divide hasn't really emerged yet.
Just like social security, it may take a presidential campaign to force the parties to define their competing approaches, especially under divided government and narrow congressional majorities. The broader point is that setting policy is about tradeoffs. Governors have to weigh economic growth against safety, U.S. leadership against international cooperation, speed of the economy against oversight, and national benefits against costs that are borne by workers and communities.
This is not the first time Americans have feared a transformational technology, as you and I have discussed all during our conversation about 250 years of U.S. innovation. The early critics of the railroad were worried that if you traveled by train at 20 to 50 miles an hour, you could liquefy your insides. That fear was clearly exaggerated.
But other concerns surrounding aviation, electrification, the assembly line proved more grounded because those technologies expanded the reach of war, surveillance, and coercion. A more useful precedent actually here is if you think back to the recombinant DNA story, you'll remember that we talked about how in the 1970s, scientists paused long enough to establish safety protocols. So AI may be different because some of the strongest warnings are coming from the industry's own leaders, and public concern is rapidly rising.
Just look at some of the surveys. 55% of young adults said they were more concerned than excited about AI in June of this year. That's up from 29% in 2022. And the issue is local around data centers. 41% of Americans opposed to a data center within three miles of their home in July, and that's up from just 28% six months before.
That's a pretty quick deterioration in support. So people are worried. They're worried about job displacement, data misuse, cyber attacks, advanced models that are bypassing safeguards.
Data centers are the representation, the tangible representation of the cost of AI, whether it's maybe it's concerns about land use or water use, construction, upper pressure on electricity bills, the incentives that local governments are providing to these large companies that are siting there. But there's another side to the trade-off. AI investment is adding half a point, we estimate, to US economic growth over the past year because of this build-out.
And there is the potential for productivity gains, advances in medicine, and other scientific research. So it's not all downside. There are potential upsides.
The policy challenge is not simply whether to regulate AI. It's how to manage the risks without undermining what is now a strategically important source of innovation in US competitiveness. The way I think about this challenge is through three lenses.
It's international, federal, and then local. Because all of these jurisdictions will matter. Think about it from the international point of view.
The US has to balance preserving its lead technologically over China against cooperating with China to limit catastrophic risk. Think about it. On the one hand, we could restrict access to advanced chips and frontier models to support our leadership, but then that might complicate the efforts that the two countries might want to make to have an interest in safeguards around cybersecurity or biotech or military capabilities or even just social stability.
So that's the international context. Federally, the trade-off is between the conditions that we're creating for AI development, the power it needs, the capacity of compute, the chips, the permitting, the grid upgrades, and so on, and managing safety, employment concerns, the security risks that are involved. There's going to be a partisan debate, clearly, over the appropriate response.
But the priorities and the positions might not crystallize until we have a presidential campaign in 2028 to bring these trade-offs into closer focus. And then divided government makes this comprehensive solution more difficult. AI cuts across national security, labor, energy, fraud, civil rights, and so the responsibility doesn't sit in one clean agency or congressional committee.
And then the near-term result may end up being that here federally, we have a patchwork of guidance at the executive branch, some state regulations, local rules on data centers, maybe narrow federal legislation. So we'll have to see how this builds out. But there's a domestic groundswell of interest in regulation.
And it comes from whether you trust AI or whether you don't trust AI. It's from both sides. And then locally, we've talked about this, you and I, together with our colleagues, about data centers.
You're seeing the state reaction, New York, Pennsylvania, recently Texas. And it might take a catalyst here to accelerate regulation at the federal level. We'll just have to see how quickly that comes about.
We're already seeing it at the local level. Our conclusion was that the data centers will be built just where and under what terms we'll have to change. So the takeaway, the conclusion from all of this is it's a powerful structural opportunity in AI.
But as investors, we don't want to have narrow exposure to just a select group of beneficiaries. We want to think about the infrastructure layer. That's going to be important.
But also those companies that are using it to advance productivity. And we have to be mindful that what's been a pretty open, wild west of development may face some regulatory headwinds in the coming years. Well, definitely more to come.
And the conversation will continue. And with that, I do want to point you, our listeners, to the website ubs.com slash election watch for investment insights on the U.S. midterm elections, including reports, podcasts, and videos. UBS Studios does produce the award-winning Road to the Midterm Election video series.
Recent episodes can be found on ubs.com slash election watch. Though, Kurt, Shane, as we look ahead over the next couple of months, what kind of coverage can our listeners and clients look forward to, including the focus of the upcoming edition of the Election Watch publication series? We will have a regular Road to the Midterm Elections video series that Anthony and the studios of which you're a part will be huge contributors to that.
And they've organized a slate of speakers, both from UBS as well as our partners, to come in and offer their perspective on the midterm. And that's an award-winning series. So tune in and check it out.
There's one more report in the series in mid-October. And it's sort of like this one, where we're sort of contrasting, right? So something old, something new.
The next one will be a contrast in global versus local. I'll share the global perspective. And then Shane can offer what we're going to touch on locally.
But the global piece is really postcards from abroad. We have a network of CIOs, strategists, economists, and thinkers who are very interested in what's happening in the U.S. And we're inviting them to share from their perspective how the U.S.'s development, what divided government, U.S. foreign policy, changes around the margin will affect what's happening in their region and why they think it's important.
And then there's the local piece. Over to you, Shane. SHANE SOUTHWICK Yeah, no, thank you, Kurt.
You know, there will be thousands of elections for state legislature seats, and 36 governor mansions are up for this election. While I could probably talk about Washington, D.C. all day, we can't only focus on Washington. We have to look at what's happening in the 50 states and start thinking about how those elections will impact some of these important policies that will have a real-world impact on different sectors of the economy, whether it be energy, AI, or other.
You know, you have to keep your eye on the ball, and that includes watching these local and state races. And so I think it's really important to take a moment and look at that as well. And I think that will be one of the goals.
CONSUELO MACK Well, Shane, Kurt, it was great catching up with you both, and do look forward to having follow-up conversations here on Top of the Morning, as well as with you, Shane, on the Washington Weekly Podcast series in the weeks ahead as we get closer to Election Day. Again, today we've been joined by Kurt Reiman, Head of Fixed Income Americas from the UBS Chief Investment Office, as well as Shane Lieberman, Senior Governmental Affairs Advisor from Governmental Affairs U.S. here at UBS. Again, I do want to promote the website, UBS.com slash Election Watch, for investment insights on the U.S. midterm elections.
Again, this includes reports, podcasts, and videos, including the report we've been referencing on today's episode from UBS Studios on Dan Cassidy. Thank you for joining us. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management.
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