by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with the latest escalation in US-China trade tensions. We then analyze shifting monetary policy expectations and the market’s growing conviction for an imminent rate cut. Our coverage continues with an examination of sustained AI infrastructure investment, potential regulatory moves against AI chatbots, and emerging signals that Putin may be facing pressure to end the war in Ukraine. We also provide a summary of key economic indicators from the US and global markets.

US-China Trade Tensions: In another tit-for-tat move, the United States has threatened to ban all imports of Chinese cooking oil in response to China’s pause of US soybean purchases — an act the White House has described as “economically hostile.” This escalation underscores heightened trade tensions as both sides position themselves ahead of the upcoming Asia-Pacific Economic Cooperation (APEC) summit, scheduled for October 31 to November 1. The White House has expressed uncertainty about its attendance, further complicating the prospect for dialogue.

• The market’s attention on US-China trade negotiations is intensely focused on the technology sector, which faces a dual vulnerability: deep supply chain reliance on China for production and China’s critical importance as a foreign sales market. This dependence on both the supply and demand sides exacerbates the risk during trade conflicts, despite companies increasingly taking steps to diversify their manufacturing and sourcing away from China.
• The escalating trade and technological conflict between the US and China, which has been underscored by disputes over rare earth minerals, export restrictions, and critical maritime shipping, is forcing a dramatic expansion in the scope of their bilateral discussions. Consequently, these high-stakes negotiations are now inevitably dominated by core geopolitical flashpoints, including the rising military tensions in the Taiwan Strait and Beijing’s sustained strategic support for Russia amidst the ongoing Ukraine conflict.
• While tensions are escalating between the two sides, we remain optimistic that there will be a grand bargain of sorts. In our view, a larger deal will likely include some form of Chinese investment in US manufacturing and purchases of US agricultural products, in exchange for more favorable trade terms and more access to US technology.

Powell Opens the Door? Federal Reserve Chair Jerome Powell has signaled a potential interest rate cut as early at the next FOMC meeting this month, citing a notable cooling in the labor market. In a speech to the National Association for Business Economics, he indicated that the ongoing decline in job openings could foreshadow a rise in unemployment. These remarks suggest that the Fed, despite navigating with limited recent data, may be shifting its priority toward upholding the maximum employment side of its dual mandate, even as concerns about price stability persist.

• With the government’s official jobs report delayed or unavailable, private data validates Federal Reserve concerns over the weakening labor market. The latest ADP National Employment Report for September showed that private employers cut 32,000 jobs, marking the sharpest decline in months. This deceleration is mirrored by surveys of consumer sentiment from the University of Michigan and the Conference Board, which show that households remain pessimistic about their job prospects.
• That said, inflation is also likely to be a key topic, as several FOMC members have signaled concern over recent increases. Over the last two weeks, both Dallas Fed President Lorie Logan and Fed Governor Michael Barr have emphasized that inflation remains a top priority. Consequently, the upcoming September CPI report, scheduled for release on October 24, will be critical in shaping their perspective.
• So far, momentum appears to be building for another rate cut at the October 28-29 FOMC meeting, driven by growing concern among Fed officials about the labor market. We anticipate a 25bps cut, after which the Fed will likely adopt a “wait-and-see” stance. While market pricing, per the CME FedWatch Tool, suggests a 93% probability of a further 25bps cut in December, this remains contingent on clear, continued signs of a cooling labor market.

More AI News: A wave of mega-deals is propelling the tech industry, driven by soaring capital expenditures for massive data centers. On Thursday, Nscale’s agreement to build a Microsoft data center using Nvidia’s AI chips highlighted this trend. The ripple effect was immediately evident in the supply chain, with ASML — a critical maker of chipmaking equipment — reporting a sharp jump in new orders. Ultimately, the market sees these deals as the core engine powering the tech sector’s ride on the AI wave.

US to Leave Argentina? Argentine President Javier Milei visited the White House on Tuesday to finalize a crucial $20 billion US currency swap line, a lifeline intended to stabilize the Argentine peso. However, President Trump explicitly conditioned this support, directly linking its continuation to the electoral success of Milei’s coalition in the upcoming October 26 legislative elections. This direct intervention introduces a significant risk of market turmoil, as a poor showing for the ruling party could now trigger an immediate withdrawal of US financial backing.

AI Chatbot Restrictions: Missouri Senator Josh Hawley has introduced a bill to ban the use of AI chatbots for minors. The legislation reflects growing political scrutiny of tech companies as AI becomes more omnipresent. The bill has gained traction amid concerns about the negative impact of chatbots on the mental health of teenagers who confide in them. While this specific restriction is unlikely to dampen the current market rally in AI, it signals initial political pushback against the largely unregulated technology.

Aluminum Import Limits: The US Aluminum Association has publicly called for increased trade restrictions on imported scrap metal to protect domestic markets. Key measures proposed include a complete ban on the import of used beverage containers from outside North America and stricter controls on “mill ready” scrap metal shipments. Additionally, the Association is advocating for enhanced tracking of the aluminum scrap flow and stronger enforcement mechanisms for existing trade regulations.

French Pension Reforms: French Prime Minister Sébastien Lecornu has proposed suspending controversial pension reforms, including raising the retirement age from 62 to 64, until after the 2027 presidential election. This concession comes ahead of a no-confidence vote, as the reform has been a major obstacle to passing the national budget. While Lecornu’s proposal has eased tensions, opposition parties are pushing for the complete abandonment of the reforms to secure the budget’s approval.

Moscow Plot: Russian authorities have accused Mikhail Khodorkovsky, a former Russian oligarch and once the country’s richest man, of conspiring to overthrow the government. The Federal Security Service (FSB) alleges that Khodorkovsky and others are planning a coup to remove Vladimir Putin from power. This action appears to be part of a larger effort to intimidate domestic critics of the war in Ukraine and could signal that Putin’s power may be under threat. We suspect that internal political division in the Kremlin could pave the way for peace talks with the US and Ukraine.

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