by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of the bipartisan push for greater government involvement in AI development. We then examine the growing significance of next year’s Federal Reserve reappointments, followed by a focus on the White House’s embrace of high-skill foreign labor and the ongoing strength in credit card spending. As always, the report includes a comprehensive roundup of key international and domestic data releases.

The Artificial Intelligent State: A bipartisan panel formed under both the Trump and Biden administrations has urgently called for greater government involvement in the economy to strengthen the tech sector, citing critical national security concerns. The group highlighted two major risks: a lack of private investment in strategically important industries and an overreliance on rival nations for key supply chain components. The warning underscores how national security concerns are driving a fundamental rethinking of traditional economic norms.

• The proposed policy represents a sharp departure from the mostly laissez-faire framework that has shaped US economic strategy since the Reagan era. While the 2008 financial crisis exposed the limits of free markets, it was the Biden administration that institutionalized a more active industrial policy, channeling targeted stimulus into strategically vital sectors. This shift was later reinforced and broadened by the Trump administration’s reliance on tariffs to shield domestic producers and promote targeted private investment.
• This bipartisan warning could be foreshadowing the potential for the state to provide loan guarantees to strategically vital firms. The concept of government-backed debt was recently raised by AI companies, notably OpenAI, whose executives have cited colossal commitments to funding billions of dollars in equipment. These massive capital expenditures currently outpace the company’s revenue stream, fueling concerns that a potential default could trigger the bursting of the long-speculated AI bubble.
• While increased government involvement can provide strategic support, it inevitably risks market distortions. One significant concern is the crowding out effect, where large public investments in strategic sectors divert capital, talent, and resources away from other productive areas of the economy. Moreover, this intervention may lead to substantial overcapacity in supported industries, making the broader economy more susceptible to speculative bubbles.
• This dynamic creates a perilous incentive for lawmakers. Having staked their policy — and potentially public funds as well — on the success of strategic sectors like AI, the government has developed a vested interest in ensuring the continued growth of the industry, even if it becomes detached from market fundamentals. While it is uncertain whether this decoupling will persist, the state is likely to attempt to manage the market and possibly artificially prop up valuations to prevent a collapse.

A Dovish Tilt: Atlanta Fed President Raphael Bostic has announced he will retire at the end of his term in February. His decision to forgo reappointment means the Federal Reserve could lose another key hawk from the committee. While Bostic has had a reputation for focusing on the maximum employment side of the Fed’s dual mandate, the unprecedented post-pandemic inflation surge positioned him as a leading voice for keeping interest rates elevated to restore price stability. His departure is therefore likely to open a seat for another dove on the committee.

• Bostic’s exit is part of a broader leadership transition, as the terms for several regional Fed presidents are scheduled to expire next year. The selection process for these roles, which carry five-year terms ending in one or six, involves a vote by local boards but requires final confirmation from the Federal Reserve Board in Washington.
• Traditionally an obscure procedural matter, the appointment of Federal Reserve presidents has now entered mainstream political discourse. This shift is driven by the White House’s ambition to exert more control over monetary policy, raising concerns that the administration may attempt to influence the selection of regional bank presidents by reshaping the Federal Reserve Board itself.
• The White House currently has two reliable allies on the Federal Reserve Board in Governors Stephen Miran and Michelle Bowman. A third, Christopher Waller, could also be considered part of this camp, given his nomination by the current president. A pivotal moment will be the Supreme Court’s January hearing, which will consider the president’s authority to remove a Fed governor. If the Court rules that the president can indeed remove Governor Lisa Cook, then the White House could secure a majority on the Board.
• While the US dollar is influenced by a multitude of factors, from economic growth to financial flows, we believe central bank policy is among the most critical. Any perception that the Federal Reserve is losing its independence could significantly weaken the dollar, prompting investors to diversify into gold and other currencies. This scenario would also likely provide a substantial tailwind for international equities.

H1-B Visas Good? President Trump indicated that H-1B visas could help address critical talent shortages in key industries. His comments may signal an imminent trade agreement with India, a key source of skilled immigrant labor, and more strategically, acknowledge that recruiting top global talent is essential for winning the international AI race. This stance aligns with the tech sector’s long-standing argument that a scarcity of skilled domestic workers has hindered its efforts to reshore production and innovate.

Government Data: The White House has announced that the release of October’s CPI and jobs reports will be suspended due to complications from the government shutdown. This absence of official data will hamper the Fed’s data-dependent approach. To fill this void, the central bank will be forced to rely more heavily on private-sector data, which, although readily available, is generally considered less reliable than official government statistics. Our analysis of current alternative data trends indicates that these conditions warrant a rate cut by the Fed in December.

No More Pennies: The US Mint has announced it will cease production of the penny for public circulation as a cost-cutting measure, marking a symbolic endpoint for a coin whose metal value has long exceeded its one-cent face value. While limited editions will continue for collectors, the move is expected to exacerbate an existing penny shortage. This has prompted calls for legislation to allow cash transactions to be rounded to the nearest five cents, a measure retailers and banks support to avoid potential lawsuits and operational headaches.

More Spending: Recent credit card data from Bank of America indicates that consumer spending accelerated to its fastest pace since early 2024. The report revealed that the increase was broad-based across all income classes, driven largely by a combination of higher wages and elevated inflation. The bank also noted that, despite reports of increased financial restraint, consumer deposit levels remain above pre-pandemic levels. This data reinforces the view that household balance sheets remain stable despite economic headwinds.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with concerns regarding new data on the labor market and its impact on monetary policy. Next, we give an overview of the impact that tariffs will have on domestic production with a focus on the auto industry, address US hacking accusations from China, and provide an update on the government shutdown. As always, the report includes a comprehensive roundup of key international and domestic data releases.

ADP Payrolls: According to the latest report from ADP Research, the labor market cooled last month. The payroll firm estimates that private employers cut an average of 11,250 jobs per week over the four weeks ending October 25. This weaker jobs report follows an earlier estimate showing a net gain of 42,000 positions for the month, suggesting that hiring momentum slowed notably in the latter half of the period. The weak report is likely to have an impact on monetary policy.

• The slowdown in job creation comes as the Federal Reserve continues to weigh which side of its dual mandate — maximum employment or price stability — should take priority. Following the latest FOMC meeting, a notable divide emerged among policymakers over the future direction of monetary policy. Two voting members issued opposing dissents on the 25-basis-point rate cut, where one favored leaving rates unchanged, while the other advocated for a deeper, 50-basis-point reduction.
• At the Fed’s upcoming meeting in December, policymakers may have to rely heavily on private-sector data, as government statistics for October might not be released in time. While September figures are expected to become available once agencies reopen, collecting data for October could prove far more challenging. According to White House economic advisor Kevin Hassett, the government shutdown has disrupted data collection for the month, resulting in information that may never be fully recovered.
• That said, the latest inflation data from OpenBrand — which tracks prices across marketplaces, retail websites, and brick-and-mortar stores — showed that prices for consumer durables and personal care goods decelerated for the first time in three months. While the index is not as comprehensive as the CPI, it adds to the growing evidence that inflation may no longer warrant being the central bank’s top priority, especially amid the notable slowdown in the labor market.
• In short, private-sector data on both inflation and employment may be enough to persuade Fed officials to cut rates again at their December 10 meeting. However, this could depend on whether the government manages to release official November data, as the ongoing shutdown, now extending past the data collection period, may make that difficult given the time constraints. A rate cut would likely support risk assets and put downward pressure on the dollar.

Tariffs Taking Hold: Recent reports indicate that firms are adjusting their business practices in response to tariffs. On Tuesday, it was revealed that GM has asked its suppliers to phase out parts sourced from China by 2027, to safeguard against potential geopolitical disruptions. Although the decision was made in late 2024, executives have reportedly accelerated implementation amid rising global trade tensions. The move underscores a broader industry shift from prioritizing efficiency to emphasizing resilience in supply chains.

• As discussed in our report on the “three Rs” of tariffs, the renewed focus on resiliency comes as the White House continues to wield tariffs aggressively under Section 232. The administration has used these national security provisions to push for greater domestic production. This assertive use of tariff authority is already beginning to reshape global supply chains.
• The effects of these policy shifts are beginning to surface in the auto industry, which has been a primary target of recent trade actions. Earlier this month, the administration fully implemented tariffs on medium- and heavy-duty trucks, truck parts, and buses, marking the first time this vehicle class has been subject to such measures. The policy includes a key incentive: automakers that relocate production to the US can qualify for a tariff reduction from 25% to 10%.
• While firms are rapidly adapting their supply chains to prioritize resiliency in response to trade policy, these shifts carry inherent inflationary risks. Although price pressures are not expected to reach pandemic-era highs, they are likely to remain elevated. So far, the demonstrated ability of consumers to absorb these increases has alleviated pressure on companies. We suspect that as long as this trend continues, the economy should remain resilient and provide a supportive environment for risk assets.

US Bitcoin Hack?  China has accused the US of orchestrating a cyberattack to steal billions in bitcoin. The allegation refers to a 2020 security breach that followed the US government’s seizure of cryptocurrency from Cambodian tycoon Chen Zhi, who was charged with money laundering. This claim mirrors a pattern of Chinese allegations against the US that typically lacks evidence to support American indictments. The move signals how the broader geopolitical rivalry is increasingly playing out in the domain of cybersecurity and digital assets.

Shutdown Update: The US House of Representatives is set to vote on legislation to end the government shutdown, following a key procedural victory in the House Rules Committee on Tuesday. Ending the shutdown is expected to boost equities by restoring government services and stability. Politically, the event is likely to shape the upcoming midterm elections, where affordability — driven by concerns over healthcare, tariffs, and housing costs — is set to be a central issue.

More Golden Shares? Indonesia’s sovereign wealth fund is in talks to acquire a “golden share” in the domestic operations of ride-hailing giants Grab and GoTo. This golden share would grant the fund influence over key corporate policies, such as worker pay, mirroring a recent White House decision to secure a similar share in Nippon Steel to facilitate a merger. While still in its early stages, this trend signals a potential shift away from the long-standing principle of shareholder primacy.

Oil Demand Rise: The International Energy Agency now projects rising oil demand for the next 25 years, reversing its earlier forecast of a near-term peak. This revised outlook, detailed in its latest World Energy Outlook, stems from weakened climate commitments and slower-than-expected electric vehicle adoption. Additionally, growing energy demand from advanced manufacturing and data centers has contributed to the change. The report underscores a growing divergence between climate targets and real-world trends, highlighting the political and economic challenges facing the global energy transition.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of potentially shoddy credit ratings being used in the booming private-credit industry. We next review several other international and US developments with the potential to affect the financial markets today, including a bit more detail on the Senate vote last night to fund the federal government again and movement toward a deal that would cut the US’s import tariffs against Switzerland from 39% to about 15%.

Global Private Credit Industry: A useful article in the Financial Times yesterday examined how a plethora of small, start-up credit rating firms has grown up to provide private-letter assessments of private credit deals. The new firms — including Morningstar DBRS, Kroll Bond Rating Agency, HR Ratings, and Egan-Jones — have allowed private capital providers to shop around for the best possible rating with little public transparency.

• As we noted in our Comment yesterday, insurers have become major participants in the private credit industry. They are especially keen to secure positive private letters so they can hold less capital against their loans.
• The risk is that the new start-ups will offer overly positive assessments, contributing to a possible over-extension of private credit that could foster a future debt crisis.
• That risk would harken back to the US housing bubble, when large, established agencies such as Moody’s and Standard & Poor’s competed to grade a finite pool of debt and gave out inflated stamps of approval to risky assets.

US Fiscal Policy: As we flagged in our Comment yesterday, the Senate last night passed a bill to fund the federal government through January. The bill passed by a vote of 60-40, with nearly all Senate Republicans, seven centrist Democrats, and one Independent voting in favor. It now goes to the House, where the Republicans who control the chamber are expected to pass it, most likely on Wednesday. Once the bill has passed both chambers and President Trump signs it into law, the longest ever government shutdown will end.

• The bill includes full-year funding for the Agriculture Department, military construction, and the legislative branch. The temporary funding for other departments and programs is designed to give legislators time to negotiate and pass full-year funding for them.
• As we noted yesterday, the Democrats who backed the bill also secured language reversing any layoffs of federal workers initiated during the shutdown and guaranteeing back pay. However, they only secured promises from the Republicans for a vote on extending enhanced Affordable Care Act health subsidies by mid-December.

US Air Travel Industry: Transportation officials yesterday warned travelers to expect worsening cancellations and delays this week even if the federal government shutdown ends, as the Federal Aviation Administration rolls out deeper cuts to flights at 40 major airports due to staffing shortages. The major airlines scrapped 2,200 flights yesterday and currently plan to do the same with at least 1,000 flights today.

• Even when the government shutdown ends, the airlines expect it will take days for their systems to normalize.
• That suggests that the air travel industry could suffer a significant financial hit, while overall economic growth could also be slowed.

US Artificial Intelligence Industry: Softbank, the bellwether Japanese technology investor, has reportedly sold its entire 32-million-share stake in AI chip maker Nvidia to help fund its ongoing investments in AI modeler OpenAI. The Nvidia sale raised some $5.8 billion, covering almost one-fifth of Softbank’s expected investment of $30.0 billion in OpenAI this year. The shift signals that at least some sophisticated investors may now be seeing better opportunities in the modelers than in the chip makers who have gained so much from the AI boom to date.

United States-Switzerland: Public and private negotiators from Switzerland are reportedly getting close to a deal with the White House to cut the US’s punishing 39% tariff on most Swiss goods to about 15%, equivalent to the US tariffs on most goods from the European Union. President Trump yesterday said he hasn’t settled on a final Swiss tariff but expected it to be somewhat lower than today. If a deal is eventually reached, it would likely be positive for the broader Swiss economy and its many firms that export heavily to the US.

China-United States: Even though China has begun unshackling its exports of rare-earth magnets as promised in the recent US-China trade truce, the Wall Street Journal today says Beijing is developing a validated end user (VEU) program that would keep US defense contractors from acquiring the products. If implemented, the program could apparently also prohibit the magnets from going to Western aerospace and automotive firms that have both civilian and defense businesses.

• It remains to be seen whether the US would see such a program as a violation of the trade truce. As we have warned previously, the truce could be disrupted at any time, leading to a rekindling of US-China tensions.
• In any case, China’s contemplated VEU system means the US is still at risk of not being able to get the rare-earth magnets needed for key weapons systems such as jet fighters and advanced ammunition. That suggests that the strong US effort to develop rare-earth mines and processing facilities will likely continue, creating opportunities for investors.

European Union: Reflecting Europe’s continued concerns about Russian aggression and other global security risks, the European Commission has begun setting up a central intelligence unit to collate information gathered by the EU member countries’ national spy services and make it more useful to counter joint threats. The new unit will reportedly be staffed largely by officials from the member countries who would be detailed to it on a temporary basis.

Germany: After gaining legislative approval earlier this year to suspend the country’s fiscal “debt brake” and channel 1 trillion EUR ($1.16 trillion) into defense and infrastructure, center-right Chancellor Merz and his government have been accused by two key economic institutes of secretly channeling billions of euros into tax cuts and increased welfare payments. The growing scandal illustrates how Europe’s improved economic prospects in the short term aren’t just tied to defense projects, but to a broader fiscal loosening that includes infrastructure and other pent-up spending.

United Kingdom: In the three months to September, the national unemployment rate rose to a seasonally adjusted 5.0%, above the expected rate of 4.9% and the highest level in a decade, excluding the pandemic period. The rise in joblessness reflects a long period of weak hiring as firms react to the new Labour government’s tax hikes and its vows to boost worker rights. Looking forward, the rise in unemployment also potentially increases the likelihood that the Bank of England will cut interest rates again at its December policy meeting.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our analysis of concerns over a rise in job cut announcements. Next, we examine what JPMorgan’s involvement in the Argentine bailout reveals about the evolving relationship between the private and public sectors, along with updates on OpenAI seeking a government backstop, the recent drop in Chinese exports, and the potential weakening of new EU regulations. As always, the report includes a comprehensive roundup of key international and domestic data releases.

Layoffs Rising? Market sentiment soured sharply on Thursday following a grim report on the US labor market. According to Challenger, Gray & Christmas, employers announced 153,074 job cuts in October—the highest for the month in over two decades. The report also showed hiring plummeted 35% from the previous year, reinforcing fears of a significant cool-down. With official government data unavailable, investors have reacted sharply to private data as they try to gauge the state of the economy.

• The report detailed the drivers behind the layoffs: cost-cutting was the top-cited reason, followed by artificial intelligence (AI), and general market and economic conditions ranking third. The technology and warehousing industries bore the brunt of the cuts, suggesting companies are actively shedding jobs due to redundancies and overcapacity concerns after a period of rapid pandemic-era expansion and subsequent automation efforts.
• While the massive total of job cut announcements from the Challenger report paints a stark and severe picture of the economy, it represents just one proprietary measure. Other high-frequency data suggests the labor market’s underlying health remains resilient. For instance, the latest state initial jobless claims data, gathered by Bloomberg, indicates that actual reported layoffs are still subdued despite a modest increase from the previous week.
• The recent layoff figures are undoubtedly concerning. However, the pronounced market volatility likely stems less from the data itself and more from the absence of official government benchmarks. This information vacuum forces an overreliance on fragmented proprietary reports, magnifying their impact. We anticipate a return to stability upon the release of comprehensive official data and, barring any major surprises therein, retain a constructive view of the economy’s underlying path.

Bank and Government: JPMorganChase executed purchases of Argentine pesos on behalf of the US Treasury, an action confirmed publicly for the first time by Senator Elizabeth Warren. This revelation confirms the bank’s direct role in a White House initiative to stabilize Argentina’s currency—a move that, in effect, provided a financial backstop for President Javier Milei’s administration. The case highlights a growing trend of the private sector being enlisted as partners in statecraft, blurring the traditional lines between public policy and private commerce.

• Although the specifics of the arrangement are not fully known, reports indicate that the bank’s function was to purchase Argentine pesos and subsequently sell them to the Federal Reserve Bank of New York. JPMorgan was not the only bank involved; Goldman Sachs, Bank of America, Banco Santander, and Citigroup also participated in the $20 billion currency swap lifeline.
• The coordination between the White House and the private sector comes as the government has taken on a more active role in promoting business interests abroad. Prior to the decision to help stabilize the peso, JPMorganChase CEO Jamie Dimon visited the South American nation and signed a lease in the capital as his bank looks to expand its footprint in the region.
• This event highlights the growing overlap between public and private interests as the US seeks to expand its global influence and enhance national security. While this collaboration can benefit firms through government protection for overseas expansion, it could also pave the way for outside political influence in firm decision-making, or at least create the perception of it.

OpenAI Wants US Backing: OpenAI, the creator of ChatGPT, has suggested that the US government provide loan guarantees to backstop its significant infrastructure expansion. The request arises from concerns about how the company will fund its ambitious projects, which represent over $1 trillion in commitments against only roughly $13 billion in annual revenue. While OpenAI clarified that it does not require the assistance to survive, it maintains that such government support would be highly beneficial for its growth.

Financial Plumbing Concerns: Wall Street banks continue to express concerns about funding stress as signs of tightening liquidity in the system appear. These fears are rooted in the sharp rise in short-term funding rates, particularly in the repo market, which has caused strain on the broader financial system. While this liquidity problem currently appears to have subsided, there is growing concern that the Federal Reserve may be forced to intervene to prevent a more severe market dislocation from emerging.

New Critical Minerals: The US Department of the Interior has added several metals, including copper, silver, and metallurgical-grade coal, to its list of “critical minerals,” a move that could pave the way for higher tariffs. This designation means these materials will be included in a Section 232 national security review, which can result in new import levies. The expansion of the list underscores the US government’s growing influence over the domestic commodity market.

Chinese Exports Fall: China’s exports fell unexpectedly last month for the first time since February. The decline suggests the world’s second-largest economy may be feeling the effects of US tariffs imposed in April. This could signal that China is exhausting its alternatives for circumventing those tariffs and may also point to a broader slowdown in global demand. The drop likely points to an economy losing momentum, which could force Beijing to inject fresh stimulus to bolster growth.

EU Regulatory Pullback: In an effort to enhance its global competitiveness, the European Commission is weighing a pause in the implementation of certain digital regulations. The proposal follows significant pressure from a coalition of large technology companies, the US government, and prominent European businesses. By creating a more favorable regulatory environment for tech development, the EU aims to strengthen its position relative to the US and China and attract greater foreign direct investment.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment leads with a critical analysis of the Supreme Court hearing on presidential tariff powers. Subsequent sections assess the economic implications of the latest PMI data and rising US household debt. Our international focus is Japan’s significant commitment to AI and semiconductor manufacturing, followed by a review of the Bank of England’s recent policy move. As always, the report includes a roundup of international and domestic data releases.

Supreme Court Tariffs: The US Supreme Court heard arguments challenging the president’s authority to impose tariffs. During the two-hour hearing, several conservative justices expressed skepticism that the International Emergency Economic Powers Act (IEEPA) could justify such unilateral action. The case was brought by a coalition of businesses and twelve states, all claiming economic harm from the tariffs. A ruling is not expected for some time, but the Supreme Court may potentially overturn the presidential action.

• Although the ruling is highly anticipated, its impact would not remove all levies. The lawsuit focuses exclusively on the legitimacy of the reciprocal tariffs from last April, a policy intended to mirror other nations’ duties. It does not, however, challenge the foundation of the broader, product-specific tariffs imposed under Section 232, which enjoy stronger statutory authority.
• A ruling against the administration would significantly hinder its trade strategy. The core of which relies on provisions that authorize tariffs against partners that do not uphold their obligations, a broad condition that encompasses both the removal of discriminatory regulations, trade barriers, and the fulfillment of promised investments.

• That said, these tariffs have effectively served as an experiment for Washington. They have proven that the US government can collect massive amounts of revenue through import taxes without causing an economic collapse. Therefore, if the Supreme Court rules that they are illegal, that ruling might not be the end but simply a trigger for Congress to pass the tariffs into permanent law.
• The removal of the tariffs could have a mixed impact on the economy. On one hand, it should provide a stimulus as firms rebuild inventory, similar to the activity observed in the first quarter. However, the immediate downside is that refunding the collected tariff revenue to the paying firms will cause a corresponding increase in government debt.

Strong PMI: Rising Purchasing Managers’ Index (PMI) readings from two key surveys signal growing confidence among businesses. The S&P Global Services PMI rose from 54.2 to 54.8, while the ISM Services PMI increased from 50.0 to 52.4. The simultaneous rise in both indexes suggests the economy retains significant momentum. In the absence of other major economic data, these PMI reports serve as a crucial alternative barometer for assessing the economy’s health, particularly as markets evaluate the impact of recent tariffs on economic activity.

• A closer examination of the data reveals the drivers behind this growing confidence. A sharp rise in new orders points to strengthening demand for services, while a concurrent increase in business activity indicates that companies are becoming busier. However, these positive signals are tempered by persistent signs of rising price pressures and a declining willingness to hire new employees.
• Respondent comments offer valuable insight into firm sentiment regarding the economy. Most firms reported that tariffs have weighed on business activity, though the intensity of this pressure — particularly concerning costs — has begun to ease. Furthermore, there were growing signs that the government shutdown was also creating problems, prompting some firms to delay planned projects.
• Overall, PMI surveys suggest that while significant headwinds persist in the economy, firms are expressing greater confidence in their ability to operate effectively despite the tariffs. This renewed confidence is largely predicated on the expectation that policy will remain relatively stable over the next few months. Assuming this stability holds, the data suggests the economy could begin showing signs of acceleration.

Households Under Pressure: Despite a robust economy, signs of strain are emerging among some households. US household debt has reached a record $18.6 trillion, with delinquency rates holding steady at a level unseen since 2011. This rising debt burden is a hallmark of a K-shaped recovery, where the financial strength of high-income households masks broader weaknesses elsewhere. While we do not expect this to weigh on equity prices in the short term, it presents a longer-term risk

Japan AI Industrial Policy: Japan’s ruling Liberal Democratic Party plans to allocate an additional $6.5 billion annually to bolster its semiconductor and AI industries. Starting in April, this funding will be sourced from the regular budget rather than a supplementary one, signaling a long-term commitment. The move underscores the strategic importance of these sectors as nations worldwide act to shield their digital economies from foreign competition. While this policy aims to strengthen domestic industries, it also risks increasing government debt.

EU Backs Down: European officials have conceded they lack the strategic leverage to quickly persuade China to lift its restrictions on rare earth exports. This admission reflects a broader Western realization of China’s dominance in this critical sector. Although the EU is pursuing a separate deal with China to ease trade tensions, its limited negotiating power is now clear. Consequently, this reality is likely to accelerate efforts by Western firms to develop their own rare earth mining capabilities.

BOE Divided: The Bank of England held interest rates steady at 4.0% at its policy meeting on Thursday, with the decision passing by a narrow 5-4 vote. This pause reflects the central bank’s ongoing challenge in balancing slowing economic growth and labor market weakness against persistent inflationary pressures. Given the tight vote, there is a growing likelihood of a rate cut at the next meeting. Such a move would aim to boost growth but could also lead to a depreciation of the pound sterling (GBP) against the US Dollar.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of Tuesday’s electoral contests. We then delve into the factors driving the recent cryptocurrency sell-off. Further coverage includes the continuing government shutdown, the EU’s relaxation of certain climate rules, and the escalation of US-Venezuela tensions. A summary of key domestic and international data releases is also included.

Democratic Sweep: In the first major electoral test of the cycle, strong Democratic turnout secured critical gubernatorial wins in Virginia and New Jersey. The party’s momentum extended down-ballot, with voters in New York electing Democratic Socialist Zohran Mamdani as the city’s next mayor and a key Pennsylvania Supreme Court race also falling in their favor. Overall, these outcomes suggest that voter dissatisfaction with the status quo is high — even with a relatively good economy — signaling a potentially contentious midterm election.

• The Democratic wins immediately intensify the national redistricting battle ahead of the 2026 midterms. Following partisan map-redrawing efforts in Republican-led states like Texas and Missouri, California responded by advancing Proposition 50. This ballot measure would allow the state to suspend its independent commission and implement new, legislatively drawn congressional maps to gain Democratic seats, effectively escalating a state-by-state partisan “arms race” for control of the US House.
• Given the White House’s “build fast and fix later” strategy, there is speculation that the administration could seek to inject additional stimulus into the economy. Such a move would likely be aimed at boosting economic sentiment to help the party in power retain control of both houses of Congress. This approach is consistent with current efforts to expand Medicare coverage for pharmaceuticals and pressure drug companies to lower prices, which are popular, consumer-focused policies.
• While the recent Democratic win might superficially suggest a shift in partisan allegiance, we propose a more fundamental driver: the global trend of electoral dealignment fueled by rising income inequality. Consequently, we anticipate that established political parties will be increasingly compelled to calibrate their platforms, adopting policies that appeal to lower-income households without alienating their wealthier base, a strategic maneuver essential for maintaining broad coalition support.
• That said, the broader political environment is poised to be favorable for equities leading up to the 2026 midterm elections. The administration is expected to utilize its policy levers for additional fiscal stimulus. Critically, the impact of the recent tax bill — likely generating larger tax refund checks for consumers and incentivizing greater capital investment — should provide a material boost, further fortifying an economy that has demonstrated consistent resilience.

Bitcoin Doubts: On Tuesday, bitcoin plunged below $100,000, a critical support level not seen since late June. This sustained decline is largely driven by long-term holders executing a risk-off strategy, having liquidated over $45 billion in holdings in the past month. The sell-off highlights a pivotal shift for the digital asset, which has recently gained popularity among retail investors while also attracting institutional flows due to recent regulatory changes.

• Although a single catalyst remains elusive, the recent downward pressure on crypto assets appears to stem from a confluence of three key factors: tech-sector deleveraging, a persistent liquidity crunch in the repo market, and growing interest in potential quantum-based alternatives to current blockchain protocols.
  • Tech Narrative: Over the past few years, bitcoin has exhibited an increasingly strong correlation with technology equities. According to CME Group, bitcoin’s 60-day correlation with the Nasdaq 100 has risen from its near zero level prior to 2020 to as high as 60% over the past two years. This trend suggests that a portion of the skepticism surrounding crypto may reflect broader shifts in sentiment toward the technology sector as a whole.
  • Repo Problem: Recently, there has been a rise in liquidity stress within the crucial repo market. This environment has forced various financial institutions to increasingly tap Federal Reserve facilities, such as the Standing Repo Facility and the Discount Window, to meet short-term funding needs. While there is no definitive link, the highly liquid nature of certain digital assets makes them prime targets for institutions needing to quickly raise clean capital
  • Quantum Hype: Adding to long-term uncertainty is the emergence of “quantum money,” a theoretical alternative to code-based blockchain systems that would secure ledgers through the laws of physics rather than cryptography. Though still conceptual, recent breakthroughs in quantum technology — especially the release of specialized hardware like the Willow Chip — have fueled speculation about the eventual obsolescence of current cryptographic infrastructure.
• Of the three possibilities, the most concerning is that the crypto sell-off signals underlying liquidity strain. If confirmed, this could point to a broader systemic issue. While it is worrisome, the Federal Reserve does possess the necessary tools to manage such liquidity pressures. Therefore, we do not expect this specific issue to have significant long-term repercussions on the broader market.

Tech Skepticism: The tech sell-off persisted as mixed earnings reports dampened sentiment in the AI sector, keeping investors focused squarely on quarterly results. On Tuesday, chipmaker AMD beat expectations but offered weak guidance, and Super Micro Computer failed to excite investors with earnings that fell short of forecasts. The disappointing performance from these companies highlights the growing expectations for AI-related firms (particularly those outside of established tech giants) despite concerns over high valuations and weak underlying fundamentals.

Shutdown Tensions: The US government shutdown is now the longest on record, but a bipartisan compromise is finally emerging among centrist senators. The proposed deal involves immediately reopening the government with a short-term bill. In exchange, Republican leadership would commit to holding a dedicated vote on the expiring Affordable Care Act premium subsidies. This shift towards accepting a promise to vote, rather than a guaranteed extension, signals growing post-election momentum to resolve the standoff.

EU Soft Regulation: The European Union has agreed to scale back its ambitious 2040 climate targets following 18 hours of intense negotiations. The revised plan lowers the carbon emission reduction target to 90% and includes key concessions, such as delaying the expansion of its carbon pricing system and permitting member states to outsource a portion of their emission reductions to other countries. This policy shift is viewed favorably for European equities, as it reduces the near-term regulatory burden on domestic industries.

Venezuela Pressure: Venezuelan President Nicolás Maduro is escalating domestic repression in response to heightened US pressure over alleged drug trafficking. This American pressure, which has manifested as a ramped-up Caribbean military presence under the guise of anti-narcotics operations, is widely viewed as a modern echo of the Monroe Doctrine. This effort to reassert hemispheric dominance and deter states like Venezuela from partnering with China carries a real risk of escalation.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of mounting concerns over a potential market pullback. We then examine how a wave of new AI partnerships continues to provide crucial market momentum. Our coverage further extends to government initiatives in the energy and commodities sector, conflicting signals from Fed officials on December rate cuts, and a notable shift in sentiment among UK youth regarding welfare benefits. We also include a summary of key international and domestic data releases.

Pullback Concerns: Wall Street leaders, such as David Solomon and Ted Pick, foresee a “healthy” market correction within the next 12-24 months, citing a dangerous divergence between valuation and fundamentals. While corporate earnings are robust, they are being vastly outpaced by exuberant price appreciation. This has created a clear schism where, on one side, there is analytical caution dictated by financial models, while on the other, there is a market psychology driven by unwavering faith in tech’s secular growth.

• Palantir appears to be driving today’s market narrative by serving as a prime example of the current tension in tech. Despite reporting robust earnings and providing strong forward guidance, its stock has declined. This counterintuitive sell-off highlights investor apprehension that a 175% year-to-date rally — and the resulting P/E ratio of 688.49 — has created a valuation that its underlying business performance cannot support, leading to renewed concerns of a sector-wide bubble.

• Historical precedent suggests this weakness is temporary. The Magnificent 7 have a track record of weathering periods of skepticism and early-year underperformance, consistently rallying to fuel broader market gains. In our view, the current negative sentiment mirrors these past episodes and is unlikely to derail the sector’s near-term trajectory.
• The case for sustained equity strength is compelling and rooted in a US economy that is demonstrating solid growth. Key data indicates twin engines of growth including unwavering household demand and a landmark acceleration in AI capital expenditure. Meanwhile, a labor market that is normalizing rather than weakening provides crucial stability. Given this combination of persistent demand and transformative investment, we anticipate further market appreciation, albeit at a potentially more selective and moderate pace.

AI Partnerships: The market is paying a lot of attention to the growing interconnectedness of tech companies. On Monday, Amazon Web Services (AWS) announced a multi-year, $38 billion agreement with OpenAI to provide it with massive cloud computing resources. The landmark deal is expected to significantly bolster confidence in AWS’s cloud computing infrastructure as it competes aggressively against rivals like Microsoft, Alphabet (Google), Oracle, and CoreWeave, all of whom are securing similar contracts to power the AI boom.

• Following the announcement, Amazon’s stock surged, a trend mirrored across the broader Magnificent 7 as investors continue to pour money into AI. The primary source of investor confidence is the robust and growing supply chains these firms are building, coupled with significant revenue diversification. This reassures the market that these companies have multiple avenues to justify their lofty valuations.
• Specifically, this move signifies that OpenAI is diversifying its cloud infrastructure beyond Microsoft, a strategic shift as it operates more like a for-profit company rather than a non-profit. Simultaneously, Amazon has solidified its status as a major AI player by securing OpenAI as a client, adding to AWS’s existing partnership with OpenAI’s rival, Anthropic.
• We anticipate a continued flow of strategic deals over the next few months as major tech companies aim to diversify both their revenue streams and supply chains. This proactive diversification is crucial for building resilient AI infrastructure and significantly reducing reliance on any single vendor. While we acknowledge that current tech valuations are elevated, we maintain that companies with strong balance sheets should see sustained momentum.

Government Investments: The White House has announced a series of new funding initiatives aimed at boosting US competitiveness in the commodities and energy sectors. On Monday, President Trump unveiled $100 million in funding for coal-related initiatives, although the specific source of the funds was not clarified. Additionally, the administration has committed $750 million to rare earth startups, a move that will involve the government taking equity stakes in the companies. These actions underscore the government’s growing role in the economy.

Rate Cut Doubt? Signals from Federal Reserve officials have cast doubt on the likelihood of a rate cut in December, revealing a split in their policy priorities. Chicago Fed President Austan Goolsbee emphasized that his dominant worry is persistent inflation, overshadowing labor market considerations. Meanwhile, Fed Governor Lisa Cook suggested her unease is more focused on the labor market’s health. This divergence creates a lack of clear guidance, which is expected to temper enthusiasm for risk assets as investors prefer the certainty of a dovish pivot.

US-China Trade Relations: In a sign of easing trade tensions, the US and China are moving toward normalizing relations. Chinese officials are expected to resume sales of rare earth metals to the US, while the White House has signaled a greater openness to allowing chip exports to China. These reciprocal gestures are likely to bolster confidence that the trade relationship will not be abruptly severed, even as the risk of future disputes remains. This should offer some support to the broader market.

EU Restraint: The European Union is considering measures to tighten its membership process, aiming to prevent the admission of what it might see as “Trojan horses.” The proposed plan would place new entrants on a probationary period before granting full membership, ensuring they do not backslide on democratic principles after joining. This measure is designed to prevent a repeat of situations like that of Hungary, which, after joining the bloc, subsequently cracked down on free speech.

UK Sentiment Shift: As the UK’s ruling Labour Party prepares to push through more tax hikes, polls show a growing number of young voters are expressing support for a crackdown on crime and benefits. This sentiment highlights the public’s growing dissatisfaction with the government as it struggles to manage the nation’s rising debt. The discontent appears to be fueling a rise in popularity for the Reform UK and Green parties, a sign that the traditional political duopoly is starting to lose favor.

Note: Due to the federal government shutdown, we were unable to update the Business Cycle Report this month. The report will return as soon as we are able to once again access government data.

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