by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning. Markets remain squarely focused on the “One Big, Beautiful Bill.” Today’s Comment will begin with an analysis of the latest progress on President Trump’s tax bill, followed by an overview of recent trade developments. We’ll also examine other stories moving markets today. As usual, we’ll conclude with a summary of today’s key domestic and international economic data releases.

The Tax Bill Progresses: Senate Republicans advanced legislation on the president’s tax agenda over the weekend, aiming to meet an ambitious July 4 deadline for passage.

• The Senate voted 51-49 to advance debate on the bill after two Republicans sided with Democrats. Lawmakers are now finalizing the legislation ahead of a decisive vote, with negotiations centering on three key issues: the budget deficit impact, regulatory changes, and proposed cuts to investment and social spending programs.
• The latest Congressional Budget Office estimates project that the bill would increase the national deficit by $3.3 trillion over the next decade. This figure excludes additional borrowing costs, which could substantially worsen the shortfall. The legislation combines $4.5 trillion in reduced revenues with $1.2 trillion in spending cuts.
• The legislation modifies a controversial AI moratorium provision from the House bill, reducing restrictions on state-level AI regulations from 10 years to five years as a condition for accessing $500 billion in infrastructure funding. It also includes exemptions for AI rules concerning child protections and incorporates a Tennessee law banning the unauthorized use of musicians’ likenesses by AI systems.

• The legislation also introduces significant changes to the social safety net, including new work requirements of 80 hours per month to qualify for benefits, along with restrictions on Medicaid provider taxes. While the new work requirements also apply to parents, exemptions are provided for those with children under 14. Additionally, the bill modifies food assistance programs by requiring states to contribute funding.
• The final bill contained several significant omissions. Most notably, the Senate removed the controversial “revenge tax” provision. Additionally, the Senate parliamentarian ruled that key provisions violated the Byrd Rule, forcing the removal of major healthcare, immigration, and financial reform as well as other measures
• While clear signs indicate that the bill remains unfinished, it appears to have strong momentum. We anticipate the legislation will likely pass within the coming days, with final approval expected by week’s end. Although the bill should provide a near-term boost to equities, investors will probably quickly shift their focus to earnings reports once it’s enacted.

Trump Trade Policy: President Trump is expected to send out his trade letters this week, which may lead to market volatility

• With just over a week remaining until the president’s July 9 deadline, significant uncertainty persists regarding the tariff rates that will be imposed on key countries. The president has already begun drafting letters to affected nations outlining the specific tariff rates for their exports, while dismissing speculation that he might extend the deadline.
• On Friday, the Trump administration announced a new trade agreement with China that guarantees continued access to critical resources for US manufacturers. While existing tariffs will mostly remain in place, the deal alleviates concerns about potential shortages of key industrial inputs like rare earth minerals. The administration also revealed that it has successfully negotiated 10 additional trade agreements that it plans to roll out this week.

• In a weekend breakthrough, the president secured Canada’s agreement to scrap its digital services tax just before it was set to take effect Monday. This came after Friday’s hardline stance, when the administration suspended trade talks until the tax was withdrawn. The White House has consistently opposed these digital levies across multiple nations, with senior officials deriding them as attempts to use American tech firms as “piggy banks.”
• Markets will scrutinize the details of the Trump administration’s trade agreements, with particular focus on tariff provisions. Signs that rates will remain stable or decrease would likely reassure investors, while any unexpected increases in import taxes could prompt a reduction in risk exposure across financial markets.

Chile Nominated Communist: One of South America’s wealthiest economies was rocked by a surprise victory, as a Communist candidate triumphed in the country’s primary elections.

• Jeannette Jara secured a landslide victory, emerging as the left-wing presidential candidate. The former labor minister’s win is likely to unsettle markets, which had hoped for a more moderate nominee. She will now face a consolidated field of right-wing candidates who bypassed their primary process amid strong polling numbers for far-right conservatives.
• Chile faces mounting economic headwinds as sluggish GDP growth and rising unemployment strain the economy. Public discontent is growing over surging immigration and crime rates, adding pressure on policymakers. Despite these challenges, markets had remained resilient — until now — and were buoyed by expectations that the incoming administration would pursue business-friendly reforms.

• South American economies have demonstrated notable resilience to the trade tensions currently roiling Asia and Europe. However, the region’s political landscape presents risks, with a growing trend of anti-establishment candidates gaining traction. While markets typically view far-right politicians as more favorable than their far-left counterparts, this polarization introduces new uncertainties for investors.

US Energy Spending: More companies are investing in power plants and transmission lines to meet the electricity demands of AI.

• Utilities companies are projected to boost capital expenditures to $212.1 billion in 2025 and will reach a record high of $228.1 billion by 2027. This sharp increase is driven largely by surging investments in energy-intensive data centers, fueled by the AI boom. However, the rapid growth in power demand has raised concerns that AI-driven energy consumption could lead to higher electricity prices, potentially exacerbating inflationary pressures.
• US electricity demand has rebounded strongly since the pandemic and is now growing faster than overall inflation. This surge is primarily demand driven, with projections showing consumption increasing 25% by 2030 and 78% by 2050. To mitigate household cost impacts, regulators have implemented solutions requiring major hyperscale developers, including Amazon, Microsoft, and Meta, to contribute through either direct capacity investments or special tariff arrangements.

• We are closely tracking technology-investment trends due to their pivotal role in the broader economy. Last quarter, tech spending accounted for the largest share of capital expenditure, solidifying its position as a key engine of economic growth. That said, we note that a slowdown in the AI boom could trigger widespread spillover effects, with potential repercussions across financial markets and the broader economy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets remain squarely focused on US-China trade developments as key deadlines approach. Today’s Comment will discuss the latest progress on the administration’s trade legislation, implications of downward GDP revisions, and other market-moving headlines. We’ll conclude with our regular roundup of critical international and domestic data releases.

Big, Beautiful Test: The Senate is set to start voting on the final changes on the Trump tax bill, but there still seem to be major differences within the party.

• Republican senators are preparing to advance their flagship tax bill, though growing dissent in both chambers threatens to derail passage despite looming deadlines. While both Senate and House leadership have endorsed moving forward with votes to meet the president’s July 4 target, substantive disagreements over key provisions continue to surface, raising doubts about whether the legislation can clear Congress in its current form.
• Currently, the bill faces revisions ahead of its scheduled vote, with the Senate parliamentarian emerging as a key obstacle. In her advisory role on procedural compliance, she has ruled against several provisions, most notably a measure that would have reduced state tax charges for Medicaid providers from 6% to 3.5%. This change alone would have generated significant federal savings, and its rejection forces lawmakers to reconsider their fiscal approach.

• Significant disagreement persists among House and Senate Republicans regarding the SALT deduction cap. Lawmakers from high-tax states continue to push for a substantial increase above current levels, with some threatening to withhold support for the bill without modifications. Meanwhile, conservatives from low-tax states oppose raising the cap, arguing it would disproportionately benefit wealthier households.
• While the bill remains in legislative limbo, passage this week appears likely, though a short extension remains an option. Approval would likely provide sufficient momentum to propel the S&P 500 to record highs. Looking ahead, we anticipate market attention will quickly shift to the outlook for rate cuts and economic growth, both of which face unusual uncertainty due to ongoing trade policy developments.

GDP Overstated: The third reading of the GDP showed that the economy did worse than originally expected.

• Economic output took a hit with the latest revision, which now reflects an annualized contraction of 0.5%, notably worse than the initial estimate of a 0.2% decline. This more significant downturn was largely fueled by moderation in personal consumption, specifically a slowdown in spending on services. While minor downward revisions to investment spending also contributed, a slight offset came from a less severe decline in net exports and government spending within the GDP figures.
• The sharper downturn in Q1 will likely prompt investors to closely monitor the Q2 economic performance. Current estimates from the Atlanta Fed’s GDPNow project a significant rebound, with an annualized growth rate of 3.4%. This anticipated increase is primarily attributed to a strong positive contribution from net exports and a pickup in consumer spending.

• Business investment will be a critical indicator for assessing whether recession risks have truly receded. Notably, first-quarter spending, particularly on information technology projects, served as a key buffer that possibly prevented an even deeper economic contraction. Going forward, we’ll be closely monitoring whether this resilience in capital expenditures persists amid tighter financial conditions and lingering uncertainty.

Updates on Trade Deals: With less than two weeks until the trade deadline expires, the president continues to make progress on key trade negotiations.

• Commerce Secretary Howard Lutnick announced that the administration has reached a trade deal with China. The agreement, pending signatures from Presidents Trump and Xi, would grant the US access to rare earth minerals. In return, the US is expected to resume ethane shipments to China upon finalization of the deal.
• The agreement should prove particularly beneficial for US tech stocks, as it secures access to critical production inputs. Rare earth minerals, essential components in everything from smartphones to advanced jet engines, represent just one example of the vital resources now more reliably available to these companies under the deal’s framework.

• While import tariffs dominate trade policy discussions, export controls represent a more systemic economic vulnerability. The fundamental asymmetry lies in substitution dynamics — markets can typically be replaced more readily than critical supply chains. Consequently, the economy’s resilience (and by extension, market performance) will depend heavily on its ability to prevent material shortages before they emerge.

Germany’s Past: The Social Democrats are set to clash over differences on how to deal with Russia.

• The party will convene on Friday to deliberate its future stance toward Russia, as members seek to reconcile their historical advocacy for détente — a policy many credit with helping to topple the Berlin Wall — with current demands for heightened defense expenditures. This strategic reassessment comes amid escalating geopolitical tensions.
• The ongoing dispute risks undermining the government’s ability to approve critical defense legislation. With the ruling coalition holding a fragile 13-seat majority, even limited defections from SPD members could stall key votes, potentially paralyzing security funding efforts.
• While German equities have been among this year’s top performers, much of the rally has been fueled by expectations of higher defense spending. As a result, we are closely monitoring intra-coalition tensions, particularly their potential to disrupt fiscal commitments, to assess whether this market strength reflects a sustainable trend or merely short-term optimism.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are intently focused on the latest Fed developments. Today’s Comment examines the growing conservative support for wealth taxes, the potential White House pressure on Chair Powell, and the new challenge facing the leader of the European Commission. As always, we’ll wrap up with a snapshot of today’s most important domestic and international data releases.

Taxing the Rich: Some conservative legislators now support raising taxes on top earners as part of efforts to protect low-income households from bearing disproportionate fiscal pressures.

• Senator Susan Collins (R-ME) has proposed raising taxes on individuals earning over $100 million annually. Her plan would allow the Trump-era tax cuts to expire for the wealthiest Americans and redirect the revenue to fund tax relief for middle- and lower-income households. If enacted, the top marginal rate would revert from 37% to 39.6%, matching the rate under the Obama administration.
• Collins’ tax proposal emerges as Republicans seek to prevent drastic cuts to essential social programs like Medicaid and Medicare. Previous attempts to reduce funding for these programs raised alarms about potential service disruptions for vulnerable populations. The debate over required funding levels has intensified, with Collins advocating for $100 billion in allocated funds while Florida Republican Senator Rick Scott has proposed a $6 billion alternative.

• According to Social Security Administration data, fewer than 293 taxpayers reported annual incomes above $50 million in 2023. Using this group as the sample, the proposed 2.6 percentage-point increase in their tax rate would theoretically generate an estimated $750 billion in additional revenue over 10 years. While exact figures aren’t available for those earning over $100 million specifically, it demonstrates how even a modest tax increase targeting ultra-high earners can yield substantial government revenue.
• As conservative lawmakers deliberate the path forward for the president’s $4.2 trillion tax cut proposal, political pressures, including the impending debt ceiling deadline, may ultimately compel passage. While the final legislation may incorporate some revenue-raising measures to reduce long-term costs and support bond markets, the package’s overall tax reductions could provide an economic boost, partially offsetting the dampening effects of current tariffs.

Shadow Fed Talks: The president is considering naming a successor for the Fed chair before Powell’s term expires in May of next year.

• The president is evaluating three to four potential nominees to lead the Federal Reserve. While no official announcement timeline has been established, speculation suggests a decision may coincide with the September-October window, the same period Chair Powell has indicated could warrant potential rate cuts. This consideration comes amid ongoing tension between the administration and the Fed, which has maintained its rate policy despite pressure for cuts from the White House.
• The president’s shortlist for Federal Reserve chair features both administration officials and current Fed leadership. Among the leading candidates are Treasury Secretary Scott Bessent, White House Economic Advisor and former Fed Governor Kevin Warsh, National Economic Council Director Kevin Hassett, and sitting Fed Governor Christopher Waller.

• The Fed leadership race appears increasingly likely to narrow to Warsh and Waller. Warsh, a previous Fed chair finalist, has notably softened his once hawkish stance from his first board tenure, a shift that is likely to raise suspicions about his ability to resist political pressure when setting policy. In contrast, Waller’s research correlating job openings with labor demand provides a data-driven case for rate cuts, though his votes this year to maintain current rates could lead Trump to go in another direction.
• That said, the uncertainty with leadership is likely to fuel bond market volatility and weaken the dollar. While Fed policy and long-term interest rates are closely linked, prolonged ambiguity could exacerbate rate swings and even intensify inflationary pressures. Moreover, diminished central bank credibility may reduce the appeal of US assets to foreign investors. One potential hedge against this risk is diversification into international markets, as a weaker dollar could enhance returns for domestic investors.

EU Head in Trouble: A recent ruling may present challenges for European leaders as they work to maintain unity amid growing pressures facing the bloc.

• European Commission President Ursula von der Leyen faces a no-confidence vote following allegations connected to pandemic-era vaccine procurement. Far-right lawmakers have reportedly gathered sufficient signatures to advance a motion — widely referred to as “Pfizergate” — seeking the removal of current leadership. While the motion is expected to fail, it highlights the deepening divisions within the EU.
• The controversy centers on transparency regarding vaccine negotiations. While von der Leyen successfully secured contracts for the bloc, questions persist about missing text messages between her and Pfizer CEO Albert Bourla during critical negotiation periods. The apparent deletion of the messages became a focal point after a European court ruled in May that the Commission must either locate the communications or provide a credible explanation for their absence.
• While the no-confidence vote is unlikely to succeed, its political ramifications could still trigger a parliamentary shake-up. The 1999 precedent of Jacques Santer’s Commission, which resigned en masse amid fraud and transparency allegations despite surviving a no-confidence vote, looms large. That said, four subsequent motions failed, underscoring the high threshold for actual removal.

• The broader concern is how the scandal might impact the EU’s trade negotiations with the US. Although recent progress includes a provisional deal on non-tariff measures, the bloc remains prepared to retaliate if the US imposes new tariffs, a possibility the Trump administration has floated with rates as high as 50%. The uncertainty risks complicating delicate talks, particularly if the leadership changes disrupt the EU’s strategic cohesion.
• That said, we do not expect the controversy to have significant short-term market implications. However, it warrants close monitoring as the EU navigates a delicate balancing act between trade pressures, primarily from the US and, to a lesser extent, China. The White House has historically preferred bilateral negotiations, meaning any fragmentation within the bloc could strengthen Washington’s hand in securing more favorable trade terms.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are breathing a sigh of relief as tensions in the Middle East show signs of easing, helping stabilize risk sentiment. In today’s Comment, we’ll break down the key takeaways from Fed Chair Jerome Powell’s first day of congressional testimony, analyze the latest drop in consumer confidence, and cover other market-moving headlines you need to know. As always, we’ll wrap up with a snapshot of today’s most important domestic and international data releases.

Powell Speaks: Fed Chair Powell addressed markets regarding the timeline for interest rate cuts but stopped short of offering any clear signals on when the first reduction might occur.

• During his congressional testimony, Fed Chair Powell pushed back against calls for an immediate rate cut but left the door open to potential easing in September. He stressed that the central bank would first need to evaluate June and July inflation data before considering any policy adjustments later this year. His remarks follow recent criticism from the president, who has accused the Fed of lagging behind other major central banks in lowering interest rates.
• The decision to cut rates appears to have deepened divisions within the FOMC, as Fed officials grapple with how to interpret inflation data amid recent tariff impacts. As highlighted in Tuesday’s report, Fed Governor Waller has advocated a data-dependent approach, arguing the central bank should act on incoming figures rather than wait for full confirmation. Meanwhile, Kansas City Fed President Jeffrey Schmid has endorsed Chair Powell’s more cautious “wait-and-see” stance.

• Despite the Fed’s ongoing debate over whether to cut rates now or later, its hesitancy to act without confirmation has been a consistent pattern. In 2024, even though the Fed ultimately cut rates by 100 basis points, it initially resisted calls for earlier reductions. This cautious approach stems partly from inflation’s seasonal patterns, as historically, price growth slows most during summer months. If incoming data aligns with this trend, the Fed will likely conclude inflation is converging toward its target.
• The key factor we’re monitoring closely is data quality. Over the past three months, the proportion of inflation components derived from estimates rather than actual measurements has surged from 10% to 30%. This increase suggests we may see significant revisions later this year. While we maintain confidence in the overall accuracy of these figures, the growing reliance on estimates could prompt the Fed to exercise additional caution before implementing its first rate cut of the year.

Confidence Slips: While inflation expectations have eased, households are now worried that tariffs could hurt their job prospects.

• Consumer confidence unexpectedly declined in June amid growing household concerns about the potential impact of tariffs on employment. The Conference Board’s index dropped to 93.0 from 98.4 in May, significantly missing economists’ consensus forecast of 100. The deterioration was primarily driven by the present situation component, which fell to its lowest level this year, while the expectations index declined further below the 80-point threshold typically indicative of impending recession.
• A closer examination reveals a nuanced shift in consumer sentiment. Respondents reported easing inflation concerns and growing confidence in equity markets. Yet this optimism is tempered by emerging labor market anxieties, with fewer consumers perceiving abundant job availability compared to early 2024. The survey also detected early warning signs of deteriorating household perceptions regarding business conditions.

• The divergence between labor market expectations and equity market performance reflects how financial markets have discounted uncertainty while households remain cautious. This suggests that despite the stock market rebound, consumers are maintaining vigilance against potential economic volatility.
• There’s often a disconnect between consumer sentiment and actual spending behavior. While declining confidence surveys might suggest economic pessimism, most hard indicators still point to continued expansion. That said, the weakening outlook does signal potential caution among households, who may begin restraining discretionary spending in coming months. This divergence warrants attention but doesn’t yet justify significant concern.

 Damaged, Not Destroyed: New information has surfaced concerning the US bombing of an Iranian facility, indicating remaining persistent risks that were perhaps not entirely diffused.

• A recently leaked intelligence report suggests that the impact from the US strike on Iran’s nuclear program was limited, estimating a setback of only a few months. This assessment directly contradicts the president’s assertion that the Iranian nuclear facility was “obliterated” and fuels concerns about the conflict escalating. Defense Secretary Pete Hegseth acknowledged the report’s existence but stated that the intelligence community had “low confidence” in its accuracy.
• Despite these tensions, diplomatic progress appears underway as Iran and Washington have agreed to resume negotiations regarding Tehran’s nuclear program. The White House’s Middle East envoy Steve Witkoff confirmed preliminary discussions are promising, with both sides working toward a comprehensive peace agreement. In a conciliatory gesture, the US has eased sanctions on Chinese vessels involved in Iranian oil purchases, signaling a potential openness to economic concessions.
• The primary challenge facing both parties will be determining a path forward. Israeli intelligence operatives who surveyed the Fordow enrichment facility reported mixed operational results, with one source characterizing the outcome as  “really not good.” The assessment noted troubling signs that Iran may have relocated enriched uranium prior to the strike, while the operational status of many centrifuges remains uncertain.
• While the president has recently warned that the US would conduct additional strikes if Iran resumes its nuclear enrichment program, we view this as an unlikely near-term outcome given ongoing negotiations. However, should another strike occur, markets would likely focus less on the military action itself and more on whether Washington intends to pursue regime change — a scenario that currently appears off the table, suggesting limited market volatility for now.

Populist Takeover: The New York mayoral race provided more evidence of a shift in sentiment concerning the established norms.

• In a surprising upset, 33-year-old democratic socialist Zohran Mamdani defeated former New York Governor Andrew Cuomo for the Democratic nomination. A relative unknown, Mamdani built a winning coalition across Queens, Brooklyn, and Manhattan, even making inroads in the Bronx, where Cuomo had believed his support was strongest. Mamdani’s victory signals a potential shift within the Democratic Party as it seeks to rebrand itself as more progressive and grassroots oriented.
• This election underscores a broader erosion of traditional politicians’ ability to maintain power through conventional means. Voters are increasingly rejecting the Washington Consensus that has shaped policy for the past three decades, demanding more disruptive leadership instead. President Trump’s populist ascent exemplifies this shift, reflecting a growing appetite for leaders willing to challenge established norms and institutions.
• Broadly speaking, shifts in sentiment can be viewed through the lens of the equality-efficiency trade-off, a concept famously articulated by economist Arthur Okun. He argued that an inherent tension exists between maintaining robust productivity and ensuring that no segments of society are left behind. While policies promoting greater equality may lead to inefficiencies due to disincentives for production or misallocation of capital, a sole focus on efficiency can exacerbate wealth and income inequality.
• We have experienced a prolonged era of policymaking that prioritized productivity over social welfare, fueling aggregate wealth but exacerbating income inequality in the process. The dynamics of the New York mayoral race appear to reflect a broader shift away from this efficiency-driven paradigm, which could introduce greater uncertainty into markets. In such an environment — where monetary policy and inflation are likely to remain volatile — we believe active investing will outperform passive in the long term.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The markets are carefully assessing the implications of the latest truce between Iran and Israel. In today’s Comment, we’ll analyze the ongoing Middle East conflict and its potential market impact, examine why a Fed rate cut at next month’s FOMC meeting is now a realistic possibility, and highlight other key developments shaping the financial landscape. As always, we’ll conclude with a concise overview of today’s most important domestic and international economic data releases.

Respond and Relax: Iran’s retaliation to the US attack on its nuclear facility has paved the way for de-escalation.

• Iran launched an attack on a US military base in Qatar, home to the US Central Command’s headquarters. The initial strikes sparked market concerns over a widening conflict. However, reports indicated that most of the missile attacks were intercepted, resulting in relatively limited damage and no reported casualties, which helped ease fears. Additionally, it was later revealed that Iran had provided advance warning of the strike, suggesting the move may have been more for show than a genuine escalation.
• Following the attack, Iran moved to de-escalate tensions by announcing it planned no further strikes and agreed to a tentative ceasefire with Israel and the US. This sentiment echoed Washington’s stance after its own strikes on Iranian nuclear facilities, when the US similarly declared it sought no additional attacks and had no intention of pursuing regime change.

• Assuming the dust will settle soon, the two sides appear poised to resume nuclear talks. However, it remains unclear who holds the upper hand, as the full impact of US strikes on Iran’s nuclear program is still uncertain. For instance, there are no traces of the 400kg of enriched uranium, suggesting Iran may have relocated it to a secure facility before the attack. Moreover, initial assessments indicate that while targeted sites sustained severe damage, they may not have been fully destroyed.
• So far, the ceasefire remains in place but is fragile. Israel has accused Iran of violating the truce — a claim Tehran denies. Meanwhile, Iran’s refusal to allow IAEA inspections of its nuclear facilities is likely to heighten international concerns. That said, the attacks appear to have significantly degraded Iran’s nuclear enrichment capabilities, reducing the immediate threat level. Barring a renewed escalation, we expect minimal disruption to financial markets in the short term.

July Rate Cut: Nearly a week after the Federal Reserve concluded its two-day meeting, there are signs that Fed officials may now be favoring a rate cut.

• On Monday, Fed Vice Chair for Supervision Michelle Bowman said she would support easing monetary policy if inflation demonstrates sustained progress toward the 2% target and labor market conditions deteriorate meaningfully. Her comments align with recent remarks from Fed Governor Christopher Waller, who emphasized that future rate decisions should be based on incoming data rather than speculation. Waller also noted the likely temporary nature of tariff-related inflationary pressures.
• Their comments on future monetary policy follow the latest Summary of Economic Projections (SEP), which revealed growing divergence among policymakers regarding the path of policy rates. While the median federal funds target rate for year-end remained unchanged from the March meeting at 3.9%, projections for the next two years showed one fewer rate cut anticipated for both years. This suggests that despite dovish rhetoric from some Fed officials, the FOMC’s overall stance has turned slightly more hawkish.

• That said, despite diverse views among FOMC members, the committee has maintained remarkable unity in actual policy rate decisions. Fed Chair Jerome Powell has presided over one of the lowest dissent rates in modern Fed history compared to his predecessors. We believe this reflects Powell’s leadership approach — allowing members to voice differing opinions publicly while maintaining consensus in formal policy votes.
• Moreover, this consensus may come under increasing pressure as the president continues to urge the central bank to lower interest rates, both to mitigate the economic impact of tariffs and reduce government debt servicing costs. We expect these pressures could prompt the Fed to deliver roughly 50 basis points of rate cuts this year if economic conditions remain stable. However, a material deterioration in labor market conditions might necessitate more aggressive easing.

NATO Defense Spending: At its two-day summit, the Western military alliance is set to address key issues, including Iran and defense spending.

• The central topic of the summit will be Europe’s plan to raise defense spending to 5% of GDP by 2035. While most member states broadly agree on this target, Spain has emerged as a key dissenter. Prime Minister Pedro Sánchez has called the goal disproportionate, arguing that Spain can fulfill all its NATO commitments, in terms of personnel and equipment, by spending just 2.1% of GDP. Its decision to hold out has called into question whether or not all countries will be able to meet spending obligations.
• That said, the larger European countries appear to be on track to ramp up spending and meet the ambitious target. The UK has pledged to increase defense spending to 5% of GDP, allocating 3.5% to core defense and an additional 1.5% to other defense-related expenditures. France’s President Emmanuel Macron has long advocated for the bloc to boost its military spending. Meanwhile, Germany has accelerated its military buildup, with plans to increase defense spending by two-thirds by 2029.
• Beyond defense spending, divisions are emerging among European allies over US involvement in the Iran and Ukraine conflicts. While Germany and NATO’s leadership have backed President Trump’s decision to strike Iranian nuclear facilities, France and others have denounced the move as a violation of international law. Separately, discussions are expected on bolstering Ukraine’s defense against Russia, with the bloc pushing for Kyiv’s potential NATO membership, a prospect Trump continues to resist.
• While tensions over defense spending and foreign policy priorities will dominate the summit, financial markets remain acutely attuned to any signs of alliance fragmentation. A deepening rift between European members and the US has become increasingly apparent, driven by Washington’s desire to shift away from providing Europe with security towards countering China in the Indo-Pacific. This shift has sparked concerns about a premature reduction of US forces in Europe before continental allies are ready.
• Although no immediate withdrawal announcement is expected, even subtle indications of such a move could exacerbate geopolitical anxieties. Market reactions would likely manifest through a rotation out of European sovereign bonds and into defense-sector equities, as investors anticipate accelerated military spending. Such a shift would pressure government balance sheets through increased borrowing while boosting revenues for aerospace and defense contractors.

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