by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting the latest GDP figures. In sports news, the Indiana Pacers secured a victory over the Milwaukee Bucks in last night’s NBA playoff action. Today’s Comment will focus on growing concerns about a potential US recession, the EU’s weighing of China trade talks, and other important market developments. As always, we’ve included our regular summary of both domestic and international economic data releases to keep you informed.

Recession Worries Rise: Despite rising fears of an economic slowdown, equities and bonds have not dropped as investors remain optimistic about possible intervention by the Fed.

• April’s Consumer Confidence Index plummeted to 86.0 — a five-year low — which is down sharply from March’s 93.9 reading. The decline reflects growing public anxiety that tariffs are dampening economic prospects. While the Present Situation Index remained relatively stable at 133.5 (down just 0.9 points), the Expectations Index cratered to 54.4, its weakest level since October 2011 and far below the 80-point threshold typically associated with recession.
• Pessimism is increasingly evident in real-time economic data as well. The latest JOLTS report revealed a decline in job openings, dropping from 7.48 million to 7.19 million in March. The ratio of job openings to unemployed workers also fell to its lowest level in four years. Meanwhile, the housing market continues to lose momentum, with national home prices rising just 0.1% month-over-month in February, well below the 0.3% consensus estimate.

• Despite the disappointing data, market optimism persists that Federal Reserve action could provide a boost. The recent weak economic indicators have prompted investors to price in additional rate cuts, with the CME FedWatch Tool now indicating a high probability of the central bank implementing its first rate cut for the year by June. Additionally, the Fed is now expected to cut rates by 100 bps by the end of the year.
• Markets are pricing in a June rate cut, but pressure is mounting on the Fed to act sooner. President Trump has intensified his calls for immediate easing at the May 7 meeting to stave off a potential downturn. He has repeatedly criticized Chair Powell’s cautious approach to shifting economic conditions and is now reportedly considering appointing a shadow Fed chair, a move that could undermine Powell’s authority and sway over markets.
• Next Wednesday, the Fed will likely have to weather a storm of concerns about the strength of the economy as well as the potential inflationary impact on tariffs. Most Fed officials have signaled that they will likely keep rates unchanged until they have a better understanding of where the economy is heading. As a result, we suspect the upcoming labor report on Friday will play a strong role as to whether the Fed will cut rates next week.

EU Playing Both Sides? The bloc of European countries is currently weighing trade talks with China while simultaneously pushing for a deal with the US.

• The Chinese government has lifted sanctions on five European parliament members who had criticized China’s human rights record, marking a goodwill gesture ahead of bilateral trade talks. While European officials welcomed this move, negotiations are expected to include discussions about China’s industrial policies as well as accusations of dumping. The thaw in relations may accelerate following the Ukraine war’s conclusion, as both sides had supported opposing factions in the conflict.
• The diplomatic thaw unfolds as Europe wrestles with its fraught relationship with Washington amid escalating US tariffs on EU exports. Despite lingering hesitancy, there are growing signs that Europe may be open to dialogue with Beijing. Spanish PM Pedro Sánchez has pushed for stronger EU-China engagement, while Italy’s Giorgia Meloni maintains pragmatic bilateral ties despite withdrawing from China’s Belt and Road Initiative.

• Meanwhile, US-EU trade negotiations remain deadlocked, with the bloc’s Digital Services Tax continuing to serve as a major obstacle. The impasse was most recently highlighted by Treasury Secretary Bessent, who identified the controversial tax as a key sticking point before the two sides can come to an agreement.
• While the EU’s engagement with China is unlikely to fundamentally shift its strategic alignment with the US, it underscores a shifting geopolitical terrain where nations adapt to a less accommodating America retreating from its role as the primary absorber of global demand. We foresee the EU navigating a delicate balance between Washington and Beijing to further its global economic objectives.
• In the near to medium term, the euro could find tailwinds from two primary sources: (1) the US administration’s apparent inclination towards dollar depreciation to stimulate exports, and (2) the potential for increased Chinese capital inflows into European markets.

India-Pakistan Feud Escalates: The two neighboring countries appear to be heading toward direct conflict, as both sides continue escalating tensions with provocative actions that risk triggering war.

• Tensions between the two nations continue to build following a deadly Islamist militant attack in India-administered Kashmir last week that killed 26 people. In response, Indian Prime Minister Narendra Modi has vowed retaliation, accusing Pakistan of involvement in the assault. Since the attack, both sides have shot down each other’s surveillance drones near their shared border. On Tuesday, Pakistan’s defense minister warned that war could erupt within 2-3 days if tensions continue to rise.
• The US faces a significant challenge as it attempts to maintain both countries within its sphere of influence. While India maintains ties with China, it also stands to benefit substantially as the US seeks to reduce its reliance on the world’s second-largest economy. Pakistan, on the other hand, remains a strategic partner — a status underscored by the Trump administration’s decision to exempt the country from the budget cuts it made in foreign aid.
• In this tense situation, US Secretary of State Rubio is getting ready for important talks with both countries. He needs to do two things: 1) stop the fighting from getting worse, and 2) protect America’s interests in the region. If these talks fail, it could be very dangerous. India and Pakistan both have nuclear weapons, and if they go to war, it could scare investors and hurt economies around the world.

Ukraine Deal Close? Ukrainian officials may sign a minerals deal today, as Trump holds out hope that Putin will end his invasion of the country.

• Ukrainian Economy Minister Yulia Svyrydenko will visit Washington this week to conclude a landmark bilateral agreement following extended negotiations. The pact establishes a framework for repaying future US military assistance while locking in foreign investment for Ukraine’s postwar rebuilding. The timing is significant, as it comes amid President Trump’s vocal criticisms of the negotiation delays.
• Although the US-Ukraine deal is nearing completion, concerns persist that Russia may reject the proposed peace terms. President Vladimir Putin continues to insist on annexing four partially occupied regions as a precondition for any settlement. Despite these demands, President Trump remains optimistic about persuading Putin to scale back his territorial claims to end the conflict.
• Although the timeline for the ending of hostilities remains uncertain, we anticipate the conflict’s conclusion within the coming months. The resolution of the war should provide support for global risk assets and could exert downward pressure on international energy prices.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are on hold awaiting key tech earnings reports. In sports, the Cleveland Cavaliers are poised to sweep the Miami Heat in their NBA playoff series. Today’s Comment will cover the economic impact of Trump’s first 100 days in office, implications of the upcoming Canadian elections, and other market-moving developments. As always, we’ll also include our regular summary of international and domestic economic data releases.

Trump’s 100 Days: President Trump is preparing to celebrate an incredible milestone as he looks to highlight his accomplishments.

• The president demonstrated his commitment to the auto industry by offering tariff concessions as carmakers adapt to evolving market conditions. Ahead of his visit to Michigan, he announced the lifting of levies on certain foreign-made parts used in US-assembled cars and trucks. The administration is also preparing to exempt imported vehicles from existing steel and aluminum tariffs, providing additional relief to the sector.
• Additionally, the president plans to highlight recent economic wins by showcasing major new domestic investments. Representatives from companies like Nvidia, Eli Lilly, and SoftBank are set to attend a White House event announcing expanded investment plans totaling $1.6 trillion — a spending surge projected to create over 426,000 jobs. The gathering will spotlight how corporate commitments align with the administration’s economic priorities in Trump’s “Invest in America” initiative.

• The president is urging his party to expedite passage of new legislation on tax cuts. While Republicans approved a procedural measure earlier this year allowing tax cuts to pass with a simple majority, internal divisions persist over how to offset the budgetary impact and avoid adding to the deficit. The White House is now pushing to finalize the bill by July 4, though the process will likely take weeks to complete given ongoing negotiations.
• While the president has touted his economic achievements, recent polling suggests his support among voters is slipping, particularly over lingering concerns about tariffs. As his administration shifts focus toward sustaining economic stability, markets are likely to remain in a holding pattern until clearer evidence emerges on whether his policies are helping or hurting growth.

Carney Wins: The Liberal Party eked out a narrow victory, securing a fourth term — one likely to be defined by how it handles a trade war with the US.

• The election initially gave the loonie a boost as a clear victor emerged, but the currency retreated once it became apparent the result would yield another minority government. The Liberals fell just short of an absolute majority, winning 168 seats, four shy of the 172 needed to govern outright. The Conservatives followed with 144 seats, while the Bloc Québécois took 23, the New Democrats secured 7, and the Green Party won 1.
• While the Conservatives outperformed poll projections, their leader Pierre Poilievre is projected to lose his seat. The party’s failure to translate a 20-point lead at the start of the year into a win may create a leadership crisis. Poilievre’s mishandling of the “Trump factor” due to his inability to counter the US president’s “51^st state” characterization and tariff threats will be a defining issue, as the party will look to rebrand itself following the loss.
• In his victory speech, Prime Minister Mark Carney struck a defiant yet pragmatic tone, expressing confidence in Canada’s ability to prevail in its trade dispute with the US, while acknowledging the profound challenges of redefining the bilateral relationship. He particularly emphasized the need for Canada to reduce its economic dependence on American trade and reassess its security arrangements, signaling a historic shift in North American relations.

• The global electoral impact of Trump’s trade policies has become undeniable, as evidenced by this outcome. While establishment candidates have benefited from rising anti-American sentiment, sustained political stability will require concrete policy responses. The critical question now facing nations worldwide is how they will reform regulations and implement stimulus measures to achieve growth independent of US markets.

Cloudy Business Outlook: A growing number of firms are reluctant to provide earnings guidance amid heightened uncertainty from the ongoing trade war.

• Automaker General Motors and logistics giant UPS have suspended their financial guidance this quarter as they reassess the evolving business environment. The decisions come as both companies implement strategic changes to strengthen their long-term financial performance. GM has postponed scheduled stock buybacks, while UPS plans to reduce its workforce by 20,000 positions.
• Corporate hesitation in issuing annual guidance underscores the profound uncertainty plaguing trade policy. Although businesses have modeled potential profit impacts since the administration rolled out targeted tariffs, the policy landscape remains too fluid for reliable forecasting. Compounding the challenge, firms must now also predict how shifting price points will reshape consumer demand, a critical variable that could dramatically alter financial projections.
• While corporate earnings continue to show strength this season, with most companies surpassing expectations, the rapidly shifting business environment poses growing challenges for strategic planning. Amid this persistent uncertainty, we believe the ultimate impact on US corporations remains to be seen. In the interim, we advocate a selective, stock-by-stock approach to portfolio management until clearer investment themes emerge.

Lights Back On: Full power was restored across the Iberian Peninsula on Monday, but the unexplained outage has triggered serious questions about the resilience of the region’s energy infrastructure.

• Power has been restored across Spain and Portugal after their worst outage since Europe’s 2021 blackouts. While authorities have ruled out cyberattacks and severe weather, the disruption appears linked to solar power supply failures. The system initially compensated for lost generation in southwestern Spain, but a subsequent failure collapsed the entire grid, including imported power supplies to Portugal at the time.
• The grid failure highlights the challenges of Spain’s ambitious green transition. While renewables now provide a substantial share of energy, they remain less reliable than traditional sources. This vulnerability emerges as Spain has accelerated its phase-out of coal-fired thermoelectric plants and has already decommissioned nuclear facilities that once contributed 20% of the nation’s power mix.
• The power grid concerns could cast a shadow over the economy’s otherwise strong performance. While Spain has been among Europe’s best performers since the Ukraine war began, posting 0.6% growth in the first quarter, this blackout is likely to hinder growth in the current period.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with reports suggesting President Trump’s import tariffs may finally show up in the trade and economic data starting this week. Firm evidence of falling imports and potential shortages would have the potential to further undermine market confidence. We next review several other international and US developments with the potential to affect the financial markets today, including an increasing risk of military conflict between India and Pakistan and Trump’s suggestion that he may pursue new tax cuts to offset the impact of his tariffs.

United States-China: New data published late last week showed that US-China trade is finally starting to fall sharply in response to the Trump administration’s stiff tariffs against Beijing. Figures from the Department of Agriculture show that US net exports of soybeans in the week of April 11 to 17 were down about 50% from the previous week and 25% below their four-week moving average. Net exports of pork were also down sharply. Meanwhile, Port of Los Angeles Executive Director Pete Seroka said he expects a 35% drop in Chinese import volumes within two weeks.

• According to Seroka, “essentially all shipments out of China for major retailers and manufacturers [have] ceased.”
• Until now, there have been few signs of outright declines in trade operations or economic activity, even though there is plenty of survey data showing that consumers and firms are becoming much more pessimistic. The relatively stable activity data probably reflects factors such as front-running shipments to get ahead of the tariffs, the difficulty of canceling shipping schedules quickly, and the overall momentum of the US economy.
• Looking forward, observers are increasingly expecting to see disruptions in trade and output by early summer. It would be no surprise if negative data starts to roll in starting as early as this week. If so, it would likely increase over the coming months. We still don’t think a recession is a certainty, but the weakening activity will probably raise the risk of a broader economic contraction.
• In any case, any incoming data that appears to confirm a sharp contraction in trade or general economic activity could potentially spark a new sell-off in risk assets, especially US stocks.

China-Philippines: The Chinese coast guard on Saturday released photos showing it had seized a tiny reef in the South China Sea that is claimed not only by China but also by the Philippines, Vietnam, and Taiwan. Most concerning, the reef is located just kilometers from a Philippine naval outpost in the Spratly Islands. The move is only the latest example of Chinese territorial aggressiveness in the area. If that aggressiveness heats up further, the result will likely be more global tensions, a risk of conflict, and further risks to the global financial markets.

China: Despite being sanctioned by the US, technology giant Huawei is reportedly preparing to test a new computer chip designed to be a substitute for Nvidia’s powerful H100, which is popular for training artificial intelligence models. The new chip, the Ascend 910D, is apparently competitive with the H100 in computing power, but it less power-efficient. Still, Huawei’s success with the chip so far is a reminder that China may be catching up to the US in advanced information technology, potentially threatening big US tech firms and their stocks.

India-Pakistan: After last week’s terrorist attack that killed 26 in the Kashmir region, Indian Prime Minister Modi has reportedly called dozens of global leaders in an apparent effort to prepare them for a retaliatory attack on Pakistan. Indian police have also launched large-scale arrests in Kashmir, while Hindu nationalists have unleashed mass anti-Muslim protests across India. Any military conflict between the two nuclear powers could prompt a global security concern and add to the current downward pressure on risk assets.

South Korea: The center-left opposition party, the Democratic People’s Party, yesterday picked Lee Jae-myung as its candidate for the snap presidential election on June 3. In the latest polls tracking public support for the candidates, Lee and the DPP currently have a double-digit lead over the conservative People’s Power Party, which has been rocked by scandal. If Lee ultimately wins the election, South Korean policy could shift toward closer relations with China and cooler relations with the US, while economic policy could shift into a more statist direction.

Germany: Incoming Chancellor Friedrich Merz has reportedly chosen Katherina Reiche, a high-level executive with German energy group Eon, to lead the economy ministry. The move is a sign that Merz may prioritize energy supply as a key part of his program to revitalize German industry and spur economic growth. The nomination of Reiche comes as Merz’s center-right CDU party has signed a coalition deal with the center-left Social Democratic Party to form a government.

Spain: The country today was hit by an enormous electricity blackout affecting approximately 10 gigawatts of demand. The blackout has also extended to parts of Portugal and France. The loss of electricity has disrupted a wide range of economic activity in the affected areas, including airline and train operations, factory production, communications, and office work. However, it is not yet clear whether the blackout will have lasting negative impacts on economic output or the Spanish financial markets.

Canada: Parliamentary elections are being held today, with the main contenders being the ruling center-left Liberal Party under Prime Minister Mark Carney and the opposition center-right Conservative Party under Pierre Poilievre. The latest opinion polls suggest the Liberals will win a modest majority, keeping them in power, after Poilievre lost a massive advantage after being tagged for being in line with US President Trump.

US Fiscal Policy: In a social media post yesterday, President Trump suggested he will push for a new income-tax cut for individuals making less than $200,000 per year to offset the impact of his import tariffs. His post suggested any revenue loss from the new tax cuts would be made up by tariff revenues. However, the likely drop in trade because of the tariffs and any tariff reductions negotiated with foreign countries would probably keep overall tariff revenues relatively modest.

• The suggestion of further tax cuts therefore could add to concerns about the federal budget deficit and debt levels. If so, the recent US capital flight and backup in Treasury yields could worsen.
• So far today, bond prices have weakened, driving up yields. The yield on the benchmark 10-year Treasury note has risen to 4.292% as of this writing.

US Corporate Sector: A review of recent earnings reports and other corporate statements by the Wall Street Journal shows that US companies in multiple industries are slashing costs to help pay for President Trump’s big tariff increases, which are essentially a tax on importers. The article notes that firms are still generally reluctant to lay off their own workers, but they are tightening their spending on consultants and contractors — a move that has often preceded layoffs and weaker economic growth in the past.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is still analyzing the latest earnings reports while adjusting to other developments. In sports news, the Tennessee Titans made Cam Ward their number one draft pick. Today’s Comment will focus on growing speculation about a potential June Fed rate cut, discuss the easing of trade tensions between the US and China, and review other notable market-moving stories. As always, we’ll conclude with a comprehensive summary of domestic and international economic data releases.

Rate Cut Hopes Alive? While Fed officials have been adamant about being patient about the pace of rate cuts, they have not ruled it out completely.

• While the Fed is expected to hold rates steady in May, momentum appears to be building for a potential rate cut in June. Cleveland Fed President Elizabeth Hammack suggested that officials could act in June if there is “clear and convincing” evidence about the economy’s trajectory. Her remarks hint at the Fed’s willingness to respond to signs of an impending recession. On the same day, Fed Governor Christopher Waller noted that evidence of job losses due to tariffs could also influence policy decisions.
• The decision to delay action by a month stems from the central bank’s desire to assess the economic impact of recent tariffs. Survey data indicates growing pessimism among consumers and businesses, which is likely to dampen spending and investment. However, real-time indicators, including weekly jobless claims, have yet to signal an imminent economic crisis.
• A shift toward rate cuts would likely appease the president, who has repeatedly argued that the Fed should take stronger action to support economic stability. Despite limited concrete evidence, recession risks remain elevated. Just one week ahead of the official report, the Atlanta Fed’s GDPNow model has signaled that there may have been an economic contraction in the first quarter of the year.

• The Fed is likely to remain patient for the foreseeable future, ensuring that inflation and unemployment trends align with its mandate. Its cautious approach reinforces market confidence in its data-dependent stance, avoiding perceptions of discretionary or politically influenced decisions. By maintaining this credibility, the Fed enhances the effectiveness of its policy tools, ensuring that future rate cuts transmit more efficiently to intermediate and long-term rates.

US-China: The world’s two largest economies are carefully decoupling and reducing mutual dependence while striving to avoid severe market disruptions.

• On Friday, Chinese officials unveiled emergency contingency plans designed to buffer the economy against potential external shocks from escalating trade tensions. While emphasizing that these measures remain precautionary for now, policymakers have rolled out a comprehensive stimulus package featuring monetary easing tools and targeted financing mechanisms. This move follows Beijing’s recent commitment to a record-high budget deficit.
• Additionally, China appears to be taking steps to address US concerns about its historical overreliance on export-driven growth, as highlighted by Treasury Secretary Scott Bessent earlier this week. In response to these remarks, China’s Commerce Ministry has prioritized moves to better integrate domestic and foreign trade development. Supporting this initiative, Walmart has launched a program to help Chinese suppliers shift their sales focus from the US market to domestic channels.
• US companies are increasingly demonstrating their willingness to diversify supply chains beyond China. Apple has announced plans to shift the majority of its iPhone production to India as early as next year. This strategic move aligns with deepening US-India trade relations and helps Apple circumvent the punishing 145% US tariffs on Chinese imports.

• As tensions ease and both sides adapt to the new economic landscape, this progress may encourage discussions about targeted tariff exemptions to alleviate bilateral economic pressures. The constructive shift could establish a foundation for productive negotiations toward a mutually beneficial agreement. While these developments appear favorable for risk assets, the true economic impact will only become clear once existing tariffs fully work their way through the system.

EU Defense Spending: An increasing number of EU member states are boosting defense expenditures to counter external security threats, aligning with the bloc’s plans to establish a dedicated European defense fund.

• Several EU member states have already begun increasing their military expenditures in response to growing security concerns. Poland and Portugal are both expected to formally request exemptions from EU deficit rules to accommodate higher defense spending, while Spanish Prime Minister Pedro Sánchez confirmed that his country expects to reach NATO’s 2% GDP defense target this year.
• European leaders are accelerating defense spending initiatives as the EU prepares to introduce jointly backed bonds to fund military modernization. This financing mechanism would support both EU member states and allied nations, with Brussels recently announcing that non-EU countries may access these funds through new Security Action for Europe (SAFE) agreements, which are subject to participation fees and bilateral security commitments.

• Defense spending has emerged as a key catalyst for European equities, with the EU’s decision to permit deficit-funded military investments expected to provide fiscal stimulus to the region. This development comes amid ongoing trade tensions with the United States, creating a potential counterbalance that should continue to support European markets. The structural shift toward increased defense expenditures is likely to deliver sustained tailwinds for equities across the continent.

 Canada Elections: Canadian Prime Minister Mark Carney is entering the final stretch of the campaign as the apparent frontrunner, though late shifts in voter sentiment could still change the outcome.

• Recent polls show that Liberal leader Mark Carney is holding a narrow four-point lead over Conservative rival Pierre Poilievre. Carney’s edge was bolstered by backlash to President Trump’s controversial trade actions against Canada and his inflammatory comment likening the country to a “51^st state.” However, the gap appears to be tightening as Conservatives gain ground, fueled by rising voter anxiety over the cost of living — an issue that traditionally plays to Conservative strengths.
• The election’s outcome may prove decisive in shaping the future of US-Canada trade relations. This development follows President Trump’s recent remarks challenging Canada’s role in the US automotive industry, including threats of escalated tariffs on Canadian vehicle exports. In response, Carney has proposed economic stimulus measures to reduce Canada’s dependence on US trade, while Poilievre has focused on deregulation as his preferred solution to boost competitiveness.
• Next Tuesday’s election will likely determine Canada’s approach in upcoming trade negotiations with the United States, talks that could significantly impact Canada’s automotive sector. Whichever candidate prevails will face the immediate challenge of convincing automakers to maintain their Canadian operations despite growing pressure from US tariffs, particularly for access to one of the world’s largest consumer markets.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are keenly focused on the latest economic data. In sports, the Washington Capitals hold a strong 2-0 series lead over the Canadiens. Today’s Comment will examine resilient economic growth despite the headwinds and analyze the White House’s new trade exemptions. We’ll also highlight other key market movers. As always, we’ll provide a detailed roundup of domestic and international data releases.

Down But Not Out: While survey data points to a sustained deceleration in US economic activity, no clear signs of a recession have yet to emerge.

• The latest Beige Book indicated that most Federal Reserve districts are experiencing sluggish growth, with respondents expressing heightened uncertainty surrounding tariffs. Of the 12 districts, five reported modest growth, three remained flat, and four saw moderate contractions. Several regions also adopted a more cautious stance on hiring and investment due to shifting trade policies. Additionally, many districts raised concerns about rising input costs squeezing profit margins and pushing consumer prices higher.
• The weakness highlighted in the Beige Book was also reflected in recent business sentiment surveys, which pointed to a marked slowdown in the services sector. The latest S&P Global Purchasing Managers Index (PMI) remained above the growth threshold of 50 but moderated from the previous month, falling from 53.5 to 51.7. While manufacturing activity unexpectedly improved, rising from 50.7 to 51.2, this was offset by a sharp deceleration in the services sector, where the index dropped from 54.4 to 51.4.

• While survey data suggests economic softening, these concerns have yet to manifest in hard data. The March payroll report showed resilient job growth of 228,000, with unemployment remaining at a relatively low 4.2%. This labor market strength underscores that current caution among businesses doesn’t necessarily reflect fundamental weakness. Consequently, the economy appears likely to maintain its momentum in the near term, with significant tariff-related impacts still on the horizon rather than immediately threatening growth.

New Exemptions: Under pressure from lobbyists and state officials to scale back recent import tariffs, President Trump is mulling new exemptions.

• The Trump administration is considering tariff relief for automakers that are dependent on foreign-made parts. The expected exemptions are likely to cover tariffs initially imposed to curb fentanyl production, as well as those on steel and aluminum imports. However, fully assembled foreign vehicles would remain subject to the 25% duty, and automakers would still face separate 25% tariffs on auto parts set to take effect May 3.
• The decision to scale back tariffs appears to be another concession to business leaders and states, many of whom have expressed skepticism about recent trade restrictions. Prior to signaling potential reductions in Chinese tariffs, the president reportedly held discussions with US executives about the economic impact. One business leader warned that the current tariffs could trigger significant supply chain disruptions within weeks, potentially leading to product shortages and empty store shelves.

• Trump’s policy shift suggests a strategic move toward compromise amid rising trade tensions, which were sparked by the April 2 imposition of reciprocal tariffs. Even after levying tariffs as high as 145% on Chinese imports, the US has been unable to coax Beijing back to the negotiating table. Although Chinese officials have signaled a willingness to engage in talks, they are demanding that Washington first roll back its unilateral tariffs, while also calling for relief from US sanctions and concessions on Taiwan.
• While the easing of tariffs offers some market relief, it creates new uncertainty for businesses deciding whether to expand or retrench. These concessions could be reversed — or additional firms might secure further exemptions — making the policy trajectory difficult to predict. This unpredictability risks dampening economic activity and could foster increased market rigidity in the weeks ahead.

Good Auction, Lingering Questions: While the latest government bond auctions demonstrated solid overall demand, concerns persist about weakening foreign appetite for US Treasurys.

• Wednesday’s Treasury auctions demonstrated continued strong demand for US government debt, particularly in the closely watched five-year note sale, which closed with a modest tail. The auction cleared at a yield of 3.995%, slightly below the 4.005% yield indicated before issuance. This robust performance helped alleviate concerns that trade tensions might be weakening primary market appetite for US debt.
• While the auction results appeared strong at first glance, underlying data suggests a potential shift in market dynamics. The five-year note, typically favored by foreign investors, showed a marked change in buyer composition as domestic participants accounted for 24.8% of allocations, significantly above the 17.7% average, while foreign buyers took just 64.0%, below their typical 70.0% share. The remaining allocations went to primary dealers.

• This single auction’s allocation shift likely warrants little concern in isolation. However, should this pattern persist, it could pose significant challenges. Reduced participation from international buyers — typically less sensitive to interest rate fluctuations — may weaken a crucial stabilizing force in Treasury markets. With government debt supply continuing to grow, such a trend could ultimately complicate efforts to maintain stability in 10-year Treasury yields.
• While we acknowledge that interest rates remain susceptible to shifting global forces, we retain a favorable bias toward bonds, especially in the intermediate-to-long duration space. Our outlook reflects anticipated demand from investors likely to use Treasurys as a hedge against mounting economic uncertainty. Should macroeconomic conditions deteriorate further, these securities would likely see additional upside.

Iran Talks: Nuclear talks between the US and Iran continue to make progress as both sides look to make a deal to avoid a military conflict.

• Secretary of State Marco Rubio has signaled Washington’s openness to permitting Iran’s civilian nuclear program to continue, provided Tehran ceases all domestic uranium enrichment. Under such an arrangement, Iran would need to rely on imported uranium to offset its restricted production capacity. This proposal comes as Iran currently possesses uranium enriched to 60% purity — just one technical step below the 90% threshold that is considered weapons-grade.
• To date, Iran has demonstrated no readiness to curtail its uranium enrichment program, asserting its right to civilian nuclear development under the Non-Proliferation Treaty. Tehran has further insisted that negotiations be strictly limited to nuclear matters, explicitly excluding discussions about its support for regional militant groups or ballistic missile program.
• While the two sides remain unlikely to reach an agreement in the near term, negotiations are expected to continue, with the next round scheduled for Saturday. Continued dialogue reduces the immediate risk of military confrontation — a positive development for risk assets. However, should talks collapse, the US or Israel may consider military action to prevent Iran from acquiring nuclear weapons capability.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Investors are closely tracking the president’s latest remarks on trade policy and a flurry of earnings reports. In sports, the Lakers evened their playoff series with a decisive win over the Timberwolves. Today’s Comment will examine softening trade tensions, renewed debates about Fed independence, and other market-moving developments, along with our regular roundup of international and domestic economic data.

Ease in Trade Tensions: Growing hopes that the US will secure trade agreements with key partners have boosted market optimism, but businesses increasingly worry about rising costs.

• Speaking at a JP Morgan investor conference, Treasury Secretary Scott Bessent predicted that the US and China will ultimately settle their trade standoff, citing the punishing tariffs — as high as 145% on Chinese imports and 125% on American goods — that now function as de facto trade barriers. He warned that sustaining such extreme measures would harm both economies, making their rollback not just likely but inevitable. Despite his confidence, he admitted that there were no talks between the two sides at the moment.
• Bessent’s openness to trade talks with China was warmly received by markets, offering hope after fears that the world’s two largest economies were headed for a prolonged standoff. Later in the day, President Trump echoed a conciliatory tone, stating he does not intend to “play hardball” with China and expects tariff rates to drop significantly from their current highs to more sustainable levels.

• Prospects of de-escalating trade tensions could provide a much-needed boost to market optimism, following growing alarm from corporate America about tariff impacts. US aerospace and defense manufacturers have warned that tariffs would significantly increase production costs. Meanwhile, electric vehicle pioneer Tesla, while relatively insulated from the broader tariff effects, expressed particular concern about potential changes to import duties on Chinese-sourced lithium iron phosphate (LFP) batteries.
• While the potential easing of trade tensions may provide support for equities, significant uncertainty remains about how existing tariffs will affect corporate performance moving forward. Consequently, we will be closely monitoring upcoming earnings reports for insights into how companies are adapting to these pricing pressures. In the interim, it may be prudent to maintain a defensive portfolio stance until markets gain clearer visibility on what constitutes the “new normal” in this trade environment.

Fed Independence Stays: President Trump has retreated from his earlier suggestion to dismiss Fed Chair Jerome Powell, though he maintains his position that interest rates should be reduced.

• The president reversed course Tuesday on his threats to fire Federal Reserve Chair Jerome Powell. Powell had previously warned that rising tariffs could fuel inflation, even as he resisted pressure to cut interest rates amid economic concerns. The apparent shift reflects mounting administration fears that undermining the Fed’s independence could further destabilize financial markets, which are already shaken by ongoing trade tensions.
• The president’s reversal follows increasing calls from Fed officials advocating patience as tariffs ripple through the economy. On Tuesday, Richmond Fed President Thomas Barkin struck an optimistic tone about economic growth while warning of potential stagflation risks — a key reason he supports maintaining current interest rates. Meanwhile, Fed Governor Adriana Kugler echoed similar concerns about the inflationary impact of tariffs during her public remarks.

• Understanding the inflationary impact of tariffs requires monitoring the import price index, which reveals the cost of imports before tariffs are levied. Therefore, a continuous decrease in import prices would imply that foreign sellers are absorbing the tariff costs, which should soften the impact of the levies for their respective US buyers. However, if the index remains stable or rises, it could mean that US firms may be forced to push tariff costs on to consumers or accept lower profit margins.
• Growing confidence that the White House will respect Federal Reserve independence is expected to bolster demand for US Treasurys, which would be a timely development as the government seeks to finance widening fiscal deficits. This renewed appetite should prove particularly valuable for today’s five-year note auction, where foreign investors typically account for roughly 60% of total demand. A strong auction result would be viewed as favorable by the market.

Ukraine-Russia Progress: The White House has delivered its “final” peace proposal to Moscow and Kyiv as both sides weigh concessions to end the war.

• The White House’s new peace proposal includes several significant concessions to Russia including formal US recognition of Crimea as Russian territory, de facto acceptance of Russian-controlled territories seized since 2022, and a complete lifting of sanctions imposed since 2014. The deal would also guarantee Ukraine’s exclusion from NATO membership while establishing a new US-Russia economic partnerships in energy and industrial sectors.
• Under the proposed arrangement, Ukraine would receive robust security guarantees featuring peacekeeping forces from European and allied nations, along with the return of Russian-occupied territories in Kharkiv Oblast. The deal ensures free navigation rights along the Dnieper River and includes comprehensive reconstruction assistance, combining international funding with compensation mechanisms.
• Following the latest proposals — and amid reports that the US could withdraw from negotiations — both sides have made concessions to salvage a potential deal. Russian President Vladimir Putin has signaled his willingness to halt military operations along the current frontlines, while Ukrainian President Volodymyr Zelensky has shown new openness to talks, marking a significant shift in posture after signs of deadlock.
• While an immediate agreement remains unlikely, recent developments suggest a peace deal could materialize in the coming weeks. European equities stand to benefit most from a resolution, as an end to hostilities, coupled with the potential return of Russian energy supplies to global markets, would alleviate key economic pressures across the region.

Global Response to Tariffs: As nations engage in trade negotiations with the United States, growing uncertainty threatens to dampen global economic growth.

• New Delhi is showing a renewed flexibility in its ongoing trade negotiations with the US. A notable concession under consideration by the world’s most populous nation involves the elimination of tariffs on luxury vehicles and auto components, a move intended to strengthen bilateral trade ties. This development is unfolding alongside persistent US pressure on India to lower e-commerce barriers that currently impede market access for American retail leaders such as Amazon and Walmart.
• Recent PMI data reveals growing concern among business leaders about US tariffs, with the latest index reading hovering just above 50.1, barely surpassing the threshold for economic expansion. This persistent lack of confidence suggests that the region remains wary about future growth prospects as trade tensions escalate.
• Despite escalating trade tensions and protracted negotiations, the IMF maintains its forecast that the global economy will avoid recession. While the institution has downgraded its worldwide growth projections — including a significant reduction in its US outlook from 2.8% to 1.8% — it remains cautiously optimistic about continued expansion. If this outlook holds, it could foster increased risk appetite in financial markets heading into year-end.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest bout of apparent capital flight from the US financial markets, which drove stocks sharply lower yesterday. We next review several other international and US developments with the potential to affect the financial markets today, including an ominous statement from China suggesting it will not accede to the demands underlying the US trade war against it and a new scandal involving US Secretary of Defense Hegseth.

US Capital Flight: As global investors continue to unload Treasury obligations and other US assets, data yesterday showed that foreigners in March posted a record $15.5 billion in net purchases of Japanese government bonds with maturities of 10 years or more. Along with the appreciation of the yen this year, the figures suggest that lower-risk Japanese assets have become an important safe haven now that investors are becoming increasingly negative on US economic growth and economic management.

• In a post on X yesterday, President Trump again pressured Federal Reserve Chair Powell to cut interest rates, arguing that, “There is virtually no [price] inflation.”
• Investors continue to fret that Trump could try to replace Powell with a Fed chair who would keep interest rates too low and fuel inflation. Those concerns are weighing heavily on US bond values and driving up yields. The result, as shown in the markets yesterday, has been weakening US stock prices, a falling dollar, and surging gold prices. In fact, gold prices are currently up another 1.2%, having earlier reached a new intraday record above $3,500 per ounce.

China-United States: The Chinese Ministry of Commerce yesterday released a statement saying that appeasement to the US in the face of the Trump administration’s tariff war would never be an option. The statement underlines China’s likely strong resistance to Trump’s demand for trade concessions, given the Chinese Communist Party’s decades-long commitment to burying the “Century of Humiliation” and achieving the “Great Rejuvenation of the Chinese People.” The statement suggests a very high risk that US-China tensions will continue to escalate.

• Beijing also signaled that it would retaliate against third countries that boost their tariffs or other trade barriers against China to mollify Washington.
• This suggests that Chinese leaders are sensitive to the risk that China could be isolated by coordinated Western trade barriers against it, even though Trump’s attacks on traditional US allies suggest that such a coordinated strategy would be hard to achieve.

China-South Korea: A new report in the Financial Times says China is building massive new fish farming facilities in the Yellow Sea between the Chinese mainland and South Korea. Officials in Seoul have become alarmed that the structures could be a new example of Chinese “gray zone” tactics to gradually seize control over South Korea’s territorial waters. If so, it would further heighten Chinese-South Korean tensions, likely pushing Seoul to be more amenable to the US’s new tariff policy to stay on the Trump administration’s good side.

United States-China-Southeast Asia: The US Commerce Department yesterday slapped massive new import tariffs on solar cells from Chinese-owned factories in Vietnam, Malaysia, Thailand, and Cambodia. Added to the Biden administration’s continuing broad tariffs of up to 300% on those countries, the total duty on the targeted facilities will exceed 3,500% (not a typo). The new duties are based on an analysis showing that heavily subsidized Chinese firms have been using their Southeast Asia facilities to export to the US at reduced tariff rates.

United States-India: Vice President Vance has been in India early this week, where he met with Prime Minister Modi to discuss ways to increase US exports to the country. Any trade deal would likely help India avoid the “reciprocal” tariff of 26% that the US imposed on it earlier this month before pausing it for 90 days. The discussions address not only Indian tariffs, but also a range of non-tariff barriers to US exports.

Spain: Prime Minister Sanchez today announced a new defense plan under which the country will boost its military budget to 2% of gross domestic product this year, up from just 1.4% last year. However, Sanchez warned that much of the new spending won’t be traditional defense investment in weapons, equipment, and troops. Rather, much of it would be quasi-civilian, such as upgrades to the Spanish telecommunications network to improve its resilience to cyberattacks.

• Given that the Soviet Union, China, and other heavily militarized countries long used a range of tactics to hide defense spending in ostensibly civilian budget accounts and off budget, we have often thought that the non-US members of the North Atlantic Treaty Organization could do the same in reverse, simply to counter US demands that they spend more on their own defense.
• For example, they could deem billions of euros of health, education, or other outlays as “defense related” and roll them into their defense budget, easily hitting the 2% defense burden demanded by President Trump.
• Nevertheless, the new Spanish defense plan will likely produce some real increases in traditional defense spending. As we have noted before, this is consistent with our view that European defense firms are likely to see continued new business, bigger profits, and higher stock prices as their countries rebuild their defenses against the increasing threat from Russia.

US Defense Policy: Adding to investor concerns about the Trump administration, Defense Secretary Hegseth is now embroiled in a new scandal on top of the one in which he discussed sensitive military operations on an unclassified Signal chat. It now appears that he also discussed those operations in a private chat involving his wife and personal lawyer. President Trump yesterday expressed his continued confidence in Hegseth, but Axios reports that the White House is already looking for a replacement.

US Pharmaceutical Industry: Swiss drug giant Roche yesterday said it will invest $50 billion in building new US factories over the next five years, including a new plant for weight-loss drugs and a facility to make glucose-monitoring devices. Separately, Regeneron said it will spend $3 billion to double its US manufacturing capacity.

• As with other similar announcements recently, it isn’t clear whether the investments have been spurred by the Trump administration’s tariff policies or whether they had been planned internally all along.
• In any case, the announcements confirm that new investment in US manufacturing facilities is currently very strong, even if it has plateaued a bit in recent quarters.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the death of Pope Francis and how it could affect geopolitics and global economics going forward. We next review several other international and US developments with the potential to affect the financial markets today, including another jump in global gold prices to a new record high and signs the Trump administration may soon target its budget-cutting efforts on the National Gallery of Art and other federal cultural institutions.

Global Catholicism: The Vatican this morning announced that Pope Francis has died, less than one day after making a surprise Easter appearance in St. Peter’s Square and also meeting US Vice President Vance. Because of the pope’s advanced age and recent illnesses, we suspect that the Vatican has already made some plans for his funeral and the conclave to pick his successor. Those processes are now expected to unfold over the coming weeks.

• For geopolitics, global economics, and the financial markets, a key question is whether Francis’s successor will maintain his focus on social and economic justice over the Church’s traditional moral teaching.
• As demonstrated by Pope John Paul II at the end of the Cold War, any successor to Francis will have a global pulpit either to support or to push back against the growing trends toward populist nationalism, deglobalization, restricted migration, market deregulation, and the like.

Global Gold Prices: The price of gold so far today has jumped 2.6% to a new record high of $3,417.50, up 28.1% from the end of last year. The jump in gold prices reflects continued global concern about the US economy and economic management — including comments last week from President Trump and his officials suggesting they may try to fire Federal Reserve Chair Powell. Investors worry that if the White House controls monetary policy, it would keep interest rates too low to control consumer price inflation.

• Reflecting that concern, the US Dollar Index has fallen about 1.3% so far today and is now down 9.6% for the year-to-date. The 10-year US Treasury note is also selling off, boosting its yield to 4.406%.
• Given that surging Treasury yields spooked President Trump into pausing his “reciprocal” tariffs earlier this month, a continued rise in those yields now probably has the potential to spur new U-turns in the president’s trade and economic policies.

European Union: Officials in European nations that normally oppose state subsidies — such as Denmark, Belgium, the Netherlands, and the Czech Republic — are reportedly becoming more supportive of Germany’s new plan to dramatically boost its spending on infrastructure and defense. The new support is consistent with our view that Germany’s coming fiscal stimulus is likely to help spur faster economic growth throughout the European Union, potentially helping both EU companies and EU stocks.

Russia-Ukraine War: Late last week, the Trump administration reportedly floated a proposed settlement of the Russia-Ukraine war under which the US would recognize Russia’s 2014 seizure of Crimea and prohibit any Ukrainian accession to the North Atlantic Treaty Organization. If the proposal is accepted by the Western Europeans and Ukraine in the coming days, it would be presented to Russia as the basis of a ceasefire and the start of negotiations toward a peace deal.

• The US proposal would condone Russia’s seizure of Crimea and its illegal 2022 invasion of Ukraine. Going forward, the risk is that the acquiescence to Russia would encourage President Putin to re-launch his invasion of Ukraine in the coming years, after he has used any peace deal to rest, re-arm, and re-build his military forces.
• The interlude would also allow Russia to bulk up its forces to put pressure on an increasingly isolated Western Europe, which now likely can’t rely on US backing as it tries to fend off the Russians.
• Russian pressure would put at risk Western Europe’s enormous wealth and economic potential, especially since the region is increasingly isolated from the US because of the Trump administration’s draconian tariff policies. For investors, the result is likely to be further economic disruption and reduced trade activity.

US-China Trade War: According to the Financial Times, no Chinese entity has accepted delivery of liquified natural gas from the US since early February. All LNG deliveries to China have stopped since February 10, when Beijing imposed a 15% retaliatory tariff on US LNG, which it subsequently hiked to 49%. The reduced imports by China illustrate the potential blowback for US products on account of the administration’s tariffs.

US-China Capital War: According to the Financial Times today, Chinese state-backed entities have started to pull back from investing in US private equity and debt funds. The news appears to confirm our fears that the current US-China trade war, which is focused on tariffs and export embargoes, could soon spread to a broader clampdown on US-China capital flows (as shown in our “Escalation Ladder” of potential new tensions in last Monday’s Comment). Obviously, growing capital controls have the potential to directly impact US firms and investors.

South Korea-United States: In a Saturday interview with the Financial Times, South Korean Acting President Han Duck-soo said his government “will not fight back” against the Trump administration’s tough 25% “reciprocal” tariff on the country. According to Han, South Korea owes a debt of gratitude to the US after its decades of aid following the Korean War, so rather than seeking to end the tariff, he would only seek to modify it and make it more efficient.

• Han’s approach is a reminder that many countries are extremely dependent on the US for both their export markets and their defense, giving them little leverage to resist the new tariffs and nearly ensuring that they will remain allied to the US. We explored this idea in detail in our Bi-Weekly Geopolitical Report from April 7, 2025.
• All the same, Han’s deference to Trump would seem to be risky, given that any sign of weakness or hesitation in fighting back might encourage Trump to reach for more, say by demanding that South Korea pay an exorbitant amount for the US military forces stationed there.
• From the perspective of US businesses and consumers, Han’s acceptance of the tariff means imports from South Korea will almost certainly face what is essentially a tax of 25%. That risks pushing down profit margins for companies in the value chain, driving up prices to the end user, or both.

US Fiscal Policy: Officials from Elon Musk’s Department of Government Efficiency met with leaders of the National Gallery of Art in Washington late last week, signaling the museum could be the next target for major federal spending cuts. The institution got $210 million of its budget from federal appropriations this year. Importantly, any budget pressure from DOGE could also aim to enforce conservative cultural viewpoints at the National Gallery, as the administration has done at the broader Smithsonian Institution and the Kennedy Center.

US Shipping Industry: Late last week, the Trump administration finalized its new port fees for Chinese ships visiting the US. The hefty new fees apply to ships owned, built, or operated by Chinese entities. Coming into force in October, the fees aim to discourage the use of Chinese ships for US imports and exports. They also aim to incentivize more shipbuilding in the US. In the near term, however, the new fees could raise the cost of US imports and boost consumer price inflation.

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