by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are looking for clues on consumer sentiment, as tariff uncertainty impacts demand projections. In sports, the NCAA tournament’s low rate of perfect brackets (1.65%) highlights its unpredictable nature. Today’s Comment will cover Europe’s NATO contingency plans, US critical minerals production efforts, and other market-relevant developments. As always, the report will include a summary of key domestic and international data releases.

Amerexit? European leaders are formulating transition plans for a potential US withdrawal from NATO, aiming to bolster their own security capabilities while enabling the US to redirect more of its strategic focus toward China.

• The UK, France, Germany, and Nordic countries are spearheading a plan to substantially boost defense spending across the alliance, positioning Europe to assume the bulk of the financial and operational responsibilities for continental defense in the event of a unilateral US withdrawal from NATO. The agreement outlines a 5- to 10-year timeline for Europe to strengthen its military capabilities, ensuring a smooth transition and the ability to independently safeguard its security interests.
• This initiative emerges as the Trump administration intensifies its pressure on Western allies to significantly increase their defense spending. On Thursday, reports revealed that NATO will call for Europe and Canada to boost their expenditure on military equipment and weapons by 30%. Simultaneously, the US is urging member countries to raise their defense spending to 5% of GDP — a figure that surpasses the current 2% benchmark and even exceeds the percentage of GDP that the US allocates to its own defense.

• The move coincides with widespread expectations that the US is poised to scale back its military presence in Europe. Last month, a Pentagon official confirmed that the US is considering relocating up to 100,000 troops from the region, signaling a potential shift in its strategic priorities.
• Growing doubts about the US commitment to Europe have intensified pressure on European nations to develop contingency plans to support Ukraine. The UK has signaled its willingness to assist Ukraine in enforcing a ceasefire by potentially deploying ground troops, as well as air and naval forces. Simultaneously, the EU is advancing efforts to allocate 5 billion EUR ($5.4 billion) to secure ammunition for Ukraine, though France and Italy are pushing for adjustments to the proposal before finalizing the agreement.
• The increase in military spending across EU countries is expected to elevate their debt levels, as governments may need to borrow additional funds to fulfill their defense obligations. This could lead to a rise in bond issuance by individual nations. We are closely monitoring the potential for implicit backing of defense-related bonds by EU institutions, which could enhance the attractiveness of these securities and help lower borrowing costs across the EU bloc.

More Mining Please! President Trump has invoked war powers to facilitate the mining of critical minerals, a strategic move aimed at bolstering the United States’ competitive edge in military technology amid an intensifying rivalry with China.

• On Thursday, the president signed an executive order invoking the Defense Production Act to expedite and streamline the production of critical minerals, underscoring the importance of national security. The order empowers the government to fast-track project permitting and provide financial support, including loans, to bolster the domestic mining industry. This action aligns with the president’s broader mission to secure the resources necessary for developing advanced technologies.
• The Trump administration’s efforts to secure critical resources extend beyond its borders. The US is currently exploring a deal to gain access to Ukraine’s mineral reserves as part of the proposed peace negotiations with Russia. Additionally, the administration’s interest in acquiring Greenland may, in part, be driven by its rich deposits of rare earth elements. Meanwhile, the Democratic Republic of the Congo has sought to leverage its mineral wealth to gain US support in its fight against rebel groups.

• The US is accelerating efforts to diversify its critical mineral supply chains due to growing vulnerabilities, particularly concerning its reliance on China. China’s dominance, notably its 70% control of global rare earth production (as shown in the chart below), has become a strategic concern. Recent export restrictions on chip-related minerals, imposed in response to US semiconductor technology limitations, underscore the escalating strategic rivalry.

• The Trump administration’s push to increase production of critical resources is likely to benefit chipmakers in the long term, as it could lead to lower input costs. However, this move also signals a deepening rivalry between the US and China. While we remain cautiously optimistic that this competition will not escalate into direct conflict, the ongoing AI arms race offers little reassurance and underscores the growing tensions between the two global powers.

US Earnings Concern: Just weeks before the president is set to implement new tariffs, there are growing concerns that businesses are already experiencing significant margin pressures.

• FedEx Corporation has lowered its profit outlook for the third consecutive quarter, citing ongoing weakness and “uncertainty in the US industrial economy” as primary concerns. The company’s freight business has been particularly impacted, with fewer shipments and lower weights continuing to drag down earnings. FedEx’s CEO highlighted that the unpredictable demand in the current economic environment has further exacerbated these challenges, intensifying concerns about the company’s near-term performance.

• Retail giant Nike has also expressed unease by warning that its sales are likely to suffer in the current quarter. The company attributed the anticipated downturn to the impact of new tariffs and a significant decline in consumer confidence. This gloomy outlook appears to align with the findings of the University of Michigan’s consumer survey, which revealed that 66% of consumers expect unemployment to rise over the next 12 months.
• Amid widespread concerns about the economy, it’s worth noting that hard data still does not provide strong evidence of a recession. In the upcoming quarter, earnings reports will be a critical focus. If companies manage to deliver positive surprises, equities could potentially overcome the current negative sentiment and weather the concerns about tariffs. However, if earnings disappoint, the markets may face significant turbulence.

UK Trouble Builds: The Starmer government faced a double blow of bad news within the last 24 hours. Borrowing in February significantly overshot expectations, while the country’s largest airport was forced to shut down due to a fire.

• The government ran a budget deficit of 10.7 billion GBP ($13.8 billion) last month, significantly surpassing the Office for Budget Responsibility’s forecast of 6.5 billion GBP ($8.4 billion). This shortfall was driven by lower-than-expected tax revenues and higher public expenditures, casting doubt on its ability to meet self-imposed fiscal targets. The overshoot is likely to heighten pressure on the government to curb spending as it strives to balance the current budget — excluding investment — by the 2029-30 fiscal year.
• At the same time, Heathrow Airport was forced to shut down for the remainder of the day after a nearby fire disrupted power to the hub. While the cause remains unclear, authorities have launched an investigation, including the possibility of terrorism. The airport closure is likely to heighten concerns about the resilience of the country’s critical infrastructure, particularly at a time when security has become an increasingly pressing issue throughout Europe.
• While UK Prime Minister Keir Starmer has seen a recent surge in popularity due to his handling of the Trump administration, his net approval rating remains deeply negative at -23. This could worsen if he is compelled to implement unpopular decisions, such as budget cuts, or if he faces additional security threats. The uncertainty surrounding his administration is likely to weigh on government bonds, as it raises doubts about his ability to restore the country’s fiscal stability.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently processing the latest decision from the Federal Reserve. In sports news, Duke University is bound to let college basketball fans down again in the NCAA Men’s Basketball Tournament this year — whether they win or lose. In today’s Comment, we’ll delve into the Fed’s latest rate decision, explore the growing pressures on chipmakers to establish operations in the US, and cover other key market developments. As always, we’ll also provide a comprehensive roundup of the latest international and domestic data releases.

Team Transitory Is Back! While Federal Reserve officials have revised their inflation forecasts upward, they have kept the possibility of rate cuts on the table, maintaining their view that tariffs will only have a limited impact on inflation.

• The FOMC unanimously voted to maintain the federal funds rate target range at 4.00%-4.25%. However, Christopher Waller dissented regarding the Quantitative Tightening (QT) policy (specifically the reduction of the Fed’s balance sheet runoff from $25 billion to $5 billion monthly), preferring to continue with the original pace.
• Fed officials cited increased uncertainty in the economic outlook, which led them to revise their year-end projections. Core PCE inflation was revised upward to 2.8% from 2.5%, the unemployment rate forecast was raised to 4.4% from 4.3%, and the GDP growth projection was lowered to 1.7% from 2.1%.
• During the press conference, Fed Chair Jerome Powell acknowledged that the central bank viewed tariffs as a potential driver of higher inflation throughout the year, which could hinder the Fed’s progress toward its inflation target. When questioned about whether the Fed would raise interest rates in response to tariff-induced inflation, Powell emphasized that if the inflationary pressure is temporary and expected to dissipate on its own, tightening monetary policy would not be an appropriate response.

• Regarding quantitative tightening, Powell stated that the Fed intends to slow the pace of its balance sheet runoff to prolong the reduction process. However, he emphasized that this adjustment in pace does not signal any broader implications for future monetary policy decisions. He reiterated that the central bank would continue to shrink the balance sheet until reserves decline from their current abundant levels to what the Fed considers an ample level.
• The latest Federal Reserve meeting suggests that the central bank is poised to take a cautious, wait-and-see approach to monetary policy. While we still anticipate no more than two rate cuts this year, the likelihood of no cuts at all has risen as the economic impact of tariffs begins to materialize in key data. In response, the Fed may explore alternative measures, such as an earlier-than-expected halt to its balance sheet reduction program, in order to alleviate long-term rates.

Nvidia Invests: The chipmaker announced a multi-billion-dollar plan to build US manufacturing facilities for chips and electronics over the next four years, reflecting a broader shift among tech firms to relocate production domestically amid efforts to strengthen US supply chains.

• The AI semiconductor leader plans to manufacture a significant portion of its systems in the US, partnering with key suppliers such as Taiwan Semiconductor Manufacturing Company (TSMC) and Foxconn. This strategic shift reflects the company’s response to escalating geopolitical risks, particularly growing threats from China. During the announcement, CEO Jensen Huang emphasized that the move would strengthen US supply chain resilience and reduce dependency on foreign manufacturing.
• The shift toward US manufacturing comes amid growing concerns about tech companies’ reliance on production facilities in Taiwan. Rising tensions between China and Taiwan, including Beijing’s increasingly assertive stance toward the self-governing island, have sparked fears of a potential invasion. Such a move could severely disrupt global supply chains, leaving companies dependent on Taiwanese factories exposed to significant risks.

• To mitigate these concerns, construction spending in the US for computer, electronic, and electrical manufacturing has surged since 2022, fueled primarily by the CHIPS Act. The legislation has offered companies tax incentives and subsidies to accelerate the relocation of manufacturing facilities to the US. A significant portion of these investments has been directed toward states like Arizona, New York, and Ohio, where new factories are being built.
• While the current administration has aimed to build on this trend, it seeks to do so more cost-effectively by leveraging tariffs. President Trump argues that the government should not rely on financial incentives to encourage domestic manufacturing. Instead, companies should be motivated to build domestically to avoid tariffs.
• Despite President Trump’s opposition to the CHIPS Act, there has been no significant policy reversal, indicating that the law is likely to remain in place. As a result, tariffs are expected to serve as the “stick” to complement the CHIPS Act’s “carrot,” as the US aims to expand its domestic chipmaking capabilities, reduce reliance on Taiwan, and better compete with China.

Election Date Set? Canadian Prime Minister Mark Carney is expected to announce this week that elections will be held on April 28. The campaign is likely to center on how best to address an increasingly assertive US without jeopardizing the economy or triggering a recession.

• Carney’s decision to call for an election appears to be strategically motivated, as his Liberal Party has surged ahead of the opposition Conservative Party in recent polls. According to the latest data from Mainstreet Research Canada, the Liberals have a 61.4% chance of securing an outright majority in the upcoming election. They are projected to win approximately 179 out of 338 seats, while the Conservative Party is expected to trail behind with 127 seats, placing them in the minority.
• The reason for this shift has been driven by Canadians’ dislike of President Trump following comments that Canada should become a US state. Current polls show that the number of Canadians with very/somewhat positive views of the US has dipped from 52% in June 2024 to 33% as of March of this year. In comparison, people with positive views of China improved from 29% to 30%, within the same time frame.
• A recent poll indicates Mark Carney is seen by many Canadians as best equipped to handle the nation’s challenges, edging out Pierre Poilievre 36% to 34%. Carney’s strong name recognition, despite limited public understanding of his detailed policies, appears to be a key asset. Conversely, Poilievre’s populist rhetoric has led to comparisons with Trump, potentially hindering his appeal.
• Ironically, it is Poilievre who has emerged as the most vocal critic of Trump, pledging to lessen Canada’s economic dependence on trade with the US. In stark contrast, Carney has taken a more pragmatic approach, openly conceding that Canada cannot sustainably engage in or escalate a tit-for-tat trade war with its powerful neighbor. This nuanced stance has seemingly resonated with Trump, who has publicly expressed a preference for working with Carney over Poilievre.
• The upcoming election is likely to intensify ongoing trade tensions between the US and Canada. While recent momentum has favored Carney, we anticipate that his support will begin to wane as the vote approaches. Consequently, we would not be surprised if Poilievre pulls off an upset or if neither party secures an outright victory. That said, a majority government in Canada would be viewed favorably by financial markets, as it would likely streamline the legislative process.

BOE Cautious: The Bank of England voted to keep its benchmark policy rates unchanged and signaled a greater willingness to pause future rate cuts.

• While the decision was widely anticipated by the market, investors observed a more hawkish shift in tone. The Monetary Policy Committee voted 8-1 in favor of holding rates, indicating that one of the two rate-setters who had previously supported lower borrowing costs in the last three meetings switched their vote. The shift has led traders to pare back bets of a rate cut in May.

• The shift in policy may be linked to a pickup in inflation, as well as concerns over escalating trade tensions with the US. In January, core inflation surged from 3.2% the previous month to 3.8%. This rise has sparked concerns that US tariffs could further worsen the inflation outlook in the coming months.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently awaiting the Fed’s rate decision later today. In sports news, Putin and Trump have expressed an openness to organizing hockey games between teams from their respective countries. Today’s Comment will cover our expectations for the latest Fed meeting, recent developments in the Ukraine-Russia ceasefire talks, and other market-related news. As usual, the report will include a summary of international and domestic data releases. 

Fed Speaks: The Federal Open Market Committee (FOMC) is expected to conclude its two-day meeting by keeping interest rates unchanged. However, the market will closely monitor the press conference for insights into the Fed’s outlook on inflation and its expectation for the economy.

• Despite the January core CPI report signaling accelerating price pressures, Fed officials are likely to welcome the progress that has been made on inflation. In January, the year-over-year change in core PCE increased by 2.6%, marking its slowest pace in over six months. Meanwhile, core CPI has seen its slowest two-month start to the year since 2020.
• Meanwhile, recent economic data has sparked concerns about the health of the economy. The Atlanta Fed’s GDPNow forecast suggests the possibility of economic contraction, though this reading has been heavily influenced by a surge in imports, particularly gold. The inclusion of gold, classified as an investment rather than a consumable good, has drawn scrutiny for potentially skewing the data. The Atlanta Fed plans to adjust for this issue with its update on March 26.
• Tariffs are expected to be a key topic of discussion among Fed officials as they explore ways to mitigate the potential negative economic impact of trade restrictions. So far, most Fed officials have signaled a “wait-and-see” approach to the administration’s trade policies. However, recent data suggests that tariffs may already be influencing import prices.

• The prices that US importers are paying for Chinese goods have risen at their fastest pace since 2021, signaling that Chinese firms are unwilling to absorb the cost of tariffs. The sharp increase in import prices appears to reinforce the view that Beijing has pressured its firms to resist easing the tariff burden for their US buyers, underscoring its stance that it will not bear the cost of these tariffs.
• We expect the Fed to lean dovish, in line with its current policy stance. While officials may not signal a willingness to cut rates in May, they could be prepared to do so in June, assuming inflation data continues to show progress toward the 2% target. Additionally, we believe the central bank is likely to address and downplay concerns about the economy entering a recession.

Ceasefire on Ice: Talks between Vladimir Putin and Donald Trump ended without securing a deal for a comprehensive ceasefire. Despite this setback, cautious optimism remains that both leaders will eventually reach a mutually acceptable agreement.

• The failure to reach a ceasefire agreement appears to stem from Putin’s insistence that military aid to Ukraine, particularly from the US, be halted during the pause in hostilities. This demand has been deemed unacceptable by the US, as it would effectively allow Russian forces to regroup and rearm during the lull, while leaving Ukraine severely constrained and vulnerable.
• However, Putin did offer one concession by agreeing to halt attacks on Ukraine’s energy infrastructure. Despite this gesture, other critical areas remain vulnerable to assault. Shortly after the agreement, Russia launched a drone strike targeting other forms of Ukrainian infrastructure, a move that drew sharp criticism and condemnation from EU officials.
• Additionally, the US has been actively seeking support from the EU and the UK, as their involvement is crucial for any peace deal. This is largely due to the need for their approval to lift sanctions as Russia desires — a process that is likely to face significant hurdles. Complicating matters further, both the EU and the UK are currently considering plans to sell seized Russian assets, a move aimed at supporting Ukraine’s recovery but one that could exacerbate tensions with Moscow.
• We remain cautiously optimistic that a peace deal can eventually be reached between the two sides. However, Russia’s lack of urgency in ongoing negotiations suggests a perceived strategic advantage over Ukraine. A potential agreement will likely prioritize European equity interests, reflecting regional stability concerns. Despite this, the path to peace remains challenging, with both sides navigating complex demands. Entrenched positions continue to complicate the negotiation process.

Erdoğan Crackdown: The Turkish president has been accused of targeting political rivals in an effort to stifle any serious challenge ahead of elections scheduled to take place by 2028. This move has unsettled markets, with investors raising concerns about the erosion of the country’s rule of law.

• Turkish police have detained Istanbul’s mayor, Ekrem İmamoğlu, widely regarded as a formidable political rival to President Erdoğan. The arrest, which was linked to alleged terrorism-related charges, coincided with reports that the opposition Republican People’s Party (CHP) was preparing to name him as its presidential candidate. İmamoğlu, who gained significant popularity after securing major victories in Istanbul’s mayoral elections, has become a symbol of opposition strength.
• His detention has ignited widespread criticism, with many condemning the move as politically motivated and warning of its implications for democracy and judicial independence in Turkey. The news triggered a sharp sell-off in Turkish assets, sending the lira (TRY) plunging by 10% to new record lows, while equities dropped 6%, prompting a temporary trading halt. Additionally, the country’s bond yields surged as investor confidence eroded following the report.

• Erdoğan’s intensifying crackdown on political rivals aligns with his party’s refusal to consider early elections, despite mounting public discontent. A recent poll highlights the deepening frustration among Turks, with 61% predicting a further deterioration in the country’s economic situation over the next six months and 58% calling for new elections. Turkey’s economy has been plagued by soaring inflation and rising unemployment, placing significant strain on households and exacerbating widespread dissatisfaction.
• While political instability in Turkey is a growing concern, there is currently little indication that widespread outrage, either domestically or from the West, will escalate into a larger movement. For now, we view these developments as relatively contained, though the situation could intensify if the government’s crackdown on opposition parties sparks violent protests or further unrest. As such, Turkey remains a country to monitor closely, but for the time being, there is no immediate cause for significant alarm.

Meloni in the Middle: Italian PM Giorgia Meloni urged Brussels to avoid escalating a trade war with the US, emphasizing that such conflict benefits no one. This aligns with her cautious approach to transatlantic relations amid existing tensions.

• Her warning comes as the EU prepares to impose 50% tariffs on US goods, including whiskey, motorcycles, and jeans, set to take effect on April 1. In response, President Trump has threatened to levy 200% tariffs on European wines, escalating tensions in an already fraught trade dispute.
• Additionally, Meloni has cautioned the EU against attempting to ramp up defense spending as a means of reducing reliance on the US. She argued that it would be unrealistic for the EU to fully shoulder its defense responsibilities without American support, emphasizing the continued importance of transatlantic cooperation in maintaining global security.
• Meloni is set to meet with EU leaders in Brussels on Thursday, where they will discuss strategies to address US tariffs and calls for increased defense spending. Her remarks highlight a growing reluctance among some EU leaders to engage in a prolonged tit-for-tat with the US, underscoring a preference for diplomatic solutions over escalating tensions.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a couple of notes on Japanese monetary policy and the Japanese stock market. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the European Union will impose steep tariffs on imported aluminum in response to the impending US tariffs, as well as a couple of notes on monetary and regulatory policy at the Federal Reserve.

Japan Monetary Policy: The Bank of Japan today starts its latest policy meeting, with its decision due to be released tomorrow. Even though strong Japanese wage growth and continuing price pressures would seem to argue for higher interest rates, uncertainty regarding US trade policy is expected to convince the policymakers to hold their benchmark rate unchanged at 0.50%, after they hiked it by 25 basis points at their last meeting in January.

Japan Stock Market: According to a report in the Financial Times yesterday, Warren Buffett’s Berkshire Hathaway has increased its shareholdings in five Japanese trading houses after negotiating to lift a 10% limit on Berkshire’s investments in the companies. Buffett’s willingness to hike his exposure to the firms will likely be taken as a vote of confidence in them. It will also probably be seen as a sign that overall Japanese stock valuations remain attractive, at least in the eyes of one of the world’s most admired value investors.

European Union: The European Commission today is expected to announce a probe into the EU aluminum market and whether third countries are dumping the metal in Europe to get around the Trump administration’s high tariffs. The investigation suggests that the EU is prepping its own tariffs to protect domestic producers. If so, the action would help validate fears that the US-EU trade war could widen to affect other economies and roil global economic growth.

United Kingdom: Struggling to contain the UK’s growing debt, the Labour Party government of Prime Minister Starmer today will propose a series of welfare reforms aimed at cutting about one million people from the health and disability programs to save some 5 billion GBP ($6.5 billion) per year. The proposed reforms would require a vote of parliament, but many junior Labour lawmakers are threatening to oppose them. If they do, it will mark a major rebellion against the center-left party and potentially limit any further efforts at fiscal consolidation.

Russia-Ukraine War: According to the Wall Street Journal today, Ukraine in December launched what appears to be the world’s first large-scale, drone-only military attack. The attack involved dozens of coordinated land robots and aerial drones to successfully destroy a Russian position in northern Ukraine. The attack illustrates the rapid development of robot warfare in the Russia-Ukraine war.

• The rapid development of autonomous vehicles in the war is likely to have massive implications not only for future military force structure, strategy, and tactics, but also for military budgets, industrial structure, economic growth, and even national educational systems.
• If a peace agreement is reached, the war could well leave both Russia and Ukraine as leaders in the new military capability. For example, when the Pentagon’s “Artemis” program awarded contracts on Friday to four companies to build prototypes for the next generation of long-range aerial attack drones, two of the contracts went to US firms and the other two went to Ukrainian companies.

Israel-Hamas War: After the Hamas militants governing the Gaza Strip halted the release of more Israeli hostages and rejected US pressure to extend the recent two-month ceasefire, Tel Aviv today launched a large campaign of airstrikes across Gaza. The airstrikes have reportedly killed hundreds of Gazans and threaten to rekindle the full-scale war that Israel launched against Hamas following its attack on Israel in October 2023. If the war resumes, it would threaten to again destabilize the energy-rich Middle East after a short period of calm.

United States-Canada: In a little-noticed provision in one of President Trump’s recent orders, about one million Canadian seniors or “snowbirds” who spend their winters in the US will be required to first register with the US government. The rule will apply to all Canadians aged 14 years and older who plan to stay in the US for 30 days or longer. Economists estimate that Canadian snowbirds spend billions of dollars in the US each year, so if the new regulation deters many of them, it could weigh on popular snowbird destinations, such as Arizona.

US Monetary Policy: Like the Bank of Japan, the Fed starts its latest policy meeting today, with its decision due to be released tomorrow at 2:00 PM ET. The policymakers are widely expected to hold their benchmark fed funds interest rate unchanged at 4.25% to 4.50%. Futures trading suggests that investors are now expecting two or three additional rate cuts of 25 basis points by the end of this year, but the policymakers may hold their fire until consumer price inflation cools further, economic growth slows sharply, or both.

US Financial Regulation: President Trump yesterday nominated Michelle Bowman, a member of the Fed’s governing board, to be the new vice chairman for supervision. If confirmed by Congress, Bowman would become one of the federal government’s key bank regulators, along with the heads of the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Indeed, her confirmation by Congress appears highly likely.

• Bowman is seen as friendly to banking interests and supports lighter bank regulation.
• Therefore, her nomination has been heralded by both the American Bankers Association and the Independent Community Bankers of America.

US Stock Market: According to Bank of America’s closely watched survey of investment-fund managers, investors have reduced their exposure to US stocks this month by the largest amount ever. The survey showed that the average allocation to US stocks plunged by 40 percentage points, from 17% overweight in February to 23% underweight in March. The big drop reportedly reflects investor concerns about factors such as the Trump administration’s global trade war, the potential for US stagflation, and changing domestic economic policies.

• In our 2025 Economic and Financial Market Outlook, we projected that the S&P 500 price index would rise about 10.5% for the date of publication to end the year at approximately 6,735. We flagged the possibility of even stronger returns, based on factors such as investors’ large holdings of money market funds “on the sidelines,” but we also noted the potential for increased volatility.
• This month’s correction in the US stock market is consistent with the potential volatility that we saw, so it has not yet prompted us to adjust our projection. However, we continue to monitor important evolving issues, such as the administration’s unexpectedly aggressive moves in foreign and domestic policy. If there are any major adjustments to our forecasts, they would likely be published in a mid-year update to our Outlook.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a note on the Russia-Ukraine war, where Kyiv’s forces appear to be on the brink of losing their toehold in the Russian territory of Kursk ahead of planned peace talks. We next review several other international and US developments with the potential to affect the financial markets today, including new details on China’s latest economic stimulus plan and several new Trump administration initiatives in the realms of national security and foreign policy.

Russia-Ukraine War: Continuing their accelerated push over the last week, Russian forces this weekend nearly succeeded in reclaiming the Kursk region that the Ukrainians seized last summer to gain leverage in peace negotiations. It appears that Ukrainian forces could be pushed totally out of the Russian region at any moment. In addition, the Russians are reportedly threatening to surround an unknown number of Ukrainian troops remaining in Kursk, which would put Kyiv at a disadvantage during any talks.

South Korea: Shortly before the end of his term in January, President Biden reportedly put South Korea on a special list of countries that the US deems at risk of acquiring nuclear weapons. The Department of Energy confirmed the designation on Friday, suggesting that the Trump administration has endorsed the move. The news comes one month after South Korean Foreign Minister Cho Tae-yul said that Seoul has not taken nukes “off the table,” but that it has no specific plans to develop them right now.

• As we’ve noted before, rising geopolitical tensions and the US’s growing reluctance to meet its mutual defense promises under various treaties have begun to prompt a range of countries to consider developing their own nuclear weapons.
• In recent polls, some 70% of South Koreans have said they want their own nukes. To block such a move, the Biden Administration in 2023 struck a deal under which Seoul would put any such effort on ice in return for stronger US security guarantees.
• Biden’s designation of South Korea as a proliferation-sensitive state suggests that some political or military leaders in Seoul are still tempted by the possibility, which in turn would likely destabilize the Asia-Pacific region.

China: The State Council today provided a few more details on how the government will implement General Secretary Xi’s vow to “vigorously boost consumption” and “expand domestic demand in all directions.” According to State Council officials, the government will focus on raising incomes, stabilizing the real estate and stock markets, and improving medical and pension services. However, the officials gave few details on the actual planned spending, suggesting the latest stimulus program will again be too modest to truly boost growth.

• Separately, the state statistics agency said retail sales in January and February were up 4.0% from the same period one year earlier, accelerating from the 3.7% increase in the year to December.
• In response to the stimulus program and retail sales data, Hong Kong stocks today have posted a modest rise, while stocks in mainland China declined slightly.

United States-Yemen: The Trump administration on Saturday launched a series of strong airstrikes against the Iran-backed Houthi rebels in Yemen. According to military officials, the strikes are an escalation from those of the Biden administration and are expected to last up to several weeks to degrade the rebels’ ability to attack shipping in the Red Sea. Along with the strikes, President Trump also warned Iran that it must cease providing aid to the rebels.

• The US strikes came after the Houthis last Tuesday said that they would resume attacks on Israeli ships in the Red Sea, the Arabian Sea, the Bab el-Mandeb Strait, and the Gulf of Aden, ending a period of relative calm that began in January with the Gaza ceasefire.
• The strikes also came just days after Iran’s supreme leader, Ayatollah Ali Khamenei, rejected a Trump suggestion of talks aimed at stopping the country’s nuclear program.

US Military: Late last week, Defense Secretary Hegseth directed that the Pentagon’s storied Office of Net Assessments be dismantled. Under the order, military personnel working in ONA will return to their service and be reassigned, civilians will be moved to “mission critical” offices, and ONA contracts will be cancelled. The deputy secretary will then be tasked with developing a plan to rebuild ONA in a manner consistent with Hegseth’s priorities.

• Since being established in 1973, the ONA has operated as a kind of Pentagon think tank to identify and analyze long-term national security trends and lay the groundwork for strategies to respond to them.
• Hegseth’s dismantling of the ONA seems to adopt a “burn it down, then rebuild” approach to reforming the office. While the move is likely to produce near-term cost savings, it is also being panned for potentially creating a period when military planners won’t have an authoritative, deeply researched perspective to rely on.
• Coupled with other recent moves, such as directing large cuts in the defense budget and ordering massive job cuts at the Pentagon and CIA, pulling the plug on the ONA adds to the evidence that fiscal consolidation and bureaucratic reforms are President Trump’s highest priorities — perhaps much higher than even near-to-medium term national security.

US Foreign Policy: Over the weekend, President Trump announced that he has signed an executive order to slash funding and essentially shut down the US Agency for Global Media, which runs the Voice of America, Radio Free Europe/Radio Liberty, and Radio Free Asia. Those Cold War-era organizations were designed to beam uncensored information to closed societies, such as China and Russia, and to promote US values globally.

• According to Trump, the move to close down USAGM was necessary to save US taxpayers from supporting “radical propaganda.”
• In the latest federal fiscal year, USAGM’s budget was about $890 million.

US Trade Policy: The American Chamber of Commerce to the European Union today warned that the Trump administration’s draconian tariffs could hamper up to $9.5 trillion in US-European transactions. According to the Chamber, the developing trade war threatens not only the $1.3 trillion or so in trans-Atlantic goods trade, but also the $750 billion in trans-Atlantic services trade and some $7.5 trillion in sales by US and European cross-border affiliates.

• For example, the Chamber warns that either the US or the Europeans could retaliate for the other side’s goods tariffs by slapping tariffs on the other side’s services.
• Potentially more problematic, US companies with affiliates in Europe could find their European operations hindered by any tariffs on imported US inputs, and vice versa. That could discourage further foreign direct investment by the US firms in Europe or by European firms in the US.

US Visa Policy: The New York Times over the weekend said that the Trump administration is considering a list of 43 countries whose citizens would be barred or restricted from visiting the US. The long list includes countries such as Cuba, North Korea, Afghanistan, Belarus, and Somalia. The extensive list is even broader than the list of countries that Trump used to bar foreigners in his first term.

US Monetary Policy: Tomorrow, the Federal Reserve starts its latest two-day policy meeting, with its decision scheduled to be released on Wednesday at 2:00 PM ET. The policymakers are widely expected to hold their benchmark fed funds interest rate unchanged at its current range of 4.25% to 4.50%. Futures trading suggests that investors are now expecting two or three rate cuts of 25 basis points each this year, but the policymakers may hold their fire until consumer price inflation cools further, economic growth slows sharply, or both.

US Stock Market: In an interview yesterday, Treasury Secretary Bessent downplayed the significance of the US stock market slipping into a correction last week, saying simply that, “corrections are healthy . . . They’re normal.” The nonchalant tone of Bessent’s statement adds to the evidence that President Trump isn’t nearly as concerned now about market downturns as he appeared to be in his first term.

• Rather, it increasingly looks like the administration is willing to tolerate even steep declines in stock prices for what it sees as long-term economic benefits.
• Reflecting that realization, stock futures as of this writing are pointing to another day of falling prices.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are reacting to the news that a government shutdown was averted. In sports, Steph Curry made history by hitting his 4,000^th 3-pointer in the Warriors’ victory over the Kings. Today’s Comment will explore the market’s recent correction, how a PPI subcomponent could shed light on the trade war’s effects, and other key market-moving developments. As always, we’ll also provide a summary of international and domestic data releases.

S&P 500 Correction: The market plunged 10.1% from its all-time high on Thursday, driven by mounting fears of a government shutdown and escalating trade war tensions. The sharp sell-off underscores just how sensitive investors have become to any signs of uncertainty.

• On Thursday, President Trump escalated trade tensions with the EU by threatening to impose tariffs of up to 200% on European wine, retaliating against proposed EU tariffs on American goods. This move sent a strong signal of escalating trade uncertainty, revealing a further decline in relations and the increasingly erratic nature of the dispute.
• Meanwhile, House Speaker Chuck Schumer (D-NY) fueled further uncertainty by initially declaring that his party would not support the legislation needed to avert a government shutdown. Although he later walked back this threat and expressed support for the bill, his initial reluctance underscored growing concerns that deepening partisanship is making effective governance increasingly difficult.
• Heightened uncertainty has prompted investors to reduce their exposure to risk assets, particularly the mega cap tech stocks. The divergence in year-to-date performance — a 1.6% decline for the S&P 500 excluding the Magnificent 7 versus a 14.4% drop for those stocks — indicates a significant rotation. This shift reflects potential investor fatigue with the persistent tech-led market leadership of the preceding two years.

• Trade tensions are creating a “wait and see” market. A prolonged conflict risks a significant market sell-off due to increased volatility. However, a rapid resolution could fuel a market surge, with mega cap tech leading the way, given their exposure to trade sentiment and growth. In the interim, commodities could provide a potential buffer against market uncertainty.

Producer Prices Ease: Following a report of easing consumer inflation in February, producer prices also showed a slowdown in supplier price pressures. However, the ongoing trade war raises concerns that this relief may be temporary.

• The overall Producer Price Index (PPI) showed a year-over-year slowdown, easing from 3.7% to 3.2%, while core PPI, which excludes food and energy, also moderated, falling from 3.8% to 3.4%. This deceleration was largely attributed to a decline in trade services, which tracks changes in profit margins between wholesale and retail businesses. The report indicates that businesses may be hesitant to pass on higher costs to consumers.
• Trade services are expected to remain a critical indicator to monitor as the trade war persists. Changes in margins between retailers and wholesalers reflect the pass-through effects of price increases, making this metric particularly sensitive to the impact of tariffs. As a result, it could provide valuable insights into how businesses are navigating the challenges posed by ongoing trade tensions.
• This indicator proved particularly useful in assessing the impact of supply chain disruptions and surging demand on businesses during the pandemic. As the gap between retail and wholesale margins widened, inflationary pressures intensified. Conversely, as these margin differentials began to narrow, price pressures started to ease for consumers.

• In short, as long as trade services remain relatively subdued, the inflationary impact of tariffs is likely to be contained. As highlighted in previous reports, while many argue that taxes on imported goods are inherently inflationary, we believe the effects may vary significantly depending on the type of good. In fact, we contend that earnings compression — where businesses absorb higher costs rather than passing them on to consumers — could also emerge as a realistic outcome of the trade war.

Benefits on the Chopping block? President Trump is open to allowing Republican lawmakers to explore cuts to certain social spending programs as part of efforts to secure funding for his priorities, including tax cuts, border security, and defense spending.

• The president is reportedly permitting Senate Republicans to identify instances of “waste and fraud” within Medicaid as part of an effort to curb spending and reduce costs. This development follows reports that Elon Musk’s cost-cutting taskforce, DOGE, has been examining inconsistencies in entitlement disbursements as part of its broader initiative to address the deficit. Both efforts highlight a growing focus on fiscal responsibility, though such measures are likely to draw scrutiny and debate.
• The heightened focus on spending comes as Republicans seek to finance an ambitious tax bill, with several conservative lawmakers insisting they will not support any legislation that exacerbates the fiscal deficit. Recently, Senator Rand Paul (R-KY) has been vocal about his concerns, vowing to oppose the stopgap bill due to its potential impact on spending. Similarly, Kentucky Representative Thomas Massie voted against the legislation in the House, citing the same reservations.
• The ongoing debate over how to fund the proposed tax cuts indicates that conservatives remain determined to pass the legislation. Efforts to target waste and inefficiency may offer some financial flexibility, but so far, these measures have not yielded substantial savings. While we anticipate that the tax bill will likely be passed before the end of the year, we remain skeptical about its ability to be deficit-neutral.

Ceasefire Close? The Russian president appeared to downplay the possibility of agreeing to a temporary ceasefire with Ukraine, instead expressing a preference for pursuing a long-term resolution. That said, there does seem to be progress.

• Putin has indicated openness to the proposed arrangement but emphasized that further discussions are necessary before he would agree to the plan. A central point of contention revolves around the allocation of territory between Ukraine and Russia, which remains a highly sensitive and unresolved issue. Additionally, negotiations would need to address the critical question of control over a large power plant, a matter of strategic and symbolic importance for both sides.
• Despite the lack of clarity, President Trump seems optimistic that a deal will be done between the two sides as Ukraine has already agreed to the terms of the truce. While there is no timeline as to when an agreement will be reached, it is clear that Russian and US officials are in contact to get something done over the next few months.

View PDF