by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on the Israel-Iran conflict and the US’s bomber and missile attacks on Iran over the weekend. We next review several other international and US developments with the potential to affect the financial markets today, including signs that some US allies in both Asia and Europe are pushing back against President Trump’s demand that they hike their defense spending to 5% of gross domestic product and an update on the progress of Trump’s “big, beautiful” tax-and-spending bill in the Senate.

United States-Iran-Israel: As we warned in our Comment on Friday, the US on Saturday launched a bomber and missile attack on Iran’s key nuclear facilities. The attacks included massive “bunker buster” munitions dropped by B-2 bombers at Fordow and Natanz, and cruise missile attacks on Isfahan. US officials say they believe the attacks caused “severe damage” to Iran’s nuclear program, but full damage assessments will take time, and officials admit they don’t know where Iran’s enriched uranium stockpiles are.

• Trump administration officials say they have no plans for further attacks on Iran, and that the weekend attacks are not the beginning of an open-ended war. However, President Trump also warned that he will launch more attacks if Iran retaliates. On Sunday, he also hinted that he may pursue regime change in Iran.
• In any case, if the bomb damage assessments indicate Iran’s nuclear program has not been destroyed definitively, there is some chance that Israel, potentially backed by the US, might have to deploy special forces or bigger military units to Iranian territory to seek out and destroy the remnants of the program. More broadly, regime change may be the only way to ensure that Iran’s menacing program is finally destroyed.
• A key issue now is how Iran might respond to the US attack. Iran retains many possible retaliatory options including: attacks on US and allied forces and/or energy facilities in the region, shipping restrictions in the Strait of Hormuz, renewed terrorism, seizures of Western hostages, cyberattacks, withdrawal from the Non-Proliferation Treaty, and reconstitution or acceleration of its nuclear program. Any of these options could force the US to attack again, potentially with ground troops.
• In the longer term, we believe the US attack will encourage Iran and other nations to rush toward acquiring their own nuclear weapons. For example, an advisor to Iranian supreme leader Khomeini warned on X that “Enriched materials, indigenous knowledge [and the] political will remain” for Iran to keep pursuing its own nukes. As we have warned before, today’s increasing geopolitical chaos risks sparking a new, global nuclear arms race.
• We also note that China, Russia and other Iranian allies merely condemned the US attack but offered no obvious tangible help to Iran. In our view, that reflects China’s continued inability and/or unwillingness to support the members of its bloc with real military aid. As we have written in the past, Beijing is managing its geopolitical bloc largely on economic, neocolonial lines. Beijing’s failure to offer Iran more tangible benefits risks undermining the cohesion of the entire China bloc.
• Despite the risk of Iranian retaliation and disruptions to global energy supplies, near oil futures as of this writing are essentially unchanged, with Brent currently changing hands at about $76.95 per barrel and WTI trading at $73.52.

Taiwan-China: Taiwanese President Lai Ching-te launched a series of “national unity” speeches yesterday, ahead of a July 26 recall vote against nearly half of the parliament members from the China-friendly Kuomintang opposition party. In a statement sure to anger Chinese leaders, Lai stressed in his speech that “of course Taiwan is a sovereign state!” That assertion will likely provoke dangerous, market-concerning retaliation from Beijing, such as more military exercises around the island or restrictions on trade and capital flows between Taiwan and the mainland.

Japan-United States: Late last week, Tokyo reportedly canceled its participation in the annual US-Japan “two-plus-two” meeting between the countries’ top foreign relations and defense officials. That meeting had been scheduled to take place in Washington on July 1. According to the report, Tokyo’s cancelation stemmed from its anger over recent US pressure to hike Japanese defense spending to as much as 5% of GDP. The move illustrates the type of pushback it can expect as it pressures its allies into politically painful defense spending hikes.

Japan: In an interview with the Financial Times published Saturday, the chief investment officer for global fixed income at bond giant PIMCO said the firm has been buying long-term Japanese government bonds (JGB) in the belief that the market is being too pessimistic about the obligations despite rising consumer price inflation in Japan and the central bank’s effort to reduce its buying.

• With the yield on 30-year JGBs now approaching 3.0%, PIMCO believes the obligations now offer an enticing opportunity.
• The firm’s interest in long-term JGBs shows how some sophisticated bond investors still see opportunities in the debt of even highly indebted developed countries. While we’ve recently seen early signs of capital flight from the US because of debt concerns and policy uncertainty, PIMCO’s decision shows why a large-scale sell-off in long-term US Treasurys is not yet set in stone.

Germany-Italy-United States: An article in today’s Financial Times indicates that lawmakers in Germany and Italy have begun to urge their central banks to reduce the amount of their gold reserves held in the US. The calls reflect not only foreign concerns about US policy uncertainty under President Trump, but also their increased prioritization of gold as a key part of their reserves.

United States-European Union: A report late Friday said the US and the EU are mulling a draft agreement reforming dozens of non-tariff trade barriers posed by the Europeans, including the EU’s Digital Markets Act, its carbon-based border tariffs, shipbuilding and more. The draft deal doesn’t address the Trump administration’s tough tariffs on EU imports or the EU’s planned retaliatory tariffs against US goods and services. However, it does suggest the two sides are making some progress in their trade dispute, raising hopes for reduced US-EU tensions

North Atlantic Treaty Organization: With NATO leaders set to meet for their annual summit at The Hague on Wednesday, Spanish Prime Minister Sánchez yesterday said he has struck a deal with the alliance to opt out of its new target of spending 5% of GDP on defense. That target is due to be officially agreed at the summit. However, a Spanish opt-out would raise questions about what spending goals the allies will ultimately agree to. In turn, that could spark volatility in global defense stocks later this week.

US Fiscal Policy: Senate leaders aim to vote this week on President Trump’s “big, beautiful” tax-and-spending bill, but the chamber’s parliamentarian has ruled several key provisions related to spending cuts as out of bounds for the fast-track reconciliation procedure. That could slow the process in the Senate. In turn, that would delay returning the bill to the House for reconciliation and final passage.

US Artificial Intelligence Industry: Masayoshi Son, founder of giant Japanese tech investor Softbank, has reportedly pitched the Trump administration with a proposal to invest $1 trillion in a new industrial project in Arizona that would focus on producing artificial intelligence, AI robots, and related products. The “Project Crystal Land” complex would aim to compete with China’s massive high-technology manufacturing cluster in Shenzhen.

• Son has also reportedly asked a range of top technology firms to join in the project, including leading semiconductor maker Taiwan Semiconductor Manufacturing Company and Samsung Electronics.
• The reporting doesn’t make clear whether the Trump administration or other big tech firms would be interested in joining the Crystal Land project. Nevertheless, Son’s vision illustrates the continuing momentum toward more US investment in high-tech manufacturing and AI.

US Labor Market: An article in the New York Times over the weekend said on-line job postings are now being inundated with applicants, not only reflecting a recent softening in labor demand but also the ease of using AI to generate tailored resumes and applications. For example, the article says the number of applications submitted on LinkedIn has surged more than 45% in the past year, and the platform is now receiving an average of 11,000 applications per minute. The result is likely to complicate hiring for both firms and applicants.

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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 on the Israel-Iran conflict. President Trump is reportedly prepared to have the US join in Israel’s attack against Iran, but he still wants to give diplomacy more time before making the final decision. We next review other international and US developments with the potential to affect the financial markets today, including a slew of monetary policy decisions around the world and worsening projections about the health of the US’s social security system.

United States-Iran-Israel: Reports late Wednesday, before yesterday’s Juneteenth holiday, said President Trump had approved final US attack plans on Iran, but hadn’t yet given the final green light. Other reports say the US attack would likely come as early as this weekend, involving US stealth bombers dropping massive “bunker buster” bombs on Iran’s underground nuclear facilities to help put a final end to the country’s drive for a nuclear weapon. Meanwhile, both Israel and Iran continue to stage air and missile attacks against each other.

• One senior official close to Trump indicated that he is leaning heavily toward launching the operation because of what he sees as a rare window of opportunity to end the Iranian nuclear threat and cement his legacy, even though the attack would likely undermine the support of isolationists in his political base.
• Of course, the signals from the White House could merely aim to scare the Iranians into a deal to voluntarily end their nuclear program. Trump has reportedly blessed a plan by the German, French, and UK foreign ministers to meet with their Iranian counterpart on Friday, and if that meeting is productive, the president could forego the military attack.
• In any case, even if the attack proceeds, it’s not certain that it will totally end Iran’s nuclear program. Eradicating the program could well require regime change and/or Israeli special forces operations at Iran’s deep-underground Fordow facility and elsewhere.

United Kingdom: The Bank of England yesterday held its benchmark interest rate unchanged at 4.25%, as expected. Importantly, BOE Governor Andrew Bailey confirmed that rates are likely to remain on a downward slope, but he cautioned that the pace of decline may be slowed by sticky inflation, including as a result of higher energy prices following Israel’s attack on Iran.

Other Foreign Monetary Policy: Besides the Bank of England, several other major central banks had their policy meetings over the last 48 hours. Taken together, the policy decisions largely reflected concern or complacency about the domestic economic impact of the US’s aggressive tariff policies, as follows:

• The Swiss National Bank cut its benchmark rate by 25 basis points to 0.00% to counter the surging currency, slowing economic growth, and a return to deflation.
• In Sweden, the Riksbank cut its benchmark rate by 25 basis points to 2.00% as consumer price inflation weakens and economic growth recovers more slowly than anticipated.
• In Turkey, the central bank held its benchmark rate at 46% amid concerns about economic instability and rising price pressures. After starting to cut rates late last year, the central bank hiked its policy rate in April amid political upheaval.
• In Taiwan, the central bank held its benchmark rate at 2.00%, marking the fifth consecutive policy meeting with no change. According to Taiwan’s monetary policymakers, the uncertainty surrounding geopolitics and US tariff policy argues for steady policy, as opposed to preemptive rate cuts.
• In the Philippines, the central bank cut its benchmark rate by 25 basis points to 5.25%, marking its second cut of 2025 and bringing its total cut to 1.25% since last August.

European Union-China: The European Commission today confirmed that it will bar Chinese medical devices from EU government procurement tenders. The move was widely expected after a formal probe by the Commission found China to be unfairly blocking EU medical devices from its government procurement programs. Although the EU has flirted with the idea of improving ties with China to make up for the Trump administration’s tough trade policies, the new ban on medical devices will likely exacerbate EU-China tensions and please US officials.

Germany: Steel giant ArcelorMittal has announced that it will turn down 1.3 billion EUR ($1.5 billion) in public subsidies to convert its furnaces in Bremen and Eisenhüttenstadt to use hydrogen rather than coal. The company also warned it may close its flagship ethanol plant in Belgium because of overly restrictive regulations. The announcement is the latest sign that firms around the world are pulling back from green programs, even as some governments are also rolling back their support.

Thailand: Prime Minister Paetongtarn Shinawatra is on the verge of losing her parliamentary majority and facing new elections after a leaked recording of her recent call with former Cambodian leader Hun Sen showed her disparaging the Thai military. The scandal has sparked anger among Thailand’s military-royalist establishment, and one conservative party has already withdrawn from Shinawatra’s governing coalition. Analysts give her only a slim chance of staying in power.

Canada: Prime Minister Carney yesterday said that his government has imposed 100% tariffs on all non-US steel and aluminum imports and would adjust its tariffs on US imports of the metals on July 21, depending on the state of US-Canada tariff negotiations at the time. The move illustrates how the Trump administration’s tariff policies have set off a wave of protectionist measures around the globe, which could well lead to disrupted supply chains, higher costs, and reduced profitability for companies around the world over time.

US Monetary Policy: As widely expected, the Fed on Wednesday held its benchmark fed funds interest rate unchanged at a range of 4.00% to 4.25%. Moreover, Chair Powell suggested that policymakers are still in wait-and-see mode as they look for evidence of a possible rekindling of consumer price inflation due to the Trump administration’s increase in import tariffs or an economic slowdown. That stance would seem to preclude a cut in rates at the next policy meeting in July.

• All the same, the accompanying “dot plot” of the policymakers’ economic projections was instructive. Compared with the policymakers’ last projections in March, the new projections show they expect weaker economic growth through 2026, higher unemployment, and faster price increases.
• Against this environment of “staglation,” the policymakers expect the fed funds rate to decline more slowly than they did in March. That’s consistent with our long-held view that investors are too optimistic about future rate cuts.

US Social Security Program: In their annual report on Wednesday, the Social Security trustees projected that the program will run out of resources to pay promised benefits by 2034, one year earlier than projected last year. The worsening situation reflects multiple issues, including more baby boomers retiring, falling birth rates, and a recent law extending Social Security retirement benefits to certain public-sector workers.

• If the Social Security trust fund is depleted and payroll taxes don’t increase, the report finds that benefits would have to be cut about 19% in 2034.
• It is widely believed that Congress would step in to top up the trust fund, increase payroll taxes, or otherwise make good on promised benefit. However, such action is not guaranteed.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is focused on the Federal Reserve’s pivotal policy rate decision. In today’s Comment, we’ll provide the latest updates on the escalating Israel-Iran conflict, analyze what to expect from the Fed’s rate announcement, and highlight other key market-moving developments. As always, we’ll include a summary of recent domestic and international economic data releases.

Iran on the Brink? The US is considering escalating its role in the Israel-Iran conflict as part of a strategy to push Tehran back to the negotiating table.

• The White House is reportedly evaluating various policy options toward Iran, including a potential regime change. In a recent social media post, President Trump suggested US intelligence had located Ayatollah Khamenei and implied that an assassination could be considered unless Iran accepts unconditional surrender. These remarks follow failed diplomatic efforts to restart nuclear negotiations, as Iran maintains it will only return to talks after Israel stops its airstrikes.
• Despite sustained Israeli airstrikes targeting critical infrastructure near Iran’s nuclear sites, the attacks have failed to achieve their primary objective of fully destroying the facilities. US military involvement could prove decisive, as American forces possess specialized bunker-busting munitions capable of penetrating the fortified mountain locations where Iran’s nuclear program is believed to operate.

• Heightened fears of an expanding conflict have sent tremors through global markets. Brent crude surged to a six-month high Thursday, driven by anxieties over potential disruptions to oil shipments. Meanwhile, the S&P 500 dropped 0.8% as investors nervously assessed the ripple effects of increased US involvement or the implications of a potential Iranian collapse.
• Iran appears increasingly isolated as key allies offer only limited support. Russia (which has depended on Iranian-made drones for its war in Ukraine) and China have provided nothing beyond verbal backing. Even Lebanon-based Hezbollah — typically a staunch Iranian ally — has remained on the sidelines, still recovering from recent confrontations with Israel and the US.
• The conflict’s ultimate resolution will likely hinge on whether the US pursues regime change in Iran. While the White House has indicated an openness to this option, it remains unclear whether such rhetoric represents genuine intent or merely strategic posturing to pressure Tehran into negotiations, particularly given simultaneous signals favoring diplomatic solutions. In the interim, we anticipate market volatility, with risk assets likely facing downward pressure until investors gain clarity on the conflict’s trajectory.

Fed Meeting Preview: Fed officials are likely to perform a delicate balancing act, aiming to convince markets that they are weighing both economic growth concerns and inflation risks.

• Fed officials are expected to keep policy rates steady at the target range of 4.25%-4.50% when their two-day meeting concludes today. Several central bank members have signaled that patience remains the preferred approach, as they continue to monitor inflation risks, including those posed by tariffs. Investors will likely scrutinize the updated economic projections, searching for clues on what data the Fed needs to see before considering rate cuts this year.
• Although inflation shows signs of moderation, Fed officials remain unconvinced that the trend will sustain. Richard Clarida, former Federal Reserve Vice Chair now at PIMCO, noted inflation has improved more than expected since January but cautioned that tariff effects may be temporarily hidden by preemptive inventory accumulation. He has argued that the inflation fight may not be over as new shipments from abroad will reflect the new tariff rates.

• A rate hold by the Fed will likely provoke immediate White House criticism, as the president has repeatedly attacked the central bank for maintaining restrictive policy despite easing inflation. His recent social media posts have emphasized that rate cuts could ease the government’s debt burden, which is a growing concern following the CBO’s revised dynamic scoring model that is now projecting the 10-year deficit at $2.8 trillion, up $400 billion from previous estimates.
• We anticipate that the Fed will maintain current interest rates at this meeting, with market attention squarely focused on future policy signals. Should the Fed indicate an openness to rate cuts, we expect a bond market rally. Conversely, any suggestion that cuts may be postponed could drive yields higher. The current market pricing already reflects expectations for two cuts for the year. Whether or not this remains will hinge on today’s meeting.

Stablecoin Progresses: Legislation governing the digital asset has passed the Senate, moving it closer to becoming law.

• The Senate has approved landmark bipartisan legislation establishing the first federal regulatory framework for dollar-pegged cryptocurrencies. The bill, aptly named the Genius Act, passed with strong support (68-30) and now moves to the House where it may undergo revisions before potential presidential approval. This represents the most significant step yet toward mainstream crypto integration into US financial markets.
• A stablecoin is a cryptocurrency that must maintain dollar-for-dollar reserves in short-term government securities or other approved assets under state or federal oversight. These digital assets have gained traction by: (1) providing liquidity to Treasury markets, (2) facilitating merchant payments, and (3) serving as a potential dollar proxy for users seeking USD exposure without currency conversion.
• However, mass adoption introduces systemic risks. Like money market funds, stablecoins remain vulnerable to bank runs and rapid capital flight during market stress — a danger starkly revealed in 2022 when China’s property crisis sparked catastrophic redemptions. One major issuer ultimately “broke the buck,” falling below its $1 peg due to reserve failures before collapsing entirely.
• We are closely monitoring stablecoin adoption, particularly given the well-documented historical pattern — articulated by economist Hyman Minsky — linking financial innovation to banking crises. While current risks appear contained, the systemic implications of widespread stablecoin adoption by households, businesses, and financial institutions warrant market attention of a potential threat to financial stability.

AI Job Displacement: Mounting evidence suggests AI adoption may significantly reduce demand for white-collar occupations.

• Amazon, the nation’s second-largest private employer, has announced plans to use AI technology to replace some of its corporate workforce. This reflects a broader corporate trend of leveraging artificial intelligence to drive productivity gains and operational efficiencies. Such technological integration may render certain job functions obsolete, particularly roles involving repetitive tasks that AI can automate.
• The growing adoption of AI aligns with the Trump administration’s strategy to fight inflation while keeping tariffs in place — a plan that relies heavily on productivity gains. This creates strong incentives for companies to absorb tariff costs by automating more operations and reducing headcount. Walmart’s recent elimination of 1,500 corporate jobs, coming just after its warnings about tariff-related price increases, shows this dynamic may already be playing out in the real world.
• Additionally, creating a larger pool of workers could motivate the Trump administration’s push to bring manufacturing jobs back to the US. Conservatives have long argued that a strong manufacturing base boosts national security, and they have supported shifting focus from college-educated roles to skilled trades. As JD Vance once quipped, “We have a lot of financial engineers and a lot of diversity consultants, we don’t have a lot of people making things.”

• Manufacturing currently accounts for just 10% of US employment, but AI-driven productivity gains could help revitalize the sector as the nation shifts toward domestic production. This transformation may attract both recent college graduates struggling in a tight job market and displaced workers seeking new opportunities. However, the inherently cyclical nature of manufacturing work could introduce greater volatility in the labor market.

Note: There will not be a Comment tomorrow due to the holiday.

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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 developments in the Israel-Iran conflict. We next review several other international and US developments with the potential to affect the financial markets today, including new forecasts of excess supply in the world oil market despite the conflict in the Middle East and new details on US fiscal policy as envisioned by Republicans in the Senate in their proposed version of President Trump’s “big, beautiful” tax-and-spending bill.

Israel-Iran Conflict: After reports surfaced that President Trump vetoed an Israeli plan to kill Iranian Supreme Leader Ayatollah Ali Khamenei in recent days, Prime Minister Netanyahu yesterday insisted that killing Khamenei would end the current conflict. Other Israeli officials have echoed Netanyahu’s stance. That raises the possibility that Israel will ultimately decide to ignore Trump, kill Khamenei, and pursue regime change in Iran, leaving the country and region even more politically unstable and potentially upending global financial markets.

• Many Iran critics who support regime change reportedly believe that Khamenei and his top officials could be replaced by former Crown Prince Reza Pahlavi, the eldest son of the former shah. Pahlavi reportedly has high name recognition among Iranians and has called for the country to transition to a secular democracy. However, it isn’t clear whether Iranians would rally around him if Khamenei were to be assassinated.
• In any case, President Trump spooked the markets late yesterday when he said he would leave early from the Group of 7 summit in Alberta, Canada, first warning that Tehran should be evacuated but then hinting that he should be back in Washington for talks about a ceasefire.
• Separately, as Israel and Iran continued to strike each other overnight, global investors worry that Israel could attack Iran’s oil export hubs or Iran could make a full-throated effort to close the Strait of Hormuz, through which much of the world’s oil exports pass. In either scenario, a key victim could be China, which currently takes more than 90% of all Iranian crude oil exports.

Global Oil Market: In its annual report, the International Energy Agency today forecast that global oil supplies will substantially outstrip demand in 2025, despite escalating conflict in the Middle East. The agency predicts that world oil production this year will rise by 1.8 million barrels per day to 104.9 million bpd, while demand rises by just 720,000 bpd to 103.8 million bpd, largely reflecting weakness in the US and China. As a result, the agency expects rising inventories and weaker pricing.

Global Gold Market: In a new survey of world central bankers, the World Gold Council found that a record 95% of respondents expect their institution’s gold holdings to rise over the next 12 months. As we have argued before, central banks are likely to continue being avid gold buyers amid today’s geopolitical tensions, sanction risks, and growing concern about the value of the US dollar. We therefore believe that gold prices will continue to march upward in at least the near term.

Japan: The Bank of Japan today held its benchmark short-term interest rate unchanged at 0.50%, as widely expected. Perhaps more important, BOJ Governor Ueda announced that the central bank will move more slowly on cutting back its purchases of Japanese government bonds starting next April. The move follows recent volatility in the market for JGBs, which has pushed longer-term bond yields higher, boosted the value of the yen, and created economic headwinds.

• The BOJ is currently buying 4.1 trillion JPY ($28.3 billion) of Japanese government bonds each month, with the purchases being reduced by 400 billion JPY ($2.7 billion) every three months.
• Under Ueda’s plan, the BOJ will start tapering its purchases by just 200 billion JPY ($1.3 billion) every three months starting next April, with the aim of reaching a monthly purchase level of 2.1 trillion JPY ($14.5 billion) by March 2027.

US Monetary Policy: The Fed starts its latest policy meeting today, with its decision due on Wednesday at 2:00 PM ET. Based on futures trading, investors widely expect the policymakers to hold their benchmark fed funds interest rate at its current range of 4.25% to 4.50%. Investors expect the next rate cut to come only in September, with perhaps one more cut by the end of the year. We agree with that assessment, but we’ll also be looking for more clues on the direction of rate cuts at Chair Powell’s Wednesday press conference.

US Fiscal Policy: Republicans in the Senate yesterday released details on their version of President Trump’s “big, beautiful” tax-and-spending bill. The basic contours of the bill duplicate what the House passed in May, but the proposal also includes significant differences that will be tough to reconcile with the delicate compromises agreed by Republicans in the lower chamber. That suggests that US fiscal policy will probably remain up in the air for at least a few more weeks, and passage of the final bill may not meet Trump’s preferred July 4 deadline.

• For example, the Senate bill includes more permanent business tax breaks, deeper cuts to Medicaid, slower phaseouts for clean-energy tax credits, and a much lower cap on the state and local tax deduction.
• The Wall Street Journal provides a handy summary of the main policy differences between the Senate and House bills here.

US Tariff Policy: President Trump’s decision to make an early departure from the G7 summit in Canada, mentioned above, has precluded most of his bilateral meetings with other leaders that many investors thought would lead to trade deals and reduced trade tensions. He did meet with Canadian Prime Minister Carney, but that meeting ended only with an agreement to work toward a deal in the next 30 days. The lack of any meetings or deals with other leaders is likely one reason for the weakness in US stock prices so far this morning.

US Immigration Policy: Following reports that US Immigration and Customs Enforcement leaders had directed agents to ease up on immigration raids at farms, meatpacking plants, restaurants, and hotels, as we noted in our Comment yesterday, reports yesterday revealed that Department of Homeland Security Secretary Kristi Noem has overridden the decision and ordered that “[W]e must dramatically intensify arrest and removal operations nationwide.”

• The reversal highlights growing disagreement within the Trump administration on whether to go full-bore on the president’s immigration raids even if they disrupt economic activity.
• Some top Trump officials are reportedly more sensitive to business concerns and argue for taking a softer, slower approach to removing illegal migrants.

US Commercial Real Estate Industry: New data from CBRE shows that the supply of office space is now on track to fall for the first time in 25 years, as developers hold off on building new work space and office-to-residential conversions accelerate. Conversions have been especially encouraged by rapid price declines for obsolete office buildings, changes to zoning rules that allow for more residential construction, and government incentives that help bring down costs.

• According to CBRE, conversions and other losses will reduce available US office space by about 23.2 million square feet in 2025, while developers are only expected to build about 12.7 million square feet of new offices.
• At the same time, corporate return-to-work policies are boosting the demand for office space.
• The result will likely help support office rents and the value of office buildings going forward.

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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 developments in the Israel-Iran conflict. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the US and China remain susceptible to new military and economic tensions and President Trump’s partial reversal on some of his immigration crackdowns.

Israel-Iran: Both Israel and Iran continued to strike each other with air and missile attacks throughout the weekend, following Tel Aviv’s initial attacks on Friday. Israel’s attacks, mostly using aircraft, have broadened beyond the initial focus on nuclear sites, military leadership, and air defenses and now include strikes on Iran’s energy infrastructure. Israel has also conducted at least one attack on the Iran-supported Houthi rebels in Yemen. All told, dozens of Israelis and Iranians have now been killed in the conflict.

• By expanding its attacks on Iran’s oil industry, Israel could potentially spark further investor concern about the world’s energy supplies, especially if Iran takes the cue to launch retaliatory attacks on energy facilities throughout the region. Nevertheless, as of this writing, oil prices have fallen about 1% so far today, with Brent trading at $73.64 per barrel and WTI at $72.27.
• Importantly, reports over the weekend said the Israeli government has pressured the US to participate in the attacks. Since the US has powerful “bunker buster” munitions that Israel doesn’t possess, Tel Aviv apparently wants the US to help take out the Iranian nuclear facilities that are buried in deep underground bunkers. So far, President Trump has refused the request. However, if he changes his mind, fear of Iranian retaliation against the US could well lead to even greater concern among investors.

China-United States: According to two officials involved in the latest US-China trade truce last week in London, the Chinese side would not commit to re-starting exports of some specialized rare-earth magnets that US military suppliers need for fighter jets and missile systems. According to the officials, the Chinese negotiators hinted they wouldn’t take that step unless the US eases up on its limits on sending advanced artificial-intelligence chips to China.

• The US officials also suggested they are looking to extend the US’s existing 30% reciprocal tariffs on China for a further 90 days beyond the August 10 deadline agreed in Geneva last month. That indicates that a more permanent trade deal between the US and China is unlikely to happen before late 2025.
• Earlier reporting suggested the London deal merely re-established the interim cooling-off deal reached in Geneva in May. However, after China reneged on its Geneva promise to ease up on rare-earth exports, the end result of the London meeting appears to be that China has only eased up on its civilian rare-earth exports. That suggests US-China trade tensions could easily flare up again and further delay any deal. Investors will therefore have to deal with heightened trade uncertainty for some time to come.

Chinese Military: In its latest yearbook, the Stockholm International Peace Research Institute (SIPRI) said China’s nuclear arsenal has now risen to 600 warheads, up from 500 last year. Beijing’s nuclear arsenal remains far below those of the US and Russia, which each have more than 5,000 warheads, but it remains on track to match the 1,700 or so the US has deployed by 2035.

• While the Trump administration’s tariff policies can make it seem that today’s US-China tensions are all about economics, the new SIPRI data on Beijing’s rapid nuclear build-up is a reminder that geopolitical and military tensions remain a key part of the relationship.
• As we noted in our Bi-Weekly Asset Allocation Report from April 15, 2024, China’s nuclear build-up is likely also boosting the price of uranium. SIPRI’s estimate that China built 100 new warheads over the last year isn’t far off from the 115 warheads we projected in our report. We estimated that such a level would require more than 10% of the world’s 2023 uranium production, which almost certainly would put upward pressure on prices.

Chinese Economy: Total industrial production in January through May was up 5.8% from the same period one year earlier, slowing from its gain of 6.1% in January through April. Fixed investment in the first five months of the year was up 3.7% on the year, after a gain of 4.0% in the first four months. This weak data was partially offset by a stronger-than-expected rise in May retail sales, but that gain likely only reflected the government’s temporary buying incentives. In sum, the figures suggest Chinese economic growth remains weak.

Australia: The Securities and Investments Commission today said it will open a probe into the country’s stock exchange operator, the Australian Securities Exchange, over its governance and risk management practices. The investigation stems from recent mishaps, including a botched upgrade to the exchange’s clearing and settlements systems and a prolonged outage late last year. The exchange is also suffering from a long drought in initial public offerings. The probe could potentially help boost Australian stock prices and new offerings going forward.

Eurozone: In a speech today, Bundesbank leader Joachim Nagel said the European Central Bank shouldn’t rush in cutting interest rates further, given that consumer price inflation in the region has already fallen to the targeted level. The statement comes after the ECB cut its benchmark short-term interest rates for the eighth straight time earlier this month, leaving it at 2.00%. The hawkish statement has given a boost to the euro so far today, with the currency now up about 0.2% to $1.1579,

G7 Summit: Leaders from the US, Japan, Germany, France, Italy, the UK, and Canada today begin their annual “Group of 7” summit in Alberta, Canada, along with invited leaders from a range of other countries, such as Mexico. While the forum will allow the leaders to discuss many key topics, such as the Israel-Iran and Russia-Ukraine conflicts, key trading partners are also reportedly eager to finalize commercial deals with the US at the meeting. Any announcements could potentially affect the global financial markets this week.

US Monetary Policy: The Fed will hold its latest policy meeting starting tomorrow, with its decision due on Wednesday at 2:00 PM ET. Based on interest-rate futures trading, investors widely expect the policymakers to hold their benchmark fed funds rate at a range of 4.25% to 4.50%. Investors currently expect the next rate cut to come only in September, with perhaps one more cut by the end of the year. We agree with that assessment, but we’ll also be looking for more clues on the direction of rate cuts at Chair Powell’s Wednesday press conference.

US Labor Market: Reports say President Trump late last week ordered US Immigration and Customs Enforcement to mostly pause its immigration raids on farms, meatpacking plants, hotels, and restaurants. According to one source, Trump was not aware of the extent of the enforcement push he had unleashed, and “once it hit him, he pulled it back.” Under his new directive, enforcement raids on the designated business types would focus only on arresting immigrants accused of serious crimes.

• As we have long surmised, any large-scale immigration crackdown would run the risk of creating labor shortages and driving up wage rates, especially in industries heavily dependent on immigrant labor.
• Trump’s quick pullback on the raids helps confirm that our concerns were valid. We suspect Trump was hearing an earful of complaints from backers in the business community.
• In any case, the president’s climbdown on the raids is a reminder that the actual policies he leaves in place on trade, immigration, fiscal policy, or regulation might be much less dramatic, and less disruptive for the economy or the financial markets, than his rhetoric or initial steps.

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