by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Stocks are surging on good news from Tesla. In the NHL, the Florida Panthers stole another victory, extending their series lead to 2-0 against the Tampa Bay Lightning. Today’s Comment examines how rising labor power could complicate the Federal Reserve’s fight against inflation. We also explain why markets are reacting positively to the latest PMI data and discuss how global investors are keeping a close eye on upcoming elections in India. As usual, the report concludes with a round-up of international and domestic news releases.

US Labor Power:  Workers have scored a string of victories since the pandemic’s end, but these gains are now coming with drawbacks.

• The Federal Trade Commission has enacted a rule banning non-compete clauses used by employers. This change empowers 30 million workers to pursue opportunities at competing firms without fear of recourse, potentially boosting their wages and career mobility. Additionally, the Department of Labor also expanded overtime pay eligibility to salaried workers earning under $58,600 annually, significantly increasing the threshold from $35,500. These combined changes to labor rules will likely face resistance from businesses and advocacy groups through the court system, but also signal a potential shift in power dynamics, with workers gaining more leverage.
• Regulations enhancing workers’ bargaining power, coupled with an exceptionally tight labor market, pose a formidable challenge to the Federal Reserve’s efforts to curb inflation. The close correlation between the PCE core services index and the employment cost index is a critical indicator, suggesting a potential wage-price spiral. In this scenario, rising wages could be offset by price increases as businesses pass on higher labor costs to consumers. This dynamic explains why policymakers like Atlanta Fed President Raphael Bostic prefer restrictive-for-longer monetary policy as the economy continues to add jobs at a healthy clip.

• Stronger worker bargaining power could signal a shift in economic priorities, potentially favoring greater equity over pure efficiency. Historically, periods with stronger worker rights and income equality have often coincided with higher employment and inflation. While artificial intelligence may eventually ease some price pressures, its uneven adoption across sectors makes the timeline uncertain. This could lead the Federal Reserve to raise its neutral rate — the interest rate considered neither stimulative nor restrictive — to manage inflation. It may be close to around 3% to 4%, which is above the Fed’s long-term projection of 2.5% as outlined in its summary of economic projections.

US Loss is Europe’s Gain: The purchasing manager survey has boosted investor confidence, suggesting an improvement in market conditions for both the US and Europe, albeit for different reasons.

• Disappointing Purchasing Managers’ Index (PMI) data released on Tuesday revealed a sudden contraction in both the US services and manufacturing sectors. This is a significant shift from expectations of continued growth. The services PMI dropped from 51.7 to 50.9, and manufacturing fell to 49.9 from 51.9. Notably, the employment indicator also dipped for the first time since June 2020, raising concerns about a potential slowdown in job growth. Remember, readings below 50 in the PMI indicate a decline in private sector activity. The dollar fell following the report as it weakened the case for prolonged policy restrictions.
• However, a brighter picture emerges in Europe. Both the eurozone and UK PMI data indicated an acceleration in growth. The composite euro area index climbed from 50.3 to 51.4, while the UK composite index surged from 52.8 to 54.0. This robust upswing fuels hope that the worst of the economic downturn might be receding, especially as these countries prepare to cut policy rates sometime this summer. Despite the overall improvement in the index, manufacturing PMIs in both the eurozone and the UK remain in contraction territory.

• The contrasting economic picture could favor European equities, especially if it leads to a weaker dollar. A potential slowdown in the US might prompt the Fed to keep the door open for rate cuts this year as it aims to avoid a policy misstep. A disappointing GDP report tomorrow, although unlikely, could further encourage the Federal Open Market Committee to maintain a neutral-to-dovish stance at its meeting next week. Meanwhile, stronger GDP data in Europe and the UK could offer support for the euro (EUR) and pound (GBP) as these countries contemplate loosening monetary policy in the coming months.

 

Indian Elections: Prime Minister Narendra Modi looks to tighten the grip on his government as voters head to polls for the first of six phases of voting.

• Modi and his Hindu nationalist Bharatiya Janata Party (BJP) are widely anticipated to clinch victory in the election, with official results slated for release on June 4. Meanwhile, the opposition, spearheaded by the once-dominant Indian National Congress, seems to be grappling with internal discord, which has cast a shadow of doubt on whether the coalition can stay together to form a government if it wins. The weakness has given Modi an opportunity to attack his rivals over their welfare plan, suggesting it could lead to a redistribution of wealth to benefit minority groups, particularly Muslims.
• While the BJP is heavily favored, its goal of securing over 400 out of the 543 parliamentary seats — a milestone not achieved since 1984 — might be harder to achieve. A cornerstone of the group’s reelection bid lies in the robustness of the economy, consistently ranked among the world’s fastest growing. Nonetheless, criticism looms over the party’s approach, with concerns raised about economic growth being accompanied by widening income disparities, especially in rural areas. Additionally, the country’s unemployment rate remains a significant concern, standing at over 7% — a sharp increase from the sub-4% rate we saw nearly a decade ago.

• The reelection of Modi is poised to be welcomed by markets, with investors viewing him as instrumental in steering the country towards robust and sustainable growth. However, the election has proven to be more hostile than in previous years. Attacks on voting booths and allegations of vote rigging, especially in regions favoring the incumbent, have surfaced. As a result, there have been calls for a redo of voting in several areas. An extension of an already long electoral contest risks diminishing investor optimism. Although we expect the election to end in line with expectations, there is an elevated chance of unrest following the results.

In Other News: The US Senate passed a bill that could force a ban on TikTok, owned by Chinese company ByteDance. This move, while likely to face legal challenges, underscores the deepening tensions between the US and China. In Pennsylvania’s primary elections, both President Biden and former President Trump secured comfortable victories, but also saw a notable number of protest votes.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equities are off to a strong start as investors await earnings, and the Los Angeles Lakers fell 0-2 against the Denver Nuggets in the NBA playoffs. Today’s Comment kicks off with an examination of how TikTok is adding yet another layer to the rivalry between the US and China, followed by an exploration of how the conflict between Iran and Israel has highlighted investors’ leanings toward safe-haven assets. Additionally, we delve into Brazil’s ascent as a geopolitical power. As always, the report wraps up with international and domestic economic releases.

Tech Wars: Facing a potential US ban, TikTok tightens security measures to address concerns, while Beijing simultaneously strengthens its domestic tech industry, potentially hindering American competitors.

• The Chinese social networking company ByteDance faces hurdles across the West in its fight to maintain access to lucrative markets. On Monday, the company announced it would challenge the legality of a potential ban of its TikTok app by arguing that it would violate free speech principles despite national security concerns. At the same time, the EU has threatened fines and has suspended TikTok’s new reward program, where users are paid to watch videos. Regulators fear this could make the app more addictive and may have a negative impact on children. The controversy over TikTok highlights the vulnerability of tech in the growing rivalry between the US and China.
• US tech companies aren’t immune to the escalating tensions either. Just days before the proposed TikTok ban made its way through the House of Representatives, Beijing retaliated by forcing Apple’s app store to remove Meta apps Threads and WhatsApp. Additionally, China has prioritized strengthening its domestic tech industry by boosting the marketability of its own companies within the country. This strategy has squeezed US tech giants like Tesla and Apple, leading them to lose market share in China, one of their biggest markets. Sales of iPhones in China last quarter were the worst since 2020, and Tesla’s price cuts on vehicles threaten to wipe out their operating earnings in the country.

• Regulatory risks stemming from the escalating US-China rivalry remain a major, yet often downplayed, concern for the tech sector. Many US tech companies have a significant presence in China, both in terms of revenue and supply chains. As tensions rise, these firms will likely face headwinds as they adjust to a new, more challenging operating environment. Even industry giants like Nvidia aren’t immune. Recent sanctions have complicated its efforts to sell some of its cutting-edge AI chips to China, highlighting the potential for disruption across the tech sector. Despite these challenges, other sectors continue to offer promising opportunities.

Calm Returns: Easing tensions in the Middle East have prompted investors to shift out of safe-haven assets and back into equities.

• Israel is shifting its attention from escalating tensions with Iran to addressing the situation with Hamas in Rafah. Israeli Prime Minister Benjamin Netanyahu pledged on Sunday to intensify pressure on Hamas to release the remaining hostages. His remarks follow the Israeli military’s decision to temporarily pause operations in Rafah to refocus on the Iranian issue following a scaled-back response on Friday. While the shift signifies an escalation in Gaza, it also signifies a crucial avoidance of the worst-case scenario in a potential broader conflict across the Middle East. As a result, there was an increase in investor risk appetite.
• The recent Iran-Israel conflict has highlighted a discernible shift in investor preference for safe-haven assets. Traditionally, during “flight to safety” episodes, investors gravitate towards bonds and gold, leading to an inverse correlation between Treasury yields and gold prices. However, since 2022, this relationship has become more intricate. Bond yields and gold prices have unexpectedly moved in tandem, a dynamic further reinforced by Monday’s news of easing tensions. This was evidenced by a 5-basis point decline in the 10-year Treasury yield and a 2% drop in the gold spot price on the same day.

• Investor anxiety about interest rate risk has likely caused the breakdown in the traditional correlation between bonds and gold. This anxiety stems from the current uncertainty surrounding monetary policy, fueled by the rising US federal deficit. The trend may persist until policymakers offer a clear path toward lower rates, and lawmakers find common ground on controlling government spending. Fed Chair Jerome Powell’s comments at the next meeting will be closely watched for any hints of doubt regarding potential rate cuts later this year. Despite the complex market dynamics, gold remains a compelling option for investors seeking a haven during times of uncertainty.

Lula’s Dance: Despite Brazil’s fiscal struggles, the president persists in promoting the country’s image as a global player.

• Brazilian President Lula Da Silva finds himself embroiled in a power struggle with Congress, where lawmakers are poised to advance legislation that would boost spending by around $18.5 billion over the next two years. Additionally, lawmakers stepped in to preserve tax benefits for the events industry, a move that complicates efforts to reduce spending. These developments came soon after the administration watered down its budget target, in order to lower expectations of achieving a 2025 surplus. The country’s inability to control its budget has weighed on the currency.
• In contrast to domestic struggles, Lula’s foreign policy of engaging with other nations to broaden his country’s influence remains effective. Despite strong ties with the United States, the Brazilian president has pursued a closer relationship with China. This month, Lula met with Brazilian beef producers to oversee the first meat shipments under the export deal he struck with China in 2023. This move reflects Lula’s strategic vision to position Brazil as a key player in the global food and energy markets, capitalizing on China’s desire to diversify its suppliers away from the US.

• While our analysis suggests a tilt towards China, Brazil’s economic growth depends on maintaining strong relationships with both the US and China. A rising US dollar could worsen Brazil’s existing dollar-denominated debt, particularly as President Lula ramps up social spending. However, China’s massive import market offers Brazil’s agricultural sector a chance to expand, stimulating the broader economy. Navigating this relationship will require Brazil to demonstrate it is not beholden to Beijing, despite its current focus on the Chinese market. Failure to establish this distance could put Brazil in Washington’s crosshairs, particularly as it seeks US assistance with Amazon deforestation.

In Other News: In a troubling sign of Mexico’s growing crime issue, masked men held up Claudia Sheinbaum, the frontrunner in the presidential race, along a highway. Russia has threatened to escalate attacks after the US approves a military aid package to Ukraine, signaling a potential shift in the war’s trajectory. Lockheed Martin’s strong earnings report adds to evidence of rising demand in the US defense industry, likely fueled by growing global tensions.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a discussion of the big foreign aid bill passed by the House of Representatives over the weekend. We next review a wide range of other international and US developments with the potential to affect the financial markets today, including an analysis of why Japan and South Korea are agitating for a weaker dollar and some observations on where US bond yields go from here.

United States-Ukraine-Israel-China: The House of Representatives approved a package of bills on Saturday that will provide a total of $95 billion in military and other aid to Ukraine, Israel, and Taiwan, even though a majority of Republicans opposed the $60 billion or so destined to Ukraine to help it fend off Russia’s invasion. The Senate is poised to give final legislative approval to the package in the coming days, after which President Biden is expected to sign it into law.

• Here at Confluence, we have long noted how US voters have become increasingly resistant to supporting the country’s traditional role as global hegemon, with the enormous fiscal, economic, and social costs. We believe that resistance is a key reason why right-wing populists such as Donald Trump have gained power in recent years.
• Nevertheless, it is not set in stone that US voters will ultimately support a full pullback from US leadership in global affairs. The vote over the weekend is an example of how, when faced with the threat of authoritarian powers abroad, politicians could well line up behind renewed US engagement, higher US defense spending, and a stronger commitment to US military power.

United States-Japan-South Korea:  New analysis suggests Friday’s joint statement on currency rates by the US, Japan, and South Korea stemmed from Japanese and Korean concerns about consumer price inflation. As strong economic growth and the prospect of continued high interest rates in the US buoy the dollar, the yen (JPY) and won (KRW) have depreciated sharply. In turn, Japanese and Korean purchases of dollar-denominated goods have become more expensive, broadly pushing up price pressures in each country.

• Since the end of 2022, the yen has lost 14.8% of its value versus the greenback. Meanwhile, the Korean currency has weakened 8.3% against the dollar.
• The statement, which acknowledged that Tokyo and Seoul have serious concerns about their currencies, could signal a future coordinated effort to weaken the dollar and allow the yen and won to rise again. At any rate, it suggests the Biden administration has given the two allies a green light to intervene in the currency markets to boost their currencies.

Chinese Monetary Policy: The People’s Bank of China today said the country’s major banks have kept their prime lending rates unchanged this week, as widely expected after the central bank kept the interest rate on its medium-term lending facility unchanged last week. The banks’ one-year prime rate remains at 3.45%, while their five-year rate remains at 3.95%. Because of continued modest economic growth, some economists still expect the PBOC to cut rates further, but policymakers continue to resist broad, aggressive stimulus measures.

Chinese Military: State media on Friday said General Secretary Xi has ordered the biggest reorganization of the People’s Liberation Army since 2015. Under the change, the Strategic Support Force will be split up, with its space and cyberspace forces becoming new, standalone services and its remaining elements becoming a new Information Support Force.

• One likely reason for the change is to hasten the development and improve the operational efficiency of China’s key space warfare and cyberspace capabilities. If successful, the reorganization could help make those forces even more formidable threats to the US and the rest of its geopolitical bloc.
• Another likely reason for the reorganization is to stamp out corruption. Over the last year, several high-ranking military officials in the sprawling Strategic Rocket Force and defense industry were removed from their posts, apparently for procurement-related corruption that would have made them susceptible to recruitment by foreign intelligence agencies. Breaking up the Strategic Support Force could help increase control over its elements and reduce the opportunity for bribery, graft, espionage, and the like.

Iran-Israel: The Israeli military finally launched its retaliation on Friday for Iran’s direct missile and drone attack on Israel on April 13, striking a military base near the central Iranian city of Natanz. Details over the weekend showed the strike apparently used one missile and multiple drones to destroy an Iranian air defense radar near some of Iran’s key nuclear program sites. The limited nature of the strike and Iran’s muted response suggest the risk of escalation has diminished, but it’s clear Israel was signaling it can attack Iran by air if it so chooses in the future.

Canada: Bank of Canada Governor Macklem has given an optimistic assessment that consumer price inflation in Canada is now “closer to normal” and that the March data was a further “step in the right direction.” According to the report last week, March consumer prices were up 2.9% from the same month one year earlier. Macklem’s statement is being read as further evidence that the central bank will begin cutting interest rates as early as June.

US Bond Market: With the big rise in US bond yields over the last month, which has lifted the yield on the10-year Treasury note to 4.62% so far today, investors are increasingly wondering whether the benchmark yield could re-test the 5.00% level reached last October. Given the strength in US economic growth and sticky consumer price inflation, that’s possible. However, we note that Fed policymakers are behaving as if 5.00% is an informal ceiling that, if touched, would spur efforts to try to talk down yields or take other actions to push them lower.

• In other words, if the 10-year Treasury yield hits 5.00%, bond yields may not go much higher in the near term.
• Indeed, that level could potentially be a buying opportunity since Fed policymakers may then push yields lower again.

US Labor Market:  The United Auto Workers said late Friday that 73% of the workers at a VW auto factory in Tennessee have voted to join the union, marking the UAW’s first success in organizing a non-Detroit Three assembly plant and its first major success in the South. The victory illustrates how labor shortages have boosted popular support for unions to a six-decade high and given workers increased leverage versus employers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equities are off to a great start following optimism that tensions in the Middle East might be easing. On the lighter side, NHL fans rejoice — the playoffs begin this Sunday! Today’s Comment examines the potential effects of rising interest rates on repo markets, explores signs of a slowdown in semiconductor demand, and discusses the growing anxiety among central banks outside the US regarding the resurgent strength of the dollar. As usual, our report concludes with a summary of domestic and international data releases.

Another Repo-calypse? The recent rise in Treasury yields has led to concerns about a squeeze in the short-term lending market.

• Recent hawkish comments from Federal Reserve officials have driven yields upwards on the 10-year US Treasury bond. While New York Fed President John Williams signaled a cautious approach by suggesting rate cuts are improbable in the near term, he didn’t entirely rule out the possibility of future hikes. Atlanta Fed President Raphael Bostic later offered a contrasting view, indicating that a rate cut in the final quarter is still a possibility. These remarks have further bolstered the market’s perception that interest rates may stay elevated for a longer period than previously expected.
• The recent rise in interest rates has sparked concerns about a potential yield curve steepening, which could lead to funding stress. Higher interest rates incentivize investors to shift their funds towards higher-yielding, safer assets, such as the short-term Treasurys the government is issuing to meet its funding needs. This shift has consequently absorbed much of the excess liquidity, leading to a decline in the use of the reverse repo (RRP) facility, which has fallen to its lowest level since 2021, and is currently at $433 billion. Moreover, a sustained decline in RRP usage could lead to an excess reserve problem, potentially posing systemic risks in the financial system.

• The 2019 repo crisis serves as a stark reminder that disruptions in the short-term wholesale market can be a warning sign of an impending recession, even though they don’t directly cause one. Notably, each of the last four recessions was preceded by such disruptions. As the usage of the RRP continues to decline, we could see an increase in bond volatility. This, in turn, could raise the likelihood of a market correction. At this time there is no evidence of any sign of trouble, but investors could seek protection in commodities if conditions worsen unexpectedly.

Chip Hype Fades: Semiconductor stocks are slumping amid growing concerns about future demand, particularly for consumer goods.

• On Thursday, Taiwan Semiconductor Manufacturing Company (TSMC) the world’s largest chipmaker, cut its 2024 chip market outlook due to a slowdown in the purchasing of smartphones and PCs. Excluding memory chips, they now expect the semiconductor market to grow around 10% this year. This revision highlights a widening gap between chipmakers supplying consumer electronics and those focused on AI-related services. The decline in Apple’s consumer products, exemplified by weak iPhone sales in China, contrasts sharply with Microsoft’s projected strong revenue growth in cloud computing, which fuels its AI efforts. This trend highlights the growing divide between hardware-focused companies and those leveraging cloud services for AI.
• The uncertain macroeconomic and geopolitical climate is likely to exacerbate the weakness in chip demand. While the US has shown some resilience this year, the global outlook remains precarious. The European Union and UK are struggling to stimulate economic growth, and China’s slowdown continues to be a drag on the world’s economy. This will likely disproportionately impact chip companies compared to other sectors due to their greater reliance on global markets. This lack of optimism is likely why Dutch chip equipment maker ASML posted lower-than-expected orders, as chipmakers are hesitant to ramp up production.

• TSMC’s earnings report underscores the waning enthusiasm for tech stocks in this volatile market. Rising interest rates, driven by the Fed’s tighter monetary policy, are prompting investors to seek alternative assets with higher yields than US Treasurys. This shift could trigger a sell-off in AI-related companies like Nvidia, particularly if earnings disappoint. Investors are increasingly questioning the sustainability of the AI boom. Even the “Magnificent Seven” tech giants, which started the year strong, may be forced to relinquish some of those gains in the coming weeks. Nevertheless, this doesn’t negate the potential value proposition of stocks beyond the traditional tech players.

The Super Greenback: Fueled by hawkish rhetoric from Federal Reserve officials and robust US economic growth, the dollar’s surge against its peers has sparked international concern.

• The Bloomberg Dollar Spot Index has climbed to its highest level since October 2023, putting pressure on economies reliant on dollar-denominated imports. South Korea and Japan recently met with the US to address the issue. Their worries stem from currency depreciation, with the yen (JPY) trading around 154 per dollar and the won (KRW) nearing 1400 per dollar earlier this week. Both countries fear a stronger dollar could exacerbate inflationary pressures. While no immediate policy coordination was agreed upon, the group has committed to “close consultation.”
• A strengthening dollar is prompting central banks to reassess their policies. The People’s Bank of China has threatened currency intervention to deter speculative bets against the yuan (CNY). The Bank of Japan is also considering intervention and a potential interest rate hike later this year to curb the yen’s depreciation. In Europe, the European Central Bank (ECB), which previously anticipated a rate cut in June, may be forced to reconsider its dovish stance. Similarly, Sweden’s Riksbank has hinted that its potential rate cut in May might be jeopardized.

• The strong dollar and tightening global monetary policy have become key drivers of international markets in 2024, creating headwinds for many countries. While the global economic climate remains improved compared to last year, the outlook has somewhat dimmed. Interest rates are likely to stay higher than initially anticipated, potentially weighing on international equities, especially if the Fed maintains its hawkish stance. However, central bank interventions could mitigate some of these challenges by injecting more liquidity into the market, potentially offering some resistance to the dollar’s appreciation and supporting foreign equities.

In Other News: Israel launched a limited counterstrike against Iran on Friday. Tehran downplayed the retaliation, calling it insufficient, but the measured response may help prevent further escalation. The US Congress is nearing a vote on approving aid for allies, including Ukraine and Israel. In a separate development, Apple removed WhatsApp and Threads from its App Store in China due to pressure from Beijing. These issues highlight the growing geopolitical tension in the world.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equities are surging as investors await another round of earnings reports today. Meanwhile, Real Madrid, after dethroning Champions League champion Manchester City, now gear up for their semi-final clash against Bayern Munich. Today’s Comment explores how the Federal Reserve’s shifting sentiment has impacted market expectations for interest rate cuts, why nuclear power is considered a potential solution to the energy constraints of artificial intelligence, and how the debate over military aid to various countries contributes to global uncertainty.

Powell Pivot: Markets have regained composure following Federal Reserve Chair Jerome Powell’s hawkish shift toward a restrictive-for-longer monetary stance.

• Investors drove the decline, seeking to capitalize on the highest Treasury yields of the year. The strong demand for the 20-year bond auction, which yielded 4.818% (2 basis points lower than the pre-auction yield), fueled optimism. However, despite exceeding expectations, the auction resulted in the second-highest Treasury yield since the 10-year tenor’s reintroduction in 2020. Additionally, the bond yields for the two-year Treasury fell below 5%, while the bond volatility declined after it hit its highest level since January in a sign that investors are still hopeful of rate cuts this year.
• Investor expectations for Federal Reserve interest rate cuts have undergone a dramatic shift in the last several months. Initially, markets anticipated up to seven cuts this year, fueled by the Fed’s confidence in controlling inflation and concerns about a slowing job market (evidenced by declining job openings and payroll figures). However, recent data has dashed hopes of an imminent slowdown. Inflation data reveals persistent price pressures, particularly in wage-sensitive sectors. As a result, policymakers have grown reluctant to cut rates anytime soon, as they fear such a move could undermine their credibility in fighting inflation.

• Federal Reserve Chair Jerome Powell’s recent shift to a more hawkish stance is likely a reflection of his cautious decision-making approach. Powell prioritizes consensus among policymakers before taking action, which has resulted in one of the lowest dissent rates in Fed history during his tenure. Over the last few weeks, members have offered a range of opinions about the inflation trajectory. Some dismiss the recent data as a blip, while others voice concerns about a new trend of stickiness. However, employment has been an area of agreement. If jobs slow considerably in the coming months, policymakers may be open to a rate cut, but until then, expect “higher for longer” to be a major theme going forward.

AI Energy Problem: The future may belong to artificial intelligence (AI) but addressing its ever-increasing energy demands is a critical challenge.

• The AI boom is raising concerns for the overall economy. A representative from UK semiconductor company ARM predicts that AI could consume more electricity than India, the world’s most populous country, by 2030. This surge is driven by companies training increasingly complex AI systems with ever-larger datasets. The energy constraint has become a significant roadblock to AI development, potentially surpassing chip shortages as the top concern among tech companies. While these firms have made strides in efficiency with custom chips, these solutions may only offer up to 15% energy savings in data centers.
• Nuclear power is emerging as a promising solution. Energy Secretary Jennifer Granholm recently announced the Department of Energy’s support for using small-scale nuclear plants to power AI and data centers. This groundbreaking approach brought together tech giants to explore the deployment of compact, on-site nuclear reactors utilizing nuclear fission. This initiative seamlessly aligns with the Biden administration’s focus on modernizing infrastructure, prioritizing a shift towards cleaner energy sources. The forthcoming rejuvenation of the Holtec Palisades facility serves as a testament to this commitment and could herald the resurgence of similar plants nationwide.

• Nuclear energy, currently supplying 20% of the nation’s power, is poised for a resurgence as the US divests from fossil fuels. Analysts predict a uranium supply crunch due to surging demand, especially with more countries adopting nuclear power. This scarcity is likely to make uranium a strategic investment, potentially granting uranium companies leverage in pricing. The recent 80% price increase over a year reflects this optimism in the nuclear sector, particularly for miners. This momentum is expected to continue as navigating the regulatory hurdles for uranium production is a slow process for many countries.

Military Aid Dispute: Despite edging closer to approving funding for military efforts abroad, persistent political wrangling among lawmakers raises concerns about future efforts.

• On Wednesday, House Speaker Mike Johnson (R-LA) informed fellow party members of his decision to schedule a crucial vote on foreign aid packages earmarked for Ukraine and Israel, set to take place this Saturday. The announcement comes amid simmering tensions within the leader’s own party. Some members are pushing for more funds to address domestic issues like border security, while others are wary of ballooning the deficit. This internal rift makes securing bipartisan support crucial, particularly as pockets of strong opposition have solidified within the party itself.
• While aid can provide much-needed support to these countries, it’s unlikely to be a cure-all for the long shadow cast by surging geopolitical tensions. The situation in Ukraine has taken a drastic turn for the worse in recent weeks. Anxieties mount as the country struggles to repel Russian advances due to a critical lack of anti-missile defenses, exemplified by Tuesday’s loss of a key power plant. Meanwhile, the specter of wider conflict looms as Israel weighs a response to Iran’s weekend attack, with Tehran threatening further escalation in the event of another military strike.

• Escalating geopolitical flashpoints exacerbate global uncertainty, sending investors scrambling for hedges against potential supply chain disruptions in a wider war. This uncertainty fuels a surge in gold prices, as the precious metal reclaims its safe-haven status. The preference for safe-havens is likely to persist, with long-term Treasury yields expected to remain volatile. The US’s growing debt burden adds to this volatility, as investors grapple with the government’s ability to manage it. Our analysis suggests that growing threats from the Russia-China-Iran alliance will necessitate increased US security spending, further limiting its ability to control spending in the coming years.

In Other News: A group of conservative economists is advocating for a 17% flat income tax and maintaining the cap on SALT deductions. This plan comes as the presumed Republican presidential nominee is likely to consider ways to reduce taxes. Weight loss drug Ozempic is unexpectedly linked to increased fertility rates in users. This raises concerns about potential unintended consequences of the medication. Japan and Korea are working with the US to weaken the rise of the dollar.

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