by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

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

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

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

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

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

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

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

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

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

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

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

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

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

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

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

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

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

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

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

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

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

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

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

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

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

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

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

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

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

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

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

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

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

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

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

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

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

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

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

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

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

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

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

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

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

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

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

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

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

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

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

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning. Global monetary policy concerns are currently a key focus for the market. In sports, reigning Champions League titleholders Real Madrid were eliminated by Arsenal. Today’s Comment will address recession fears in Canada, the Federal Reserve’s policy stance amid tariff uncertainty, and other market-moving developments. As always, this report will include domestic and international data releases.

Trouble Up North? The Bank of Canada became the first G-7 central bank to flag a trade war as a potential recession trigger.

• BOC Governor Tiff Macklem delivered a sobering warning about Canada facing a potential once-in-a-generation economic crisis. While the economy showed resilience through late 2024, recent developments have revealed a dramatic deterioration fueled by growing trade policy uncertainty, particularly from aggressive US tariff measures. Macklem expressed concerns that escalating trade tensions could push Canada into a prolonged recession, potentially creating rising inflation and increasing unemployment.
• The grim economic outlook reflects growing concerns that Canada may struggle to maintain growth amid escalating trade tensions with its southern neighbor. The auto sector (a key pillar of the economy) has already shown signs of strain: Stellantis has temporarily idled a factory, General Motors is planning months-long plant shutdowns, and Honda is rumored to be considering a relocation of 90% of its Canadian and Mexican production to the US to prioritize local sales.
• Economic anxieties have surged to the forefront of Canada’s election campaign, now just 11 days away. Prime Minister Mark Carney, leading the Liberals, and Conservative challenger Pierre Poilievre are locked in a high-stakes battle to prove their ability to navigate relations with US President Donald Trump. Wednesday’s inaugural televised debate revealed stark contrasts as Carney positioned himself as the steady crisis manager, while Poilievre embraced the mantle of radical change.

• Canada’s economic vulnerability and heavy reliance on US trade have elevated this election to historic importance, with the outcome likely shaping how the nation weathers a potential trade conflict with its southern neighbor. The Conservative candidate previously enjoyed what seemed to be an insurmountable advantage just months ago, but the political landscape has shifted decisively as voters perceive PM Mark Carney as being best equipped to counter President Trump’s assertive approach toward trade talks.
• As the global order fragments into economic blocs, stronger US-Canada alignment could foster coordinated policy responses to address shared concerns about China’s economic and geopolitical ambitions. We believe that Carney’s pragmatic stance positions him favorably for negotiations with the Trump administration. His recognition of Canada’s limited retaliatory capacity in trade disputes underscores his unwillingness for an out all out back and forth between the two countries.

Fed Concerns? Federal Reserve Chair Jerome Powell hinted that tariff uncertainty may lead the Fed to hold rates unchanged for the rest of the year.

• During a speech at the Economic Club of Chicago, Powell warned that trade uncertainty has complicated the Federal Reserve’s efforts to fulfill its dual mandate of maximum employment and price stability. He noted that the current tariff levels far exceed the Fed’s worst-case projections, potentially forcing the central bank to adopt a more cautious, wait-and-see approach to interest rate policy. With Fed officials still uncertain about whether to prioritize inflation control or unemployment, the path forward remains unclear.
• Powell’s lack of explicit guidance has raised market concerns that the Fed may deliver fewer rate cuts than anticipated. According to the CME FedWatch Tool, investors currently assign a 64% probability to three or four rate cuts this year. This uncertainty triggered a mild equities sell-off, as traders grew skeptical that the central bank would intervene to cushion a sharp market downturn — a phenomenon known as the Fed put.

• While the Fed and the market are concerned about rising inflation and slowing GDP growth (aka stagflation), it’s important to note that true stagflation is exceptionally rare. The last significant occurrence in the US was in the 1970s and was driven by the Arab oil embargo. Given that oil prices have declined and broader economic data remains relatively stable, we believe it’s too early to determine the economy’s true trajectory.
• Despite concerns over trade policy, we believe the Fed is likely to keep its policy tools available to address economic risks. While Chair Powell has signaled hesitation about easing policy amid elevated inflation risks, we expect the central bank’s stance could shift swiftly in the event of a severe disruption, such as a sudden spike in defaults or emerging liquidity strains. Barring such shocks, however, the Fed will probably remain on hold and allow developments to unfold.

Trade Talks Progress: Giorgia Meloni, Italy’s Prime Minister, aims to strengthen US-EU ties, while Japan and the US maintain ongoing discussions.

• Prime Minister Meloni is scheduled to meet with President Trump on Thursday, following the breakdown of recent EU-US trade negotiations. Her shared populist background with the US president has positioned her as a potential mediator. The visit occurs amidst EU accusations that the US failed to articulate its specific demands for a trade agreement. During those negotiations, the EU offered to eliminate all tariffs if the US reciprocated. The White House rejected this proposal, insisting on a 10% baseline tariff.
• Despite the lack of progress in EU negotiations, the Trump administration has made headway in discussions with Japan. While specific details remain undisclosed, a second round of negotiations is anticipated later this month. It is expected that both sides will seek agreements on trade and defense.
• US discussions with the EU and Japan are expected to be intense as they aim to establish a framework for an agreement before the 90-day exemption period expires. Given that the deadline is anticipated to near the Fourth of July holiday, we believe an arrangement will likely be finalized in time for the president to potentially use it as a marketing tool.

US-Iran Talks: The two sides have agreed to hold talks in Rome about Iran’s nuclear program this weekend.

• US officials met with their Iranian counterparts last Saturday in Oman for the first round of discussions. The two sides are currently working to define their ultimate objectives regarding Iran’s nuclear capabilities. Complicating matters, Iran has accused the US of moving the goal post from first aiming to limit its nuclear capability to now wanting to shut it down completely.
• The disagreement over what the US aims to achieve in talks with Iran appears to be driven by internal divisions within his inner circle. President Trump has made it clear that he would like to prevent Iran from weaponizing its program and creating a nuclear bomb. This comes after he refused to support Israel’s desire to strike Iran’s nuclear sites as soon as next month.
• Ongoing discussions are likely a positive for the market as they reduce the likelihood of conflict. Trump appears unwilling to pursue military action if a deal can be reached, potentially paving the way for an agreement between the two sides in the coming months.

Note: There will be no Daily Comment published tomorrow due to the holiday.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The markets are weighing the latest retail sales. In sports, both the Golden State Warriors and Orlando Magic have clinched playoff berths in the NBA. Today’s Comment will focus on interpreting what import prices indicate about inflation pressures, examine the White House’s growing openness to tax increases, and analyze other key market developments. As usual, the report will include a summary of domestic and international economic data releases.

Tariff Update: Recent import price data suggests that tariffs have not yet translated into increased inflation. Nevertheless, trade concerns remain.

• The latest trade price figures revealed a 0.1% decline in import prices during the first complete month following the new tariff implementations. This was the first monthly decrease since September 2024. The downward movement was principally fueled by a significant 2.3% drop in petroleum prices. When excluding petroleum, import prices were unchanged from the previous month. Export prices also showed no meaningful change from the previous month’s levels.
• The muted inflationary impact of recent tariffs has provided temporary relief to policymakers, though uncertainty lingers regarding the Fed’s next moves. Boston Fed research shows import prices account for 10% of core PCE, comprising 6% from direct passthrough effects and 4% through secondary channels. This structural relationship has intensified market worries that sustained trade restrictions may keep monetary policy on hold through year-end, potentially delaying anticipated rate cuts.

• Nevertheless, several Fed officials continue to highlight lingering risks. Richmond Fed President Thomas Barkin cautioned that while businesses have managed to maintain inventories thus far, consumers could still face price increases by June. He further warned that ongoing tariff-related uncertainty may delay the timeline for potential rate cuts. Atlanta Fed President Raphael Bostic highlighted that the Federal Reserve would adjust its policy once it has a better understanding of where trade policy is going.
• This month’s import price data is significant because it indicates that the impact of trade restrictions on price pressures is currently lagging. This delay could be due to factors like discounts for bulk orders placed before tariffs or absorption of some tariff costs. Consequently, we caution that while tariffs will likely lead to higher costs for consumers and suppliers, the overall effects remain uncertain.

More Taxes: Raising taxes on wealthy individuals and corporations is gaining momentum within the Trump administration as it aims to offset the costs of proposed middle-class tax cuts.

• While no final decision has been made, President Trump is reportedly considering corporate tax rate increases as a potential revenue source to offset proposed payroll tax cuts. Simultaneously, Republican lawmakers are drafting legislation that would introduce a new 40% tax bracket for individuals earning over $1 million annually. These discussions emerge as the administration faces challenges in financing its new tax package.
• The proposal to increase the top marginal tax rate from 37% to 40% reflects growing Republican concerns about the deficit’s impact on national debt. While some GOP members worry that the new tax bill could exacerbate fiscal shortfalls, attempts to offset costs through cuts to Medicare, Medicaid, and Social Security face significant political resistance due to potential backlash.

• The GOP’s openness to tax increases represents a striking break with party orthodoxy, challenging its decades-long commitment to tax reduction — especially for top earners. This ideological evolution reflects the rising sway of populism in Republican economic policy. The shift coincides with a broader realignment of political coalitions, as affluent suburban districts increasingly favor Democrats while working-class areas trend Republican, a transformation years in the making.
• Proposals to raise taxes on corporations and high earners should be viewed skeptically until formally enacted into law. Even if included, such measures would likely be offset by other tax provisions and may primarily serve as political insulation against Democratic claims that Republicans favor the wealthy. That said, successful passage could establish a precedent for future wealth-focused tax increases, potentially reshaping the party’s fiscal approach to align with its evolving populist base.

Tech Concerns: A clouded outlook from ASML as well as new trade restrictions on chips has weighed on the tech sector.

• Dutch semiconductor equipment leader ASML has warned that persistent tariff uncertainty is significantly obscuring its visibility for 2025-2026. The company’s disappointing first-quarter net bookings — a critical forward-looking metric — fell short of analyst expectations, suggesting potential headwinds for the global semiconductor sector. Compounding these challenges, management acknowledged difficulty in quantifying the potential earnings impact of escalating trade tensions.
• Nvidia faces intensified regulatory challenges as the Trump administration expands its semiconductor export controls, adding the company’s flagship H20 AI processor to the China trade blacklist. The new restrictions, which require special licensing for all future China exports with no defined expiration, could force Nvidia to absorb a significant $5.5 billion Q1 write-down on previously approved shipments. This represents one of the largest financial hits yet from the ongoing US-China tech decoupling.
• One critical consideration throughout this trade war is monitoring companies with substantial foreign revenue exposure. These multinational firms face heightened risks as global markets adapt to escalating tariffs. Consequently, investors may find defensive opportunities in domestically oriented businesses that are less vulnerable to international trade disruptions.

Japan Test Case? The US has prioritized Japan as it seeks to establish a framework for trade negotiations with major global economies.

• Japanese negotiators are scheduled for direct talks with President Trump to address bilateral trade imbalances and ongoing military cooperation. While the Trump administration has indicated that it intends to maintain at least 10% baseline tariffs, Tokyo is reportedly advocating for their complete elimination. These discussions follow the US president’s recent push to impose 24% reciprocal tariffs on Japanese goods.
• Trade negotiations between the two will provide a lot of insight into the flexibility of the Trump administration, which has been known to drive a hard bargain. If they are able to show more leniency in response to getting some concessions from trade partners, then the market could regain the optimism that it had at the beginning of the year.
• Notably, the 10% baseline tariffs may be more negotiable than the Trump administration’s public position indicates. As we previously reported, President Trump’s chief economic advisor Kevin Hassett has suggested that exceptional trade concessions could justify rates falling below the 10% threshold. Should any trading partner successfully secure such terms, it would represent a significant policy shift.
• Market expectations have evolved significantly — where investors once demanded complete tariff elimination, they now view moderated tariffs as an acceptable outcome. This shift suggests cautious optimism that the Trump administration can balance its dual objectives of generating tariff revenue without the market disruption.

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