by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Financial markets are still in a good mood following the latest deals from the Trump administration. In sports news, fans are celebrating the Indiana Pacers’ victory over the Cleveland Cavaliers that secured their spot in the Eastern Conference Finals. Today’s Comment will examine the latest inflation data, important tax policy developments, and other market-moving news. As always, our report will provide comprehensive summaries of both domestic and international economic data releases.

Where’s the Tariff? Inflation was softer than expected, signaling a continued downward trend in underlying price pressures that began before the tariffs took effect.

• Overall, US consumer prices increased by 2.3% year-over-year, down slightly from the previous month’s 2.4% and well below the 3.0% reading at the start of the year. The decline was driven by a sharp 11.5% drop in energy prices compared to the prior year, along with a monthly decrease in food costs. Excluding food and energy, Core CPI held steady at 2.8% for the month.
• The most encouraging aspect of the report is the continued downward trend in services inflation, signaling a return to normalization. The year-over-year change in the index has declined for six consecutive months, with the deceleration primarily driven by shelter costs — a key inflationary driver. This moderation in shelter prices has played a major role in bringing overall inflation closer to the 2% target.
• However, there are early signs that tariff pass-through is beginning to influence inflation, albeit modestly. As the chart below illustrates, the latest CPI reading pushed inflation above its pre-pandemic trend, roughly matching the previous year’s monthly increase. Much of this uptick stemmed from key goods likely affected by tariff-related cost pressures. Notably, price indexes for appliances, recreational goods, and educational commodities all accelerated compared to the previous month.

• The April CPI report offers some reassurance that the feared inflationary surge may not be as severe as initially expected. As we’ve noted in previous commentaries, these tariffs are unfolding alongside a broader disinflationary trend, particularly in shelter costs, which should help restrain an increase in the overall index for the year. That said, the full impact of inflationary pressures may not materialize until mid-to-late summer. Therefore, investors can remain cautiously optimistic regarding inflation.

More Tax Details: The latest estimate for the House Republicans’ tax bill falls within the range projected by lawmakers, clearing the way for additional adjustments to the bill.

• According to the Joint Committee on Taxation, the GOP’s latest budget proposal is projected to increase the deficit by $3.7 trillion over the next decade. This figure reflects $5.8 trillion in proposed new tax spending, partially counteracted by $1.9 trillion in savings achieved through the reversal of clean energy incentives. With this projected deficit increase remaining below the House Ways and Means Committee’s $4.5 trillion benchmark, the possibility of additional tax reductions is being explored.
• Expanding the SALT deduction has emerged as the most likely concession. Several lawmakers have signaled they would support the tax bill only if the deduction is raised from the current $30,000 cap. They contend that opposing the bill outright could lead to a full repeal of the cap, so they are pushing for a larger deduction as an incentive to vote in favor. While negotiations over a potential increase continue, House Speaker Mike Johnson has indicated that a deal could be reached by Wednesday.
• The additional fiscal flexibility could also facilitate a partial reversal of eligibility restrictions for food and health assistance programs. Republican legislators have expressed concerns that these limitations might alienate key constituents who supported Trump’s 2024 presidential victory. This newfound budgetary margin may enable lawmakers to relax certain provisions, potentially averting significant political backlash.

• Although the bill has not yet reached its final form, it is still anticipated to deliver significant stimulus to the broader economy. This economic boost could help mitigate much of the anticipated impact from rising tariffs. We expect businesses may view the bill’s provisions as an incentive to increase investment activity. Consequently, the legislation could provide meaningful support to equity markets in the second half of the year when the tariff impact becomes clearer.

Strengthening US-Gulf Relations: On the first day of his Middle East diplomatic tour, President Trump strengthened strategic partnerships with key Arab leaders, marking a significant step in countering China’s growing influence in the region.

• During his diplomatic visit, the president focused on strengthening economic and security partnerships across the Middle East. The trip yielded significant results, including Saudi Arabia’s commitment to invest more than $1 trillion in the US. A landmark agreement was also reached to enable Nvidia and Advanced Micro Devices (AMD) to supply critical semiconductor chips for several countries in the Middle East, bolstering the region’s artificial intelligence capabilities.
• Additionally, President Trump aims to address long-standing regional conflicts through diplomatic engagement. His administration has announced plans to lift sanctions against Syria’s government and remains open to negotiations with Iran regarding its nuclear program. Furthermore, he is scheduled to meet with Qatari leaders on Wednesday to discuss strengthening bilateral security cooperation.
• The president’s actions appear to be part of a broader strategy to counter China’s expanding influence in the region. Over the past five years, China has significantly deepened its trade and investment ties across the Middle East as part of its effort to reduce economic reliance on the US. This expansion has included major advancements in digital technology, with Arab nations playing an increasingly important role in Beijing’s Digital Silk Road Initiative.
• The administration’s sanctions relief and technology agreements appear strategically designed to counter China’s regional influence by disrupting its economic momentum and isolating it technologically. The Trump administration is reportedly preparing to implement new trade rules that would require partner nations to limit technology transfers to China. If effectively executed, this strategy could substantially weaken Beijing’s ability to compete with American dominance in AI.

A New Plaza Accord: Speculation is growing that the Trump administration may pressure Asian nations to allow their currencies to appreciate to bring down the value of the US dollar.

• The Trump administration has reportedly engaged in preliminary discussions with South Korea regarding currency policy. These talks coincide with upcoming bilateral trade negotiations aimed at averting potential tariffs on Korean exports. While no formal agreements have been confirmed, market reaction to the reports has already triggered appreciation in the Korean won.
• A potential appreciation of Asian currencies could reinforce market expectations that the administration favors a weaker dollar policy to prevent tariff circumvention. While this approach would increase costs for foreign imports, it might also create conditions for either reduced tariff rates or at least an avoidance of additional increases beyond those implemented on April 2.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an added US concession in the tariff war between Washington and Beijing, which will likely help de-escalate tensions between the two sides. We next review several other international and US developments that could affect the financial markets today, including an incendiary accusation by Poland that Russia was responsible for an arson fire last year that destroyed Warsaw’s biggest shopping mall (pun intended) and new signs that US lawmakers will gut many green-tech tax incentives, including for buying electric vehicles.

United States-China: After yesterday’s market euphoria over the news that the US and China had agreed to temporarily slash most of their tariffs on each other, the Trump administration last night clarified that it would also cut the US “de minimis” tariff on low-value parcels from China. Applied to packages with a retail value below $800, the de minimis tariff will now be cut to 54% from 120%. An optional $100 payment will be unchanged, rather than rising to $200. The move marks a further de-escalation in the US-China tariff war.

• The clarification will benefit Chinese retailers offering cheap goods directly to US consumers, such as Shein and Temu.
• Importantly, some low-end US retailers could also benefit, as they often rely on small shipments from China that qualify as de minimis parcels.

Russia-United States-Ukraine: President Trump yesterday told reporters that he might attend the planned Russia-Ukraine peace talks scheduled for Thursday in Turkey. The idea was quickly endorsed by Ukrainian President Zelensky, but we have seen no official response from Russian President Putin so far. Indeed, it’s still unclear whether Putin plans to attend. In any case, if Trump is serious about attending, it could set the stage for a potentially volatile, unpredictable meeting, which in itself could discourage Putin from participating.

Russia-Poland: Nearly a year after the largest shopping center in Warsaw burned to the ground, Polish Prime Minister Tusk said it is now confirmed that the fire was set by saboteurs working for the Russian intelligence services. The incident marks the latest instance of Russian destabilization efforts in the European Union. Those actions are likely to keep EU countries focused on rebuilding their militaries, which in turn will likely keep boosting EU defense firms and their stock prices.

Germany: Showing the extent to which populist nationalism and far-right authoritarianism have progressed in some Western democracies, the German government today banned the separatist organization “Kingdom of Germany” and confiscated its assets. Kingdom of Germany members have their own nominal king, reject Germany’s democratic institutions, and claim to rule a small enclave of about 2.4 acres near Wittenberg.

• Berlin’s move against Kingdom of Germany comes just days after it also declared the populist Alternative for Germany party to be a “rightwing extremist” organization, despite the party’s success in winning about one-fifth of the votes in the February federal elections. The designation gives the government the right to monitor the AfD more closely, including by tapping its communications.
• The designation has also sparked public debate over whether to ban the AfD outright. In a survey published over the weekend, some 53% of respondents favored such a ban.

United Kingdom: As firms dealt with an increase in national insurance contributions last month, April payroll employment fell by a seasonally adjusted 33,000, after a drop of 47,000 in March. The report also showed that average hourly earnings in the three months ended in March rose just 5.6% from the same period one year earlier, matching expectations but slowing from the annual rise of 5.9% in the three months ended in February. Weaker hiring but still-high wage growth is expected to keep the Bank of England cautious about cutting interest rates.

US Price Inflation: Late last week, economists at the Federal Reserve published a paper describing a new method to estimate the real-time impact of import tariffs on consumer price inflation. Looking at individual categories of personal consumption expenditures, the tariffs implemented for each category, the prevalence of imports in each category, and assumptions about pass-through from tariffs to consumer prices, the analysis estimates that President Trump’s tariffs this year have already boosted core consumer prices by 0.1%.

US Drug Industry: After hinting on Sunday that he would sign an order aggressively cutting US drug prices to “most favored nation” levels, the measure that President Trump signed yesterday only directed the Department of Health and Human Services to assist any drug company that wants to establish a direct-to-consumer purchasing program. The order threatened aggressive action against the drug firms if they don’t voluntarily cut their prices, but that was less stringent than feared. As a result, pharmaceutical stocks yesterday generally rose.

US Green Technology Industry: As we continue to process the draft budget bill presented by Republicans in the House, we note that one set of provisions would end a range of subsidies for green technology. For example, the proposal would end the $7,500 tax credit for buyers of new electric vehicles by the end of 2027 — despite the recent strong support for President Trump by Tesla chief executive Elon Musk. However, it’s important to remember that the bill at this point remains just a proposal, so it’s far too soon to know whether the provisions will become law.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently digesting the latest tech earnings. On the ice, the Jets secured a third playoff victory against the Blues. Today’s Comment dives into why we’re not overly concerned about the economic contraction in Q1, the market’s focus on Treasury developments, and other key market news. As always, we’ll also provide a summary of relevant international and domestic data releases.

GDP Contracts: While the economy’s contraction in Q1 has intensified recession concerns, a closer examination of the underlying data paints a more nuanced picture.

• The US economy shrank at an annualized rate of 0.3% in Q1 2025, marking the first quarterly decline since 2022. This downturn was primarily driven by a surge in imports as businesses and consumers accelerated foreign purchases ahead of anticipated tariff implementations. The flood of foreign goods more than offset gains in domestic consumption and fixed investment. Further exacerbating the weakness, a drop in government spending created additional headwinds for economic growth.
• While the import surge is expected to reverse — easing GDP concerns — the sustainability of recent consumption and investment growth remains doubtful. Much of the apparent strength stems from temporary factors such as businesses stockpiling inventory ahead of tariffs and using existing stock to suppress price hikes, therefore artificially boosting demand. These short-term dynamics suggest that underlying economic weakness may persist once these one-off boosts fade.
• The report also revealed emerging signs of inflationary pressures as the GDP price deflator — the inflation measure used to adjust nominal output for price changes — accelerated to its fastest pace since Q4 2022. This sharp increase, driven primarily by stronger adjustments to prices related to personal consumption and government spending, may fuel concerns about potential stagflation risks in the economy.

• We advise investors against overreacting to this single economic report as conditions are expected to shift throughout the year. As we’ve highlighted previously, the administration likely anticipated an early-year slowdown, positioning itself to deploy stimulative policies like tax cuts later this year to reinvigorate growth. Such measures could materialize in the coming months, potentially boosting the economy ahead of next year’s midterm elections.

Under the Radar: The Treasury signaled no changes to its borrowing program, sticking with existing issuance levels even as investors worry about bond market saturation.

• The US Treasury’s latest quarterly refunding announcement maintained steady issuance sizes for long-term bonds, with officials indicating this approach would continue for “several quarters.” While market participants had speculated about potential bond buyback changes to address supply concerns, Treasury Secretary Bessent only confirmed that the department is studying such measures but stopped short of committing to implementation or providing a timeline.
• Growing speculation about an expanded buyback program follows weeks of exceptional volatility in long-dated bonds. The 10-year Treasury’s trading range in April marked its widest swing since the March 2023 banking crisis triggered by Silicon Valley Bank’s collapse. While these adjustments would extend a program initiated by the prior administration, market participants view the potential expansion as further evidence of the Treasury’s increasingly active role in the bond market.
• The statutory debt limit has further complicated the Treasury’s position, preventing increases in net Treasury supply and forcing reliance on cash reserves and extraordinary measures to maintain government funding. The department is expected to announce in early May when these temporary measures will be exhausted, potentially adding another layer of uncertainty for the Treasury market.

• Though boring, Treasury auctions are emerging as a critical market force. Successive administrations have deliberately managed issuance patterns to prevent liquidity shortfalls and improve market functioning. We expect coordinated Treasury and Federal Reserve action to actively contain long-term yield volatility in the future, creating potential tailwinds for both fixed income and equity markets as policymakers intervene to maintain orderly conditions.

BOJ Holds Off Hikes: The Bank of Japan is postponing its policy normalization plans as it continues to assess the potential economic impact of US tariffs.

• The Bank of Japan held its policy rate steady at 0.5%, while slashing its 2025 GDP growth forecast by more than half — from 1.1% to 0.5% — citing heightened risks from US tariffs imposed on Japan’s export-driven economy. Despite inflation being above its 2% inflation target, policymakers opted to delay rate hikes, signaling concern over near-term headwinds while preserving flexibility for possible monetary tightening should economic conditions stabilize.
• Japan’s economy has taken center stage in global markets as investors gauge how potential shifts in trade policy could reverberate across the world economy. The Trump administration has placed Japan at the forefront of its trade agenda, heightening the significance of ongoing bilateral negotiations. However, progress of the talks remains uncertain, with Japanese Prime Minister Shigeru Ishiba recently asserting that Japan will not compromise its national interests to accommodate US demands.
• The two nations are preparing for a third round of trade talks in which Japan is anticipated to offer an increase in imports of US rice and soybeans, while easing certain auto safety regulations. However, more substantial concessions appear unlikely as Ishiba faces domestic political constraints ahead of July’s critical elections, limiting flexibility for potentially unpopular trade compromises.
• Given the risk of slowing growth ahead of elections, the BOJ will likely delay monetary tightening to avoid additional economic strain. This dovish stance should support global bond markets as higher Japanese rates could have prompted the nation’s institutional investors, a crucial source of global fixed income demand, to repatriate significant capital.

US Tech Shows Life: Despite growing concerns about the economic fallout from the tariffs, robust tech earnings — particularly in AI-focused companies — demonstrate the sector’s remarkable resilience.

• Several mega-cap tech leaders revealed robust earnings growth in their cloud computing divisions, with Microsoft and Meta both surpassing market expectations, fueling positive momentum across the AI sector. Investor attention now turns to upcoming reports from Apple and Amazon, particularly focusing on how these companies navigated supply chain challenges amid escalating trade tensions last quarter.
• AI-related sectors are likely to be among the first to rebound as global economic expectations reset, with investors favoring established players that have demonstrated consistent growth. However, the sector may experience heightened volatility if ongoing macroeconomic uncertainty persists in the coming months.

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