by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins by examining the escalating risk of a direct conflict between the West and Russia over Ukraine. We then analyze the latest GDP figures and explain our cautiously optimistic outlook for the US economy. Additional topics include the looming threat of a government shutdown, the lowball offer by the US for TikTok, and a recent breach of security on devices used by federal government officials. We also provide a summary of key recent economic indicators from the US and around the world.

War in Europe? European diplomats have privately delivered a stark warning to Moscow, suggesting that NATO could potentially shoot down Russian aircraft that violate the alliance’s airspace. This direct threat marks a significant escalation following a series of recent incursions by Russian military planes into the territory of several European countries. These actions are viewed as a deliberate test of NATO’s response. The warning is the closest hint yet that the conflict in Ukraine could directly spill over into the rest of Europe.

• The warning appears to reflect Washington’s hawkish stance toward Russia. This is based on President Trump signaling earlier this week that Europe should down Russian aircraft entering its airspace, as well as comments from Ukrainian President Zelenskyy that he had Washington’s backing to strike Russian energy infrastructure and arms factories with US-supplied long-range weaponry.
• Moscow appears to be taking these threats seriously. Russian Foreign Minister Sergey Lavrov recently stated that Russia may already be at war with its Western rivals. This sentiment was underscored by an incident a day after the warning, when the US scrambled military jets to intercept Russian planes detected off the coast of Alaska, highlighting Russia’s continued ability to project power toward US territory.

• These heightened tensions coincide with the US’s increase of its weapons exports to Europe to help Ukraine defend against the Russian invasion. While European purchases of US weapons have slowed from a peak of nearly 35% of American exports, they remain well above pre-pandemic levels and still account for nearly a quarter of the total. This growing European reliance on American armaments further underscores the risk of deeper US involvement should a broader war break out.
• While a full-scale conflict is not seen as inevitable, the current geopolitical climate suggests that tensions between the West and Russia are arguably at their highest point since the Cold War. This is a precarious moment, and if NATO or the United States were to follow through on threats of retaliation against Russia, it could potentially trigger a broader conflict involving other nations.

GDP Report: The US economy demonstrated surprising resilience in the second quarter, with growth revised up to a 3.8% annualized rate from a prior estimate of 3.3%. Final Sales to Private Domestic Purchasers, a key indicator of underlying economic strength that excludes volatile inventories, government spending, and net exports, was also revised upward from 1.9% to 2.9%. This suggests that core domestic demand was more robust than initially thought. Nevertheless, a closer look at the report’s components reveals a more nuanced situation.

• This upward GDP revision was primarily fueled by a significant surge in consumer spending, which was revised from 1.9% to 2.5% and accounted for the bulk of the growth. The strength in consumption was driven by higher-than-initially-estimated spending on services, particularly in transportation, financial services, and insurance. An additional boost came from nonresidential business investment, led by spending on AI.
• While growth was better than expected, it continues to reflect an economy adjusting to a new normal. The primary contributor to GDP was net exports, driven by a significant drop in imports. This decline occurred because many firms and households had front-loaded their foreign purchases by stockpiling goods in the first quarter, which had caused growth to contract during that period. The subsequent pullback in spending in the second quarter artificially boosted net exports.
• Looking ahead to the second half of the year, we expect growth to remain relatively stable. Despite growing concerns about the job market, households have sustained their spending. One area we are monitoring closely is trade, as a continued decline in imports is artificially supporting growth. Historically, such a trend has indicated that households are becoming more conservative. While we do not anticipate an economic contraction in the third quarter, the outlook for the fourth quarter remains uncertain.

Government Shutdown: The White House is dramatically escalating the government shutdown standoff by requesting that federal agencies plan for mass layoffs targeting employees in programs that would lapse in funding and do not fit the president’s priorities. This move of issuing permanent Reduction-in-Force notices instead of temporary furloughs is widely viewed as an attempt to force the opposition to accept a short-term funding deal before the October 1 deadline. The budget impasse persists as the president seeks to follow through on reigning in spending.

Bye-Bye Fed Funds? Dallas Fed President Lorie Logan is proposing to shift the Fed’s primary rate target from the federal funds rate to a repo rate. This reflects the dramatic shrinkage of the traditional interbank market, with institutions preferring the more robust repo market. Targeting the repo rate could make the Fed more effective in directly controlling current financial conditions. However, the move carries an inherent risk of market disruptions or unintended consequences within the interbank lending system.

TikTok Deal: The White House announced that it has valued the forced sale of the popular video-sharing app’s US operations at $14 billion — significantly below the original $40 billion estimate. While officials stated the final price will be determined by investors, the lower valuation highlights the US government’s effort to minimize the cost of acquiring the platform. This move follows a law that mandates the app’s divestiture within 120 days to avoid its shutdown, citing national security concerns.

More Tariffs: President Trump has now targeted tariffs on pharmaceuticals, heavy trucks, and furniture to pressure producers to manufacture more of the goods in the United States. Patented pharmaceutical products could potentially face tariffs as high as 100%. This decision is part of a broader effort to encourage firms to reshore operations. The president has also announced that pharmaceutical companies that begin construction of manufacturing facilities in the US will be shielded from these new tariffs.

Government Hack: A breach has compromised firewall devices used by US federal government officials. While the full scope of the impact is unclear, the threat is considered widespread. The attacks have exploited a backdoor in Cisco devices. This campaign appears to be part of a broader international effort, and although there is no evidence of state actor involvement, investigators believe it is unlikely that the hackers are acting alone.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with a look at a possible pivot in US foreign policy. We then analyze the latest comments from Federal Reserve officials regarding the future path of interest rates. Additional topics include more investment news from the Stargate initiative, the president’s brief encounter with Brazilian President Lula da Silva, and the growing possibility of a government shutdown. We also provide a summary of key recent global and domestic economic indicators.

Foreign Policy Pivot? The president has now opened the door for greater support for Ukraine by arguing that he believes the country can win back all the territory it lost to Russia. His comments represent a significant shift in attitude as he had previously suggested that Ukraine “does not have cards” and should be willing to make concessions for a peace deal. This new, more confrontational stance toward Moscow may signal a change in Washington’s foreign policy approach.

• The White House’s new stance is likely a response to Moscow’s recent attempts to breach NATO territory. Over the last few weeks, Russian drones have been sighted in Romania, Poland, and Estonia, in what appears to be a test of NATO’s resolve and willingness to defend those territories. The president has expressed his frustration with these incursions, stating that NATO should down them.
• Reflecting the shift in the president’s tone, Secretary of State Marco Rubio has also affirmed that the US is prepared to defend “every inch of NATO territory.” These statements, which follow calls from NATO for a more robust response to Russian incursions, suggest that the US is now aligning its policy more closely with its military allies.
• While we remain confident that the White House ultimately prefers peace, we have observed a distinct hawkish shift in both its foreign policy rhetoric and actions in recent weeks. Key indicators include the symbolic renaming of the Department of Defense to the Department of War, the push to reposition troops near Chinese nuclear facilities in Afghanistan, and the recent attacks on Venezuelan vessels suspected of drug trafficking.
• The president’s increasingly hardened stance toward Moscow may primarily be a tactical maneuver to compel Russia to negotiate a peace settlement. However, this shift also serves as a broader signal to international actors that the United States is prepared to confront aggression. While we assess that the probability of direct conflict remains relatively low, it is likely higher than what is currently reflected in market valuations.

Fed Speaks: Following the Fed’s first interest rate cut in a year, Chair Jerome Powell underscored a flexible approach to future monetary policy. Speaking to business leaders in Providence, Rhode Island, Powell described rates as “modestly restrictive” and stated that balancing near-term inflation risks with potential threats to employment presents a “no-risk-free path.” His nuanced view on labor market risks is likely to fuel speculation that the central bank remains undecided on its future monetary policy direction.

• His comments highlighted the deep divisions within the Fed, a sentiment already suspected by investors after last month’s meeting. The committee’s “dots plot” revealed an almost even split between members who favor one or fewer rate cuts this year and those who anticipate at least two.
• This internal debate has become public in recent speeches. For example, Chicago Fed President Austan Goolsbee has explicitly stressed the need for inflation to return to the 2% target. In contrast, Fed Governor Michelle Bowman argues that the central bank was late in addressing labor market imbalances, urging for swift rate cuts.
• A senior White House official and current Federal Reserve governor, Stephen Miran, has also entered the debate. He argues that the administration’s policies — specifically on deregulation, immigration, and tariffs — are fundamentally reshaping the economic landscape. According to Miran, these changes are lowering the neutral rate, therefore paving the way for as much as 200 basis points of interest rate cuts from current levels.
• Fed officials are likely to remain data-dependent, and their lack of a clear policy direction highlights this. Chair Powell’s view that policy is “modestly restrictive” hints at a preference for lowering rates. However, more aggressive rate cuts will require evidence of a cooling labor market, while signs of persistent inflation could force rates to remain on hold.

GPS Jamming: A growing number of European flights are experiencing attacks on their GPS systems. Most recently, a Spanish military plane traveling to Lithuania faced interference. Although the attack was ultimately blocked, it marks another incident of GPS tampering. A few weeks ago, a plane carrying European Parliament President Ursula von der Leyen experienced a similar situation. This pattern of interference, likely originating from Russia, signals a potential ambition to broaden the conflict beyond Ukraine.

Stargate Data Centers: OpenAI, SoftBank, and Oracle have announced plans to develop five new data centers for the “Stargate” project, an initiative being pursued in collaboration with the US government. This move is part of a broader effort by major tech firms to build out AI infrastructure, aimed at ensuring the United States maintains its technological edge. Such significant investment spending reinforces the narrative that has buoyed AI stocks and continues to provide underlying support for the economy.

Trump Meets Lula: In a bid to resolve their differences, the presidents of the US and Brazil adopted a conciliatory tone during a meeting at the UN’s annual gathering in New York. The exchange came after Brazilian President Lula, who had taken subtle jabs at the US president earlier in the day, had a brief, impromptu conversation with him and subsequently requested a more formal meeting. The conversation helped boost demand for financial assets in Brazil.

Government Shutdown: The risk of a government shutdown has intensified in recent days as the president has yet to meet with Democratic leaders to negotiate a budget deal. The primary point of contention is healthcare funding, which faces significant cuts in the proposed Republican budget. While the president has not entirely ruled out a meeting, he has stated he will not be bullied into accepting demands he opposes. Complicating the situation for Republicans is that they will need the support of at least seven Democratic senators to pass the bill.

AI Global Push: Technology equities worldwide are receiving a boost as countries embrace the AI revolution. In China, Alibaba’s plans for new spending have helped lift the stock, while stronger-than-expected performance from Micron Technologies has bolstered sentiment for domestic tech stocks. We believe tech stocks will maintain their momentum for the foreseeable future. However, as expectations grow, so does the risk of disappointment if goals aren’t met. As a result, we think it remains prudent for investors to maintain exposure to other sectors as well.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of an important video showing flight operations aboard China’s newest aircraft carrier. We discuss the investment implications of this Chinese success, and we recommend watching the video. We next review several other international and US developments with the potential to affect the financial markets today, including a major international institution’s forecast of more aggressive interest-rate cuts in the US and a potential hiccup in the US’s booming private-credit market.

China: State media yesterday released what appears to be the first-ever video of flight operations taking place aboard China’s new, domestically produced aircraft carrier, the Fujian. The video shows various aircraft types, including airborne warning and control system (AWACS) planes and J-35 jet fighters, taking off from the deck of the carrier with the help of its advanced electromagnetic catapult and then landing back on the deck. The flights were apparently practice sorties ahead of Fujian’s planned commissioning near the end of 2025.

• We think the video was clearly aimed at sending a message that China can now replicate US-style power projection anywhere its fleet can sail. However, Fujian and China’s other two carriers are smaller than US carriers. In addition, China’s carriers run on diesel fuel, as opposed to the US carriers’ nuclear propulsion, which limits the capabilities of the Chinese carriers. The Chinese will likely also need considerable time to reach the operational expertise and efficiency of the US carrier fleet.
• All the same, Fujian and future advanced carriers are likely to help China even the balance of military power in the Asia-Pacific region. That means China will probably become increasingly confident that it can take control of Taiwan or achieve other territorial goals in the region while deterring intervention by the US and its allies.
• For investors, China’s rising military power and increasing ability to deter US and allied military pressure could be a double-edged sword. On the positive side, finely balanced military power could force Washington and Beijing to avoid war, precluding a conflict that would likely devastate each side’s economy and financial markets. On the negative side, China’s rising military ability could help it to eventually displace the US as the global hegemon and gradually constrict US economic power and financial performance.

China and Hong Kong: Super Typhoon Ragasa is slamming into the southern provinces of China today, forcing hundreds of thousands of people to evacuate their homes and leading to hundreds of flight cancellations. The storm is the strongest typhoon to hit the area so far this year and is expected to cause significant damage and temporarily disrupt economic activity. The storm could potentially lead to the shutdown of the Shanghai and Shenzhen stock markets today, but the Hong Kong market is expected to stay open.

OECD-US Monetary Policy In its interim economic outlook published today, the Organization for Economic Cooperation and Development said slowing US economic growth could justify the Fed cutting its benchmark fed funds interest rate to as low as 3.25% by next spring. That would imply three 25-basis-point rate cuts in the coming six months or so, which is slightly more than Fed policymakers and many outside observers have projected.

• The OECD’s projection for faster rate cuts is also consistent with our view that personnel changes on the Fed’s policymaking board will likely result in faster rate cuts next year.
• Faster rate cuts would likely give a boost to the US economy in 2026 and support further price gains for assets ranging from stocks to gold. However, the rate cuts could add more downward pressure to the dollar.

Sweden: The Riksbank today unexpectedly cut its benchmark short-term interest rate by 25 basis points to just 1.75%, its lowest level in about three years. According to the central bank, the decision reflected continued weak economic growth, which the policymakers saw as likely to bring consumer price inflation down in the coming months. The policymakers also signaled that they did not foresee any further rate cuts going forward.

Denmark-Norway-Russia: Major airports in Copenhagen and Oslo were forced to close for several hours late yesterday after large drones were spotted in or approaching their airspace. According to Danish police, the drones came from several directions, and their size and flight patterns suggested they were sent by a “capable operator.” The incidents show how Europeans are increasingly on edge after Russia’s recent jet fighter and drone incursions into the airspace of Poland, Romania, and Estonia, potentially setting the stage for a market-shaking miscalculation.

France-Israel: At the UN General Assembly yesterday, French President Macron officially recognized Palestine as a state, a day after the UK, Portugal, Canada, and Australia did the same. With the General Assembly continuing this week, more major countries could follow suit, further isolating Israel in an attempt to punish it for its aggressive war against the militant Hamas government in Gaza.

US Military: The US Army has confirmed that it will cut 6,500 of its 30,000 active-duty aviation jobs over the next two fiscal years as it transitions away from its iconic helicopter systems to unmanned platforms. The move is the latest sign of how drones are becoming key weapon systems for militaries around the world. However, it still isn’t clear to what extent major publicly traded defense contractors will benefit from the trend.

US Pharmaceutical Industry: At a White House event late yesterday, the administration warned that acetaminophen, the active ingredient in Tylenol, is a potential cause of autism. Health and Human Services Secretary Kennedy also said this department would update the warning label for acetaminophen and conduct an awareness campaign about the potential link to autism, despite a range of scientific studies that, taken together, have shown no link.

• Tylenol maker Kenvue’s stock price cratered about 7.5% ahead of the announcement, bringing its total decline to about 21% over the last month.
• The steep decline in Kenvue’s stock price illustrates the regulatory risk with many healthcare and consumer products companies as the administration rapidly shifts US health policy.

US Private Credit Industry: Private credit firms today are rattled by the sudden bankruptcy of privately held auto parts firm First Brands, which grew rapidly in recent years using debt-fueled acquisitions. Up to $10 billion of the company’s private loans and financial obligations are reportedly plunging in value amid uncertainty over what the lenders might get from the bankruptcy proceedings. The situation could test the resiliency of the booming private-credit industry and potentially have spillover effects for the rest of the financial markets.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of OpenAI’s pivotal shift from a non-profit structure and its broader implications for the AI sector rally. We then explore the market’s optimistic anticipation of potential rate cuts at the upcoming Federal Reserve meeting. Our discussion extends to the latest round of US-China trade negotiations in Madrid and the notable warming of relations between the US and India.

OpenAI Goes Public: The AI company is restructuring its relationship with parent company Microsoft, moving toward a more traditional for-profit model. It will gain greater control over a new public benefit corporation, allowing it to balance generating profits for shareholders with its public-benefit mission. This shift away from its unconventional structure comes as market focus intensifies on AI companies .

• In recent months, the market’s reliance on tech companies for growth has accelerated. A prime example is the “Magnificent 7,” which, despite initially dragging on the broader S&P 500 Index this year, has since surged and now outperforms the combined growth of the other 493 companies.

• This pattern echoes the “safety trade” observed in 2023 and 2024, wherein investors flocked to established tech giants for capital appreciation. This strategy was driven by the companies’ robust earnings power, which provided a haven during a period of significant economic uncertainty caused by concerns over high interest rates and persistent inflation.
• Much of the hype around these companies has come from the optimism that they will become monopolies within their sector and generate substantial future returns. However, there are signs that this may not happen.
• Although some firms, such as Adobe, have shown that AI can boost profits, evidence suggests its practical impact remains limited. An MIT study revealed that a mere 5% of AI implementations have yielded significant returns or productivity gains — a finding supported by census data indicating that AI adoption rates among large companies have begun to fall.
• While we believe the AI momentum trade may still have legs, adding some exposure to value stocks could be a beneficial portfolio addition. During the equity sell-off earlier this year, value stocks outperformed their growth counterparts, suggesting they could act as a shock absorber if AI sentiment were to unexpectedly reverse.

Rate Cut Optimism: Equities rallied on Thursday as fresh economic data bolstered investor confidence that the Federal Reserve remains on track to cut rates next week. The rally occurred despite a key labor market report showing initial jobless claims jumping to their highest level in nearly four years, signaling continued softening. Furthermore, the latest inflation reading rose precisely in line with forecasts, reassuring markets that price pressures remain within expected bounds.

• Although this data all but guarantees a rate cut at the next meeting, it also raises serious questions about what follows. The primary headwind for future cuts is somewhat elevated inflation, with the monthly increases in July and August marking the highest in two years. Conversely, the startling jump in jobless claims may be less sinister than it appears; it could simply be a seasonal anomaly exacerbated by the unusual clustering of holiday weekends, which notoriously distort the data.

• The mixed economic data will likely fuel vigorous debate among FOMC members as significant concerns over persistent inflation remain. Several Fed officials — including voting members like St. Louis Fed President Alberto Musalem, Kansas City Fed President Jeffrey Schmid, and Chicago Fed President Austan Goolsbee — have already expressed reluctance to cut rates, citing inflationary pressures exacerbated by recent tariffs.
• The upcoming FOMC meeting will be pivotal for the sustainability of the current market rally. Markets have currently priced in 75 basis points of rate cuts for this year, with an expectation that the Fed will start with a 50-basis point cut next week. Consequently, the updated “dots plot” will be scrutinized as it outlines the projected path of future policy rates. A signal of aggressive easing is likely to buoy risk assets, while any suggestion of a moderate approach to easing could dampen investor risk appetite.

Brazil President’s Sentence: A Brazilian Supreme Court justice has sentenced former President Jair Bolsonaro to 27 years in prison for his role in plotting a coup after his 2022 election defeat. The ruling is poised to strain relations with the United States, where some lawmakers have called the arrest politically motivated. Prior to the sentencing, the US had imposed 50% tariffs on Brazilian steel, and Secretary of State Marco Rubio suggested further trade penalties could follow.

US and China Meet in Madrid: The US and China will meet in Madrid next week for talks on trade and TikTok. This follows the White House’s decision to extend the deadline for a trade agreement until November 10. The discussions will offer insight into the progress made over the past month, with both sides seeking concessions. While we do not expect a full resolution, the apparent unwillingness of either side to escalate tensions going into the meeting is a positive signal for markets.

ECB Holds Rates Steady: The European Central Bank decided to hold rates steady at its latest meeting, expressing optimism that growth and inflation remain broadly consistent with its goals. The bank revised its annual growth outlook upward by 30%, while acknowledging upcoming headwinds. Conversely, it revised its inflation forecast downward to 1.9% for the year. This strong outlook will likely boost the euro against the dollar but may act as a headwind for US investors holding European equities.

US and Poland Disagree: Polish Prime Minister Donald Tusk has rejected the White House’s assertion that a recent Russian incursion into Polish airspace was unintentional. This disagreement coincides with Poland’s request for additional military assistance to defend against future Russian provocations. The US willingness to give Russia the benefit of the doubt may suggest a hesitancy to getting more deeply involved in European security. The incident provides more evidence that the EU needs to shore up its own defenses amid the lack of US assurances.

US and India: Washington and New Delhi are close to finalizing a trade agreement, according to the White House. It also stated that the US views India as one of its most important strategic trade partners as it seeks to shape a future economic order. Simultaneously, the US is reportedly advocating for G-7 nations to impose tariffs on India due to its support for Russia’s invasion of Ukraine. This announcement aligns with the US employing a “carrot-and-stick” approach to encourage India to distance itself from China.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins by examining the White House’s push for a greater share of university patent revenue and the underlying ideological shift this move represents. We then analyze the latest Producer Price Index report and its implications for monetary policy. The discussion will also cover Mexico’s new tariffs on goods from China and other Asian countries, as well as French President Macron’s choice for a new prime minister. We also include a summary of key global economic and domestic data releases.

Industrial Policy: The White House is arguing that it is entitled to a share of the revenue that universities generate from patents developed through federally funded research. During an interview with Axios, Commerce Secretary Howard Lutnick stated that the government should recoup its investment and “participate” in the returns, noting that many universities profit by licensing this research to companies that provided no initial funding. Secretary Lutnick also suggested that this revenue could be used to support Social Security and other public programs.

• This move is consistent with a broader pattern of recent economic policies, such as mandating revenue-sharing from chip sales to China, acquiring a direct stake in Intel, and securing a “golden share” in US Steel (a veto power over key decisions) as a condition for approving its acquisition by Nippon Steel.
• The government’s move to seek payments from companies and organizations appears to be a significant ideological shift away from the “Washington Consensus,” which favored a light-touch approach. This new direction may reflect a preference for state-aligned monopolies that can serve a dual purpose: coordinating policy efforts and generating government revenue.
• This change will likely favor larger companies over smaller ones. Their significant economies of scale give them the financial strength to absorb increased costs that would be a challenge for smaller competitors. Large technology and manufacturing firms are well-positioned to benefit, given their ability to provide solutions for both consumer and military markets. We are entering an era where collaboration between companies and governments is becoming essential for addressing complex challenges.

PPI: Producer prices experienced an unexpected decline in August, signaling that firms are encountering resistance to price increases. The headline Producer Price Index (PPI) reversed from a 0.7% gain in July to a 0.1% decline the following month. Core PPI, which excludes food and energy prices, also fell by 0.1%. A sharp slowdown in trade services was the primary driver behind the decline in overall price pressures. In fact, when excluding trade services, core PPI rose by 0.3%.

• The trade services component of PPI, a key measure of wholesale and retail margins, is essential for monitoring how tariffs are being absorbed by the economy. The index recorded its sharpest one-month decline since July, indicating that businesses are either accepting lower profits or are being forced to reduce prices amid weakening demand.
• This decline, particularly in trade services, can also be a sign that the effects of previous tariff-driven inflation are beginning to wane as businesses and supply chains adapt to the new pricing environment. The contraction in wholesale margins serves as a reliable forward-looking indicator for consumer prices.

• A weak PPI report suggests that companies are struggling to pass tariff costs on to consumers, which may have implications for profit margins. This development bolsters expectations for a Fed rate cut at the upcoming meeting next week. If price pressures continue to abate, we anticipate the Fed will shift its focus away from fighting inflation toward protecting the labor market.

Miran’s Confirmation: The Senate Banking Committee advanced Stephen Miran’s nomination on Wednesday, paving the way for him to participate in the next Federal Open Market Committee (FOMC) meeting. To meet this timeline, the full Senate must confirm his nomination by Monday. If confirmed before the FOMC begins its two-day meeting on Tuesday, Miran is expected to push for a rate cut, likely an aggressive one, probably 50 bps or more.

Mexico Plans Tariffs: The Mexican government has announced a tariff increase of up to 50% on imports from China and other Asian nations. This protectionist measure is a strategic move to safeguard domestic industries ahead of upcoming talks for the North America Free Trade Agreement (now known as USMCA). Since the US is expected to push for a more unified trade policy among the North American bloc, this action by Mexico signals its willingness to align with US concerns about Chinese imports, a point we highlighted in last year’s outlook.

Poland Seeks Assistance: On Wednesday, Poland requested more allied air defense systems and counter-drone technology to protect against new incursions from Russia. The request follows 19 instances where Russian drones crossed into Polish territory and were subsequently shot down by Polish forces. While the conflict did not escalate, this marks the first direct military engagement between NATO and Russian forces since the war in Ukraine began. Although full-scale war is unlikely, the risk of escalation is now elevated.

Political Violence: Popular conservative activist and influencer Charlie Kirk was assassinated during a speaking event at Utah Valley University. The attack underscores the dangerously growing polarization in US politics. An increasingly hostile political environment is likely to fuel further civil unrest, with direct market effects including eroding trust in public institutions. This trend could trigger significant market volatility if investors begin to fear a fundamental weakening of the nation’s political stability.

New French PM: French President Emmanuel Macron has appointed Sébastien Lecornu as the new prime minister. The two share a close relationship, with Macron previously relying on him to negotiate delicate situations, such as the release of hostages held by Hamas. Lecornu maintains connections across the political spectrum, and it is hoped that he will leverage this to finally pass a budget. Nevertheless, France’s complicated political situation continues to fuel uncertainty in the bond market.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with the recent downward payroll revisions and explains our sustained optimism regarding the market’s resilience. We then examine escalating tensions in the Middle East, the surge in AI-driven market enthusiasm, and the potential for a collaborative US-EU effort to hold India and China accountable for supporting Russia during the war in Ukraine. Finally, we provide a summary of key economic data releases to offer a comprehensive view of the current global financial landscape.

Payroll Revisions: A major government revision revealed that US employers hired 911,000 fewer workers in the 12 months leading up to March 2025 than was previously reported. This represents the largest downward revision in payrolls on record, indicating the economy actually added an average of just 74,000 jobs per month in 2024 — roughly half of the initially reported 147,000. This data suggests the labor market was significantly weaker than understood, a revelation that will likely add urgency to the Federal Reserve’s deliberations on interest rate cuts.

• The critical question raised by this data is whether the economy is sliding into a recession or merely experiencing a period of weakening growth. Currently, we lean toward a more optimistic interpretation that while economic momentum has undoubtedly slowed in recent months, it remains underpinned by resilient household consumption and robust investment spending, particularly within the technology sector.
• That said, even if our assessment is incorrect, this is not a time for complacency. History shows that markets can rise during a recession, particularly in the absence of a major shock. For example, the US recession technically began in December 2007, but the equity market did not fully capitulate until the collapse of Lehman Brothers in September 2008. Without such a defining crisis, it is unclear whether that period would have been perceived as a deep recession or merely a prolonged economic slowdown.
• This dynamic contrasts sharply with the March 2023 collapse of Silicon Valley Bank. A swift and coordinated regulatory response successfully contained the crisis and averted a broader contagion. Consequently, the S&P 500 rallied and went on to gain over 26% for the year. Therefore, we are watching for a similar catalytic event before materially changing our outlook. In the meantime, we continue to emphasize the importance of including value in portfolios as a way to balance risk.

Israel-Qatar: In a significant escalation of regional tensions, Qatari Prime Minister Sheikh Mohammed bin Abdulrahman al-Thani has called for a regional response against Israel following an attack in Doha that targeted Hamas leadership. This move comes just one week after Qatar warned that a potential Israeli takeover of the West Bank could jeopardize the Abraham Accords, the foundational agreements for Israel’s normalization with several Middle Eastern states.

• Although the White House was briefed on the incident, it has expressed clear frustration with Israel’s assertiveness. A cornerstone of US strategy to de-escalate tensions in the Middle East is the normalization of relations between Israel and the Gulf states. By executing a strike on the sovereign territory of a key regional partner without its consent, Israel risks causing those same Gulf nations to reconsider their decision to establish ties, thereby undermining a central US diplomatic achievement.
• While we expect cooler heads to prevail between Israel and regional Arab states, the risk of a broader conflict remains elevated. Following the attack, natural gas prices initially spiked but quickly reversed course, closing lower for the day. This market response suggests that investors are currently discounting the probability of a wider regional war. Nevertheless, we are monitoring the situation closely, as a significant escalation could trigger a flight to safety, particularly into assets like gold.

Tariff Case: The Supreme Court has agreed to fast-track a hearing to determine whether President Trump possesses the authority to implement tariffs without congressional approval. The court has consolidated two separate cases on the dispute: one involving an appeal of a federal ruling that found the president lacked such authority and another brought by two educational toy companies arguing that the tariffs violate the International Economic Powers Act.

• We do not believe this will stop the White House from issuing tariffs, as it retains other legal tools at its disposal to impose tariffs under certain circumstances.
• Nevertheless, the bond market is monitoring the situation closely. A ruling against the administration could force the return of collected tariff revenue, an outcome that would further weaken the US fiscal situation.

AI Optimism: Oracle Corporation’s stock surged to a record high following its earnings release, driven by an exceptionally aggressive outlook for its cloud business. This occurred despite the company missing its earnings per share (EPS) target. Investor enthusiasm was primarily fueled by a stunning increase in bookings (a measure of future revenue), which reached $455 billion for the quarter. The company also anticipates significant new contracts with other clients, potentially pushing its total future contractual obligations over $500 billion.

• This optimism is likely to provide a tailwind for the broader technology sector, underscoring the market’s robust faith in the long-term AI narrative.
• That said, the market response does show that investors are prioritizing future growth over current performance.

FOMC: A federal judge has granted a temporary restraining order blocking President Trump from firing Federal Reserve Governor Lisa Cook. The federal court ruling grants Governor Cook the ability to remain on the Federal Open Market Committee (FOMC) and participate in the upcoming policy meeting, where officials will determine whether they will cut rates. However, regardless of the lower court’s decision, the ultimate authority to fire a Fed governor will almost certainly be decided by the Supreme Court.

New Tariffs: The White House is pressuring the EU to impose a 100% tariff on goods from China and India. This aggressive push is based on the two countries’ continued support for Russia in the Ukraine war. The US has also stated its willingness to match any tariffs the EU implements, aiming to create a united front and force a swift end to the conflict. This move is part of an ongoing effort by the US to secure greater assistance from the EU in its foreign policy goals.

View PDF