by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with increasing geopolitical tensions after an apparent Israeli airstrike killed senior Iranian military commanders in Damascus, Syria. We next review a wide range of other international and US developments with the potential to affect the financial markets today, including a growing likelihood that the Japanese government will intervene in the currency markets to support the weakening yen, and new signs that investors are giving up on the likelihood of a Federal Reserve interest-rate cut in June.

Israel-Hamas-Syria-Iran:  In an indication that Israel’s war against Hamas in the Gaza Strip threatens again to escalate, the Syrian government yesterday claimed Israel was behind a missile strike on an Iranian diplomatic post in Damascus. The strike reportedly killed several high-level Iranian military leaders. It also marked at least the fourth Israeli strike on Iranian military forces in Syria this year, potentially aimed at provoking Iranian proxy forces in the area to fight back so that they can be targeted. The risk is that such an incident could draw Iran directly into the conflict.

• Separately, an Israeli airstrike has killed seven workers from World Central Kitchen, the aid group established by celebrity chef José Andrés that first rose to fame by providing food aid to Ukrainians displaced by the Russian invasion of their country. After the UN, World Central Kitchen is reportedly the largest food-aid group operating in Gaza.
• Israel today claimed the airstrike was unintentional, but the killing of aid workers is likely to further undermine global support for Israel’s attacks on Hamas in Gaza.

Russia-Ukraine War:  Britain’s defense intelligence agency has issued a dire warning that a key Ukrainian defensive line west of Avdiivka is beginning to collapse as Russia pours new troops, equipment, and munitions into the area. The report suggests that Russian forces may be starting to build sufficient momentum to overcome Ukrainian resistance, especially now that Kyiv’s forces are facing severe resource constraints.

• Any additional Russian momentum will likely cause greater angst in Western European capitals regarding future threats from President Putin.
• In turn, that could spur additional European aid to Ukraine and even more commitment to boost European defense spending.

United Kingdom:  S&P Global said its March purchasing managers’ index for manufacturing rose to a seasonally adjusted 50.3, beating both the flash estimate of 49.9 and the February reading of 47.5. Like most major PMIs, this one is designed so that readings over 50 indicate expanding activity. With the rise in March, the index suggests Britain’s factory sector is now growing again for the first time since July 2022.

Japan:  Finance Minister Suzuki warned today that he is watching trends in the currency market with a “high sense of urgency” and that his ministry would address any “excessive movements” in the yen (JPY). That marks the latest in a string of government warnings that it might intervene in the market to keep the yen from weakening further.

• Despite the Bank of Japan’s recent move away from negative interest rates, investors have been dumping the yen on concerns that the central bank doesn’t intend to keep hiking rates. In contrast, investors increasingly think that continued good economic growth in the US may prompt the Federal Reserve to slow or even abandon its plan to start cutting its current high interest rates.
• So far this morning, the yen is trading essentially flat at 151.65 per dollar ($0.0066), its weakest level in approximately 34 years and is down 7.1% for the year-to-date.

US Monetary Policy:  Against the backdrop of strong US economic data and signs of sticky price inflation, investors continue to ratchet down their expectations for interest rate cuts from the Fed. In a little-noticed development, trading in interest-rate derivatives now indicates only a 56.8% chance that the policymakers will implement their first rate cut at their policy meeting in June; trading suggests there is a 49.1% chance that they will keep the benchmark fed funds rate unchanged until at least their July meeting.

US Stock Market Regulation:  In an exclusive report by the Wall Street Journal today, US regulators are examining whether big money managers such as BlackRock and Vanguard are truly acting passively when their index funds amass more than 10% of the shares in major banks. To date, the regulators have exempted the index providers from some rules that treat investors as active when they surpass 10% ownership. The new probe reflects bipartisan concern that the index funds are using their big ownership stakes to push ideological causes, from climate-change policies to pay equity.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with yet another warning from a top European leader of a potential war with Russia. We next review a wide range of other international and US developments with the potential to affect the financial markets today, including several key economic reports out of Asia and various notes on the US economy and markets.

European Union:  In an interview last week, Polish Prime Minister Donald Tusk became the latest high-level EU official to warn of an impending war in Europe. According to Tusk, “I know it sounds devastating, especially to people of the younger generation, but we have to mentally get used to a new era. We are in a pre-war era. I don’t exaggerate. This is becoming more and more apparent every day.” In his interview, Tusk said it is essential for the EU to stand by Ukraine and make sure it is not overrun by Russia’s invasion forces.

Turkey:  In local elections yesterday, incumbent Istanbul Mayor Ekrem İmamoğlu, one of President Erdoğan’s top critics, appears on track to win reelection with about 50.8% of the vote.  Opposition candidates also look set to win in other major urban areas, potentially setting up a major embarrassment for Erdoğan and his conservative Islamist political party.

Japan:  The Bank of Japan said its “Tankan” index of optimism among large manufacturers fell to 11 in the first quarter, slightly beating expectations but still coming in weaker than the reading of 13 in the fourth quarter. The index is designed so that positive readings point to more manufacturers seeing positive business conditions rather than seeing negative conditions. Even though the decline in the first quarter was the first since the beginning of 2023, the positive reading therefore still suggests Japan’s factory sector is in good condition.

South Korea:  The country’s exports, a bellwether for global trade, showed a total value of $56.56 billion in March, up 3.1% from the same month one year earlier. The increase was a bit weaker than expected, and it marked a slowdown from the 4.8% rise in the year to February. Nevertheless, South Korean exports have now risen on a year-over-year basis for six straight months, suggesting that global economic activity is picking up after some softness in 2023.

• According to the data, exports to the US were up a healthy 12.0% in the year to March, reflecting the country’s continued strong economic performance.
• In contrast, exports to China were up just 0.4%, reflecting that country’s continued lethargy as it faces a slew of structural economic headwinds.

China:  The government’s official March purchasing managers’ index for manufacturing rose to a seasonally adjusted 50.8, beating expectations and marking a sharp improvement from the reading of 49.1 in February. Like most major PMIs, the official Chinese index is designed so that readings over 50 indicate expanding activity. The March reading therefore suggests that China’s factory sector is now growing again after five straight months of contraction, despite the weakness suggested by China’s lessening demand for South Korean products.

• The rebound in Chinese manufacturing may seem like a positive for the global economy and financial markets, but that isn’t necessarily the case.
• We note that the rise in the manufacturing PMI came in part from a surge in new export orders, which is consistent with the idea that Beijing is trying to re-accelerate its economy by dumping electric vehicles, batteries, solar panels, and other products on world markets. Such dumping threatens to decimate key industries throughout the developed countries.

US Monetary Policy:  After Friday’s personal income and spending report showed the Fed’s preferred measure of consumer price inflation remained above target, Chair Powell took a sanguine attitude, stating at an event in San Francisco that he still expects price pressures to keep easing, even if the road to 2.0% inflation will be “bumpy.” Nevertheless, Powell also warned that the Fed would take its time in cutting interest rates if price pressures prove sticky.

• In Friday’s report, February personal income rose by a seasonally adjusted 0.3%, slowing from a gain of 1.0% in January. Nevertheless, despite the slowdown in income growth, February personal consumption expenditures (PCE) jumped 0.8%, accelerating from their rise of 0.2% in the previous month. On a year-over-year basis, personal income in February was up 4.6%, while PCE was up 4.9%.
• Excluding the volatile food and energy components, the February core PCE price index was up 2.8% year-over-year, after two straight months in which it increased an annual 2.9%.

US Bond Market:  New data shows corporate bond issuance has already hit $606 billion so far in 2024, up about 40% from the same period last year and the highest year-to-date total since at least 1990. Reports suggest companies are rushing to market in part to take advantage of today’s low corporate yield spreads over Treasury obligations, but they may also be trying to get ahead of any potential volatility in the marketplace as the November elections draw closer. Trading in VIX futures also points to investors betting on election-driven market volatility.

US Labor Market:  According to the Wall Street Journal, new high school graduates and other members of Generation Z are increasingly eschewing college in favor of training in trades such as welding and plumbing. The report says the number of students enrolled in vocational-focused community colleges rose 16% last year to a record high. The number in construction-trades programs alone jumped 23%. The figures are consistent with our view that US reindustrialization and today’s labor shortages will help broaden the workforce going forward.

US Artificial Intelligence Industry:  Technology giant Microsoft and OpenAI are planning to jointly build a specialized data center costing up to $100 billion to boost OpenAI’s computing capacity for artificial intelligence. The data center would house a supercomputer called StarGate with millions of specialized AI processors. In return for funding the project, Microsoft would have exclusive rights to use the resulting AI systems. The project illustrates how much investment could be needed to build out AI systems in the US going forward.

• A separate report today says big AI firms will soon run out of the high-quality internet text needed to train their large language models. As a result, they may have to shift toward using synthetic text derived from videos, proprietary data, or other sources.
• The report may also help explain China’s extensive hacking of large US databases and its promotion of social media tools like TikTok, which could vacuum up immense amounts of user data. If even the internet isn’t big enough to feed modern AI models, Beijing may be surreptitiously gathering immense amounts of private data from US citizens to aid its influence campaigns and espionage efforts.

US Agriculture Industry:  After years of concern about falling honey-bee populations, new data from the Department of Agriculture suggests bee colonies are making a strong comeback. For example, the data shows that more than one million new bee colonies have popped up around the US since 2007, making them the fastest-growing type of livestock in the country.

• The rise may in part reflect inflation, since the Agriculture Department only counts bee colonies producing at least $1,000 of revenue each year.
• Nevertheless, the strong rise in counted bee colonies suggests populations are indeed rising, allaying concerns that global warming, invasive species, and other challenges are reducing the population of bees that are so critical to pollination and food production. The new data is therefore creating a buzz among environmentalists. (Sorry)

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Note to readers: the Daily Comment will not be published tomorrow due to the Good Friday holiday.

Good morning! While equities are showing a muted reaction to the revised GDP figures, we are celebrating the start of the MLB season. Today’s Comment dives into the rationale behind why investors shouldn’t overlook large-cap stocks. Additionally, we explore how central bank caution has supported the dollar, while shedding light on the factors contributing to the remarkable ascent of the Mexican peso, which has emerged as one of the top-performing currencies globally. As usual, the report includes a summary of domestic and international data releases.

Not Like the Rest: Hopes for Fed rate cuts and the froth in AI stocks fueled risk-on sentiment in Q1; however, this may not carry over into next quarter.

• Fueled by AI optimism and dovish monetary policy expectations, the S&P 500 surged 10% in Q1, its fastest year-to-date rise since 2019. Policymakers’ promises of rate cuts and tech companies’ defiance of expectations fueled this growth. However, recent headwinds threaten to stall this momentum. Fed officials, like Governor Christopher Waller, have grown cautious, downplaying the possibility of imminent cuts due to strong economic data. Additionally, concerns mount that tech valuations are stretched, potentially jeopardizing their outperformance streak. These mounting doubts raise the specter of whether these trends will be able to hold going into the next quarter.
• The market may experience volatility in the next quarter due to a confluence of factors. The Federal Reserve’s monetary policy decisions will be heavily influenced by upcoming employment data. Another strong payroll report, if it exceeds expectations like the recent ones, could lead policymakers to reevaluate their plan for interest rate cuts, potentially reducing the anticipated number to just two for the year. Additionally, investor sentiment is shifting as they look beyond the Magnificent Seven (M7) stocks, whose valuations are reaching expensive territory, and seek safer alternatives.

• The narrow leadership in the market’s 2024 rise suggests a Q2 pullback in momentum is more probable than a correction, absent a significant macroeconomic shock. That said, investors may be able to find value in large-cap companies outside the M7. Excluding those large-cap companies, the index has a P/E ratio of just under 19, which is right in line with historical averages. Given their size, those large-cap firms are relatively well-positioned to absorb changes in Fed policy compared to their mid- and small-cap counterparts and would likely benefit if the Fed follows through on its easing plans.

The Dollar Is Back! The greenback has roared to its strongest quarter in two years, as a shift in market expectations for central bank policy bolstered the dollar’s value.

• The US dollar has surged 2.7% in Q1, according to the Bloomberg Dollar Spot Index, fueled by a shift in central bank policy expectations. Markets initially anticipated interest rates converging globally, but recent pronouncements suggest a slower pace of easing. Echoing the Fed’s cautious stance, central bankers worldwide signaled a more measured approach. Bank of England Monetary Policy Committee member Jonathan Haskel indicated that the UK is a long way off from cutting rates, while ECB President Lagarde remained noncommittal on future policy easing after the ECB’s expected June cut. Meanwhile, the Bank of Japan distanced itself from any tightening bias.
• Central banks’ shift away from aggressive rate cuts has resonated with the market. Investors have adjusted their forecasts upward, anticipating a slower pace of rate reductions and a higher interest rate environment over the next three years. This hawkish tilt is particularly pronounced in 2025 projections, with US rates revised up by 70 bps and the UK seeing a 55-bps increase. These revisions suggest the market isn’t convinced that central banks in Europe and the UK will take drastic measures to cut rates independent of the Federal Reserve’s actions, despite economic weakness in those countries.

• The Fed’s aggressive rate cuts, which have historically started from higher points, often result in a lower terminal rate compared to other central banks. Even if the Fed cuts this year, whether before July or after the election, the dollar’s weakness would likely be temporary. However, the current combination of a strong dollar and high interest rates creates tighter global financial conditions than investors may have anticipated for 2024. This could potentially dampen global growth and make US equities more attractive relative to foreign markets.

The Super Peso: The Mexican peso (MXN) has defied expectations in 2023 by strengthening despite rate cuts and potential US tensions.

• The MXN has emerged as the world’s strongest currency against the dollar this year. Two key factors fueled this stellar performance. First, despite lowering its policy rate this year, Mexico boasts one of the highest interest rates globally, making it attractive for carry-trade investors seeking to profit from interest rate differentials. These investors buy foreign currency (like the dollar) and then invest those funds into a higher-yielding currency (like the peso). Secondly, President Andrés Manuel López Obrador’s (AMLO) plan to reduce government spending has helped curb national debt, bolstering investor confidence in the Mexican economy and its currency.
• Mexico’s strong peso hasn’t shielded its stock market from volatility in 2024. The MSCI Mexico soared nearly 30% in the final two months of 2023, but this year’s performance has been choppy. This uncertainty likely stems from outgoing AMLO’s late-term spending spree, which is expected to push the estimate of public debt as a percentage of GDP from 4.9% to 5.0%. Additionally, his presumed successor, Claudia Sheinbaum, has pledged to cap oil production at 1.8 million barrels per day, a slight decrease that suggests a potential move away from fossil fuels.

• Mexico’s upcoming election looms large over its financial markets. The country’s proximity to the US makes it a magnet for companies seeking North American market access. While AMLO has navigated relations with both US presidential contenders, uncertainty swirls around Claudia Sheinbaum and her ability to maintain these ties. Further complicating matters, tensions with the US are rising as Chinese firms attempt to manufacture electric vehicles in Mexico for the US market, attracting criticism from American lawmakers. Immigration, another perennial issue, adds another layer of complexity. If Sheinbaum is able to successfully avoid US hostilities, Mexican companies could present potential opportunities for investors looking for foreign exposure.

Other News: China’s most senior military leader has urged Asia to take responsibility for managing its own security, indicating that despite the thaw in tensions between the world’s two largest economies, significant geopolitical differences persist. The Russian propaganda machine remains active and potent, raising concerns that Moscow may attempt to influence the upcoming US election.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equity markets are off to a strong start today. In sports news, the NFL has announced a rule change to its kickoff format, making it similar to the format used by its competitor, the XFL. Today’s Comment dives into the nuanced reasons behind the Bank of Japan’s cautious approach toward significant shifts in monetary policy, explores consumer apprehensions surrounding the upcoming election, and examines the burgeoning AI frenzy making its way across Asia. As usual, we include a round of international and domestic news.

Yen Worries Continue:  The Japanese yen (JPY) weakens as the Bank of Japan indicates it will refrain from additional interest rate hikes, despite inflation exceeding its 2% target.

• The Bank of Japan threatened currency intervention to halt speculation, driving down the JPY. Earlier today, the currency plunged to a 34-year low of 151.97 per dollar, alarming policymakers. This sharp depreciation follows the central bank’s recent decision to end negative interest rates and to signal a pause in further tightening. However, Governor Kazuo Ueda’s dovish stance — suggesting the BOJ won’t raise rates aggressively until inflation expectations reach 2% — has spooked investors. Consequently, they’re dumping yen holdings in anticipation of other central banks, like the Federal Reserve and the European Central Bank, maintaining higher rates for a longer period than the market anticipated at the start of the year.
• Recent inflation data strengthens the Bank of Japan’s case for maintaining its dovish stance. Headline inflation rose 2.8% year-over-year, but this increase hasn’t translated to core inflation. The core index has remained flat since October 2023, suggesting underlying inflationary pressures are subdued. Furthermore, core inflation shows signs of further moderation, rising at an annualized pace of only 2.1% over the past five months, significantly lower than the 3.3% annual change observed in February. The setback in inflation has likely led policymakers to question whether the country has truly turned a corner in its fight against deflation.

• In a shift from past policy, central banks, including the Bank of Japan, are prioritizing a cautious approach to monetary policy. Their primary concern is to avoid triggering unintended economic downturns that would necessitate future policy reversals. This cautious stance extends even to central banks who have traditionally been seen as more hawkish, as evidenced by similar concerns about interest rate adjustments voiced by members of the European Central Bank and the Federal Reserve. This cautious approach by central banks is likely to keep the interest rate differential between the US and its peers stable or even widen it, potentially strengthening the dollar.

Election Concerns: Anxiety is rising among American households about the country’s direction, fueled in part by the potential for a rematch between President Biden and his predecessor, Donald Trump.

• Recent surveys paint a complex picture of consumer sentiment. While headline figures from the Conference Board and the University of Michigan suggest stability, a closer look reveals a growing unease about the future. This is evidenced by a decline in consumer expectations in the Conference Board’s March survey, with the six-month outlook dropping to its lowest point in six months (73.8, down from 76.3). The University of Michigan Sentiment Index echoes this trend, dipping slightly from 75.2 to 74.6. Notably, this weakening confidence emerges despite positive signs in the labor market and significant progress on inflation reduction from its highs in 2022.
• The forthcoming election appears to be a significant factor in the growing disparity between consumer sentiment and favorable economic indicators. According to the latest findings from the University of Michigan, the survey shows a downturn in sentiment among independent voters, while partisan optimism is on the rise among the two major parties. The Conference Board’s observations underscore a rising trend of write-in responses concerning the political climate. This coincides with a noticeable generational divergence among respondents. Individuals under 55 exhibit a considerable decline in enthusiasm, while those aged 55 and above demonstrate greater optimism.

• While the election may influence consumer sentiment, it likely won’t significantly impact short-term spending. This disconnect suggests voters perceive that neither candidate is offering solutions to improve daily living standards. A deeper reason could be the growing acceptance of a new economic reality: Low borrowing costs are likely gone. Tighter monetary policy and ballooning deficits are expected to keep long-term interest rates above 4% for the foreseeable future. This shift may force consumers who missed the window of easy credit to increase savings to maintain their desired financial stability. In the long run, this could stifle economic growth as households tighten their belts and reduce spending in order to adapt to the shifting economic landscape.

Emerging Tech: With tech stock valuations reaching lofty heights, investors are increasingly turning their attention to Asian countries to capitalize on the burgeoning growth in artificial intelligence (AI).

• US tech giants Meta, Nvidia, Microsoft, and Amazon have been driving the S&P 500’s returns this year, accounting for 55% of its gains so far. This surge is likely due to the increasing popularity of AI and the corresponding demand for semiconductors, which are crucial components in AI hardware. While some of the excitement may carry over from last year, Nvidia’s strong sales figures in Q4 have bolstered investor confidence that these companies can continue to deliver above-average returns in the future. That said, their high valuations have led investors to begin seeking cheaper alternatives.
• Fueled by the Asian tech boom, India, South Korea, and Taiwan have emerged as attractive destinations for investors seeking to diversify their tech holdings beyond the US. ETF flow data from Bloomberg shows that India is leading the way with $197 million in inflows year-to-date, followed by South Korea at $181 million, and Taiwan at $112 million. These countries are all well-positioned to benefit from the growth of key technologies like AI and semiconductors and are attracting investors seeking exposure to these trends. The rising inflow also reflects a growing investor preference for geographically balanced portfolios, with a focus on countries with strong economic ties to the US or those maintaining neutrality.

• Risk appetite is currently high, likely fueled by market expectations that central banks will begin easing monetary policy within the next six months. While US mega-cap tech stocks have been in the spotlight for years, their dominance seems to be fading. This is evident in the recent broad-based gains across the S&P 500. Investors seeking to capitalize on the AI boom might find opportunities abroad. Foreign AI firms have experienced impressive growth over the past year and currently trade at lower valuations compared to the well-established “Magnificent Seven” US tech giants.

Other News: Protests have broken out in Hungary after Prime Minister Viktor Orbán was implicated in a graft probe. The Bank of England has warned that a boom in private equity may negatively impact the country, elevating the potential for financial mishap. The Congressional Budget Office Director, Phillip Swagel, has warned of a “Liz Truss-style market shock” if the US government does not get its fiscal house in order.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Despite strong economic signs like positive durable goods orders, equity futures are paring back earlier gains. On a brighter note, the University of Iowa continues to dominate the Women’s NCAA tournament! Today’s Comment dives into why rising analyst forecasts for the S&P 500 shouldn’t lull investors into complacency. We’ll also explore how rising housing costs might impact the Fed’s policy decisions and analyze the likelihood of a slow US-China decoupling. Plus, we include our usual wrap-up of domestic and international data.

Equity Bulls on Tap: With the first quarter of 2024 nearing its close, several banks have already begun revising their year-end forecasts upwards.

• Oppenheimer Asset Management isn’t alone in its bullish outlook on the S&P 500. After a stellar first quarter, it has raised its year-end target from 5,200 to 5,500. This optimism is echoed by HSBC, UBS, and Bank of America, all revising their projections upwards to around 5,400 for the index by year’s end. Fueling this sentiment are the market’s strong gains and surprisingly positive corporate earnings reported in the final quarter of 2023. With the S&P 500 already up 10% year-to-date, further growth is anticipated if the Fed manages a soft landing.
• A cloud of uncertainty looms over the recent stock market optimism. Positive earnings surprises stemmed from analysts significantly lowering their Q4 2023 earnings per share (EPS) estimates ahead of reporting season, reflecting concerns about a potential economic slowdown later this year. Furthermore, liquidity in the financial system is expected to tighten in the coming months due to tax payments, ongoing quantitative tightening, reduced use of the overnight reverse repo facility, and interest rates remaining higher than market expectations. These conditions will likely prevent much of the cash being held in money market funds from returning to financial markets.

• The strength of the US economy bolsters optimism for equities, but hidden risks obscure the outlook. This is evident in the looming debt maturity wall. While leveraged loans offered companies a temporary lifeline, they’ve come at the cost of eroded profitability, potentially creating future solvency issues. There aren’t any glaring signs of an immediate crisis, but the lack of transparency in the private credit market remains a significant concern. Given these uncertainties, investors should exercise caution before taking on excessive risk, especially with policy rates hovering above 5%.

Fed Leaning Hawkish? Rising shelter costs are dampening the Federal Reserve’s optimism for three rate cuts this year, and the high home prices continue to fuel domestic inflation.

• Federal Reserve officials presented a divided front on future rate cuts this week. Voting member Raphael Bostic, President of the Atlanta Fed, pointed to stronger economic data and scaled back his forecast from two cuts to one. While Bostic expressed caution, Fed Governor Lisa Cook emphasized the potential hurdles on the path to price stability. In contrast, Chicago Fed President Austan Goolsbee held firm to his projection of three cuts, as outlined in the Fed’s latest Summary of Economic Projections (SEP). These divergent views highlight the complex interplay between robust employment data and higher-than-expected inflation on policymakers’ outlooks.
• Shelter costs remain a major hurdle for the Fed, delaying their shift on interest rates. While overall inflation shows signs of easing, housing prices act as a glaring outlier, driving a wedge in price trends. Excluding shelter, core CPI has held steady between 1.9% and 2.2% for the past seven months. This persistent rise in housing costs is often attributed to limited inventory and a slowdown in new construction. However, confusion clouds how this data is collected, with Fed Chair Jerome Powell himself acknowledging uncertainty about when the slowdown in housing prices will be reflected in inflation figures.

• Federal Reserve officials are signaling a cautious shift, with some openness to considering two rate cuts this year depending on economic data. While we expect the January and February inflation spikes to moderate, our confidence in the Fed achieving its target of 2% core PCE inflation by year-end has decreased. Stubbornly high shelter costs, a significant factor in inflation metrics, contribute to this hesitation. If inflation persists alongside a strong labor market, the Fed may postpone rate cuts until after the election.

Carrot and Stick Diplomacy: Despite China’s push for self-sufficiency in technology, it still seeks cooperation with US business leaders to temper U.S. hostility.

• On Wednesday, a select group of US corporate executives received an esteemed invitation to meet with Chinese President Xi Jinping. Following their participation in the high-profile China Development Forum, which wrapped up on Monday, these key players will convene for an exclusive gathering, aimed at providing insights into the nation’s burgeoning growth trajectory. The invitation arrives as US-China tensions escalate, fueled by policies targeting economic decoupling. With American businesses pulling back on investments in China, and Beijing planning to replace US technology, this high-level dialogue holds the key to shaping the future relationship between these economic giants.
• Despite recent tensions, a meeting between US CEOs and President Xi highlights the mutual dependence of the US and China. China’s manufacturing overcapacity strains its ability to sustain growth without access to US markets. This is particularly true for the electric vehicle industry, where China faces pushback from Western countries due to its surplus. However, US firms also rely on China’s vast consumer base for their own continued growth. Just look at Apple, whose sales of their flagship iPhone have dropped in China, prompting them to explore a partnership with Baidu to regain a foothold.

• High tensions simmer between the US and China, but a complete breakdown seems unlikely barring a major geopolitical crisis. Deep economic ties act as a safety net, minimizing supply chain disruptions and potentially creating space for a gradual thaw. Upcoming high-level visits, like Treasury Secretary Yellen’s expected trip to China next month, highlight the ongoing communication between the two countries. This trend is likely to continue, especially as China grapples with its economic slowdown. Nevertheless, we anticipate encountering occasional obstacles as both major economies strive to maintain their economic influence.

Other News: A major bridge in Baltimore collapsed late last night after a cargo ship collided with one of its supports. While there’s no indication of this being a deliberate act, authorities will likely conduct a thorough investigation in the coming months. Florida passed legislation to prevent minors under 14 from accessing social media, in another sign of the growing scrutiny of US tech companies.

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