by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a recap of yesterday’s White House summit between President Trump, Ukrainian President Zelensky, and top European leaders. We next review several other international and US developments with the potential to affect the financial markets today, including US success in forcing the UK to backtrack on a proposed new regulation against Apple and a reiteration of the US sovereign debt rating by S&P.

United States-Ukraine-Europe: In yesterday’s summit between President Trump, Ukrainian President Zelensky, and top European leaders, it appears that Trump offered to have the US act as a backstop to any direct security guarantees given by the European countries to Ukraine to help stop Russia’s invasion of the country. Trump also said he is trying to arrange a bilateral summit between Zelensky and Russian President Putin, to be followed by a trilateral summit including Trump himself.

• It isn’t clear how the US’s backstop security guarantee might look. Nevertheless, as we noted in our Comment yesterday, the offer from Trump marks a notable evolution in his foreign-policy understanding and adjustment. Implementing such a backstop guarantee would tilt Trump’s foreign policy back toward the US’s traditional global engagement, despite his apparent shift toward Putin’s position in other war issues, such as the need for land swaps.
• According to the Financial Times last night, the Ukrainian government has offered to buy $100 billion of US weapons, financed by European countries, to help secure the US security guarantees. Kyiv has also offered to provide the US with $50 billion in military drones, leveraging the expertise it has gained in the new technology in the heat of war.
• Of course, Trump will likely face some pushback against the idea of any US security guarantees from the more isolationist wing of his political base.

United States-United Kingdom: Under pressure from the Trump administration, the UK has reportedly agreed to rescind its January directive requiring US tech giant Apple to provide a “back door” to encrypted customer data for investigatory purposes. The incident is the latest example of the administration’s strong focus on protecting US digital services firms from burdensome taxation and regulation in foreign markets — a stance that likely will help maintain the US firms’ global market dominance going forward.

United States-Brazil: Finance Minister Haddad yesterday said Washington and Brasilia have reached an impasse over the US’s new 50% tariff against Brazil, given that the constitution bars the government from trying to force the supreme court to end its prosecution of former right-wing President Bolsonaro, as the US demands. If Haddad’s statement is true, it would suggest that Brazil could continue to face debilitating US tariffs for an extended period, likely weighing on the economy and Brazilian asset prices.

Canada: The Canadian Union of Public Employees this morning said it has struck a tentative labor deal with Air Canada, ending the strike against the airline by 10,000 of its flight attendants. As we mentioned in our Comment yesterday, the strike had threatened to disrupt air travel and freight shipments across North America and beyond. Reports indicate the flight attendants’ main gripe against Air Canada was low wages, but it isn’t clear how their compensation would be adjusted under the new labor contract.

US Fiscal Policy: S&P Global Ratings today said it is keeping its US sovereign credit rating on hold at AA+/A-1+, midway between its second- and third-highest ratings, reflecting recent resilience of the US economy and “credible, effective” monetary policy. Importantly, S&P said it expects the US administration’s new tariff revenues to largely offset the tax cuts and spending hikes in this summer’s “big, beautiful” budget bill. The steady rating will help maintain demand for US Treasury obligations and help keep bond yields in their recent trading range.

US Labor Market: Fresh analysis shows new entrants to the labor force (mostly high school and college graduates with no prior work experience) now make up 13.4% of all unemployed workers, the highest rate since 1988. The jump in the new entrants’ share of jobless workers largely reflects the difficulty that Generation Z is having in finding work, as factors such as policy change and artificial intelligence make businesses reluctant to hire. High unemployment among the young is likely one reason for weak buying among lower-income consumers.

US Pharmaceutical Market: Danish drug giant Novo Nordisk yesterday said it will halve the US price of its Ozempic weight-loss drug for people who can’t buy it with health insurance. The firm also said it will offer the drug for home delivery. The moves likely aim to stave off tough US tariffs and/or other trade barriers that President Trump has threatened as punishment for high imported drug costs. In response, Novo Nordisk’s US-listed share price jumped 3.7% yesterday, ending at a three-week high of $53.75.

US Semiconductor Industry: Semiconductor giant Intel late yesterday said it will sell a 2% stake in the company to Japanese technology investor SoftBank for $2 billion. Intel will sell new common stock to SoftBank at $23.00 per share, a slight discount to yesterday’s closing price of $23.66. The deal represents a vote of confidence in Intel as the Trump administration also mulls having the federal government buy a 10% stake in the struggling firm to bolster its domestic chip manufacturing. Indeed, SoftBank and the administration may have coordinated on the deal.

• In response, Intel share prices are up some 5.1% so far today, despite the risk that government ownership could eventually lead to political interference in company management.
• More broadly, the positive market response to the SoftBank deal and the potential federal stake highlight how investors have become comfortable with increasingly aggressive industrial policies, from subsidies under President Biden to outright government ownership under President Trump. One key question is whether investors will eventually get skittish about such policies and sell the associated stocks.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on the Trump-Putin summit in Alaska late Friday. We next review several other international and US developments with the potential to affect the financial markets today, including a new intra-day record high for Japanese stock prices and a short preview of the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, which starts later this week.

United States-Russia-Ukraine: President Trump today will meet Ukrainian President Zelensky and top European leaders at the White House to hash out next steps to end Russia’s war against Ukraine, after Friday’s summit between Trump and Russian President Putin yielded meager results. Reports over the weekend suggested the main goal of the White House meeting will be to flesh out the US security guarantees for Ukraine that Trump seems to have embraced of late. The leaders are also expected to discuss possible land swaps as the basis for a peace deal.

• All presidents and their administrations continually learn as they conduct US foreign policy, even in their second term. Recent months have highlighted President Trump’s evolving awareness of the relative power and goals of China and Russia, the world’s other two “Great Powers.”
• Although Trump and his administration had rightly focused on China’s dependence on exports to the US as a source of leverage, the US-China trade war in recent months has shown that China also has an important source of leverage in its near-monopoly over critical mineral supplies. Putin’s intransigence in prosecuting his war against Ukraine has brought into high relief his maximalist geopolitical goals and duplicity.
• As US officials come to terms with these learnings about the other Great Powers and their relative leverage versus the US, it is possible they will partially back off their populist, isolationist inclinations. If Trump really has swung behind US security guarantees for Ukraine, we would have strong evidence of such a shift, even though his abandonment of a ceasefire goal and embrace of land swaps may look like he has embraced Putin’s perspective on the war.
• Any such shift back toward a more traditional US foreign policy focused on support for allies would likely help ensure the survival of the US geopolitical and economic bloc, which we have argued is an attractive investment space for US investors. However, such a shift would also likely generate plenty of pushback from much of the administration’s political base.

United States-European Union: A planned joint US-EU statement fleshing out the terms of the two sides’ July 27 trade deal continues to be delayed by disagreements over reforms to the EU’s Digital Services Act, which US officials claim is an unfair hinderance of US tech companies. The joint statement was originally expected to be issued within days of that trade deal.

Japan: The Nikkei 225 stock price index today reached its third all-time high in the last five trading days, illustrating how factors such as market momentum, a renewed weakening of the yen, decent economic growth, and optimism over the war in Ukraine have been boosting Japanese stock values.

China: As Chinese economic officials seek new resources to fund fiscal stimulus measures, they are reportedly starting to crack down on domestic investors’ foreign investment income. Chinese residents investing onshore are currently exempt from tax. However, foreign investment income is subject to a 20% tax, and many individuals fail to report their gains. A new crackdown could theoretically limit Chinese demand for a range of investments around the world, hurting returns.

Bolivia: In the first round of the presidential election yesterday, centrist Senator Rodrigo Paz came in first with about 32% of the vote, and conservative former President Jorge Quiroga came in second with 27%. Paz and Quiroga will now compete in the October run-off, ensuring that Bolivia will once again be led by a pro-US, market-friendly president after 20 years of almost uninterrupted rule by the leftist Movement Toward Socialism party. The prospect of better economic policies has given a further boost to Bolivian bond values and other assets.

Canada: The Canadian Union of Public Employees, which represents 10,000 of Air Canada’s flight attendants, launched a strike against the airline over the weekend, ignoring a government order for binding arbitration and grounding hundreds of flights. The main issue for the union is compensation. Since Air Canada is tightly integrated with the Star Alliance (which also includes United Airlines, Lufthansa, Turkish Airlines, and Singapore Airlines), the strike threatens to disrupt air travel and freight shipments across North America and beyond.

US Monetary Policy: The Fed’s annual symposium in Jackson Hole, Wyoming, starts this Thursday, with the official theme of “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” Chair Powell will give his keynote speech on Friday, and investors will be looking for confirmation that the central bank will cut its benchmark fed funds interest rate in September as expected. Investors will also be hoping that Powell will provide guidance on future rate cuts through the end of the year.

US Corporate Bond Market: Little noticed amid the recent rally in stock prices, surging prices for company bonds have driven the corporate yield spread over 10-year Treasurys to a 27-year low of just 0.75%. The ultra-low credit spread appears to reflect investors’ continued strong optimism about the US economy, even as they also expect slowing economic growth and cooler inflation to allow the Fed to cut interest rates multiple times before the end of the year.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market remains focused on the latest developments in the tax bill. Today’s Comment examines why the weak PMI reading may not be as significant as some fear, breaks down how the CBO scoring offered both positive and negative implications for the White House, and covers other key market updates. As usual, the report will also include a summary of today’s domestic and international data releases.

Economic Jitters: Just a day after markets breathed a sigh of relief over surprisingly strong job numbers, fresh data casts doubt on that optimism.

• The ISM Services PMI unexpectedly fell from 51.6 to 49.9 in June. While a reading below 50 indicates potential contraction in the services sector, which represents nearly two-thirds of US economic activity, it appears that the decline more likely reflects statistical noise rather than fundamental weakness. The deterioration was concentrated in inventory and new orders components, which were particularly vulnerable to normalization effects following tariff front-running by firms.
• While much attention has been paid to the weak June figure, we believe the moving average is a more reliable indicator. Notably, the index has dipped below 50 three times since the pandemic without triggering a downturn, suggesting that a single weak month may not be significant. However, if the three-month moving average falls below 50, that would be more consistent with an impending downturn.

• While the indicator may not yet signal a downturn, it does suggest inflationary pressures are building. The key component to watch is prices paid. Not only is that hovering well above 60 (indicating strong expansion), but it also appears to be gaining momentum. If this trend continues, firms may be able to absorb higher costs through squeezed margins, reduced employment, or an increase in consumer prices.
• The economy is sending mixed signals — some good, some not so good — and inflation is still a worry. Because of this, the Fed is unlikely to cut interest rates at this time. Even if Friday’s jobs report is weaker than expected, we don’t think that will be enough to sway their decision. Right now, fed fund futures suggest that the central bank will cut rates 2-3 times this year, with the first being in September.

 Budget in Better Balance: Despite criticism of the president’s sweeping bill, the White House received favorable budget news.

• The Congressional Budget Office (CBO), a nonpartisan group, projects that the recently passed House budget will increase the national deficit by $2.42 trillion over the next decade. The bill shows expected increases in spending of $3.67 trillion along with a decline in spending of $1.25 billion. This estimate, however, does not factor in potential economic growth, which could partially offset the increase in the deficit.
• There was some good news. The CBO’s analysis suggests that the tariffs imposed as of May 13, could offset a significant portion of the new spending, potentially even pushing the federal budget into surplus. According to the agency’s estimates, these tariffs could generate up to $2.8 trillion in offsets, which may substantially reduce the deficit. Additionally, the CBO projects that the policy would lower interest expenses, further improving the fiscal outlook.
• However, the head of the CBO included several caveats in the agency’s analysis. The CBO warned that tariffs could reduce overall GDP by 0.6% over the forecast period and might increase inflation by 0.9% by 2026, before stabilizing afterward. Additionally, the agency cautioned that the estimates were subject to significant uncertainty, given the lack of historical precedent for tariffs of this size and scope. That said, we have already seen that tariffs are a strong revenue generator.

• The latest CBO estimates are likely to fuel arguments both for and against the president’s new tax bill. Republican senators will likely need near-unanimous support to ensure passage — a feasible goal given their 53-seat majority and control of the White House, which provides a three-vote cushion. Given the high stakes, we anticipate the bill could be signed into law as early as next month, though passage by the end of summer appears more likely.

US-NATO Rift: While NATO members are boosting military expenditures, US strategic priorities appear to be rebalancing from the Russian threat to the Chinese challenge.

• The Pentagon has informed Congress of its intent to reallocate advanced anti-drone technology originally destined for Ukraine to US forces. This decision follows Russia’s vow to retaliate against Ukraine after a successful drone strike deep inside Russian territory destroyed more than 40 aircraft. While the US president, who was not briefed on the operation beforehand, privately praised the attack, some reports suggest he also expressed concern that it might undermine his diplomatic peace efforts.
• Additionally, the US has declined to support a European proposal for an American security guarantee following any potential ceasefire agreement. Despite pressure from the UK and France, who have urged Washington to provide air defense systems to support a coalition of European forces that would deter Moscow from any future reinvasion, the US remains unwilling to commit to enforcing the terms of a future Russia-Ukraine peace deal.
• These developments are likely to raise concerns among European leaders about the need to increase defense spending as the US shifts its strategic focus toward the Indo-Pacific. According to Secretary of Defense Pete Hegseth, NATO members appear poised to raise their defense spending target to 5% of GDP. Germany, Europe’s largest economy, is positioned to take the lead, planning a significant military expansion that would add 60,000 active-duty personnel to its armed forces.
• The US strategic pivot away from NATO is expected to pressure European nations to increase defense spending. While this could lead to higher debt issuance among member states, potentially pushing up sovereign bond yields, the accompanying fiscal stimulus may provide support for equity markets.

Data Credibility: Growing concerns are emerging that budget cuts may compromise the reliability of official government statistics.

• The Trump administration has proposed cutting the Bureau of Labor Statistics‘ (BLS) budget by 8%, along with an equivalent reduction in staff. This comes as the agency — responsible for critical price and employment data — has faced years of underfunding that have compromised its data collection capabilities. These constraints have drawn particular criticism following significant downward revisions to last year’s payroll figures, which undermined confidence in the agency’s reporting.
• Budget cuts could lead to an increased reliance on private-sector data for economic assessment. However, these alternative sources may prove less reliable and more limited in scope than official government statistics, potentially distorting economic analysis and undermining informed policy decisions. Moreover, the reduced transparency could fuel market uncertainty, driving up risk premiums as investors grapple with diminished data quality and consistency.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an overview of the interim US-China trade deal announced earlier today. News of the deal has been reflected in surging values for all manner of risk assets around the world, but we also note a few words of caution for the longer term. We next review several other international and US developments with the potential to affect the financial markets today, including the latest on the India-Pakistan military tensions and a new proposal from President Trump to cut US drug prices.

United States-China: According to Trump administration officials, the US-China trade talks in Switzerland over the weekend yielded an interim agreement under which both sides would slash their tariffs on each other and dismantle other trade-war measures for 90 days. The three-month deal is designed to give the two sides time to negotiate a new permanent trade structure. In response, global risk markets are surging so far this morning, with futures linked to the S&P 500 price index up more than 3% as of this writing. US bond yields and the dollar are also rising.

• Under the deal, the US will slash its “reciprocal” tariffs on Chinese imports to 10% from the current 125% for the interim period, while China will slash its retaliatory tariffs to 10% from 125%. However, the US will maintain its 20% punitive tariff linked to fentanyl trafficking, which means most Chinese imports will face a tariff of 30%. The US’s product-specific tariffs on steel, aluminum, autos, and some other goods will also remain.
• Under the deal, China will also suspend or cancel some of its non-tariff retaliatory measures against the US, potentially including its clampdown on exporting critical minerals.
• However, despite the market euphoria today, we think it’s unlikely that the administration would allow the US tariffs and trade barriers against China to ultimately settle anywhere near as low as they were before Trump’s second term. If the US’s trade barriers against China were going to revert to their previous low levels, there would have been no reason for the disruptive tariff announcements of the last four months.
• More generally, we think the US is likely to maintain much higher barriers to foreign imports than in the past, sparking major changes in economic dynamics and international capital flows over the long term, including a possible intensification of the capital flight out of the US that has become apparent over the last month or more.
• Indeed, the director of the non-partisan Congressional Budget Office recently warned that the US’s tariff war could discourage foreigners from buying US financial assets going forward, potentially weighing on US economic performance.

India-Pakistan: After four days of cross-border airstrikes and drone attacks, a ceasefire struck by New Delhi and Islamabad early Saturday appears to be holding, despite initial violations by both sides. Even though global investors had taken a surprisingly sanguine view of the conflict between the two nuclear-armed nations, we think the situation bears continued watching and could potentially still upend financial markets if the fighting flares again.

Russia-Ukraine: After publicly expressing his support for the Ukrainian people on Sunday, newly installed Pope Leo XIV today reportedly held a phone call with Ukrainian President Zelensky. According to Zelensky, the conversation was “very warm and truly substantive.” The news shows that Leo XIV may continue to throw his moral weight behind the Ukrainians after his predecessor, Pope Francis, struck a much more neutral tone and sometimes seemed to suggest that Kyiv should capitulate to the Russian invasion.

Turkey: The leadership of the Kurdistan Workers’ Party, or PKK, which has been fighting Ankara for independence and greater Kurdish rights since the 1980s, today said it will give up its military struggle and disarm. While it still isn’t clear that all PKK militants will stop their attacks on the government, the announcement is a breakthrough that could increase political stability in Turkey and help ease US-Turkish tensions. It is therefore likely to provide a boost to Turkish stocks going forward.

South Korea: Illustrating the chaos in the conservative People’s Power Party ahead of the June presidential election, the group on Saturday canceled its decision one week earlier to nominate Kim Moon-soo as its presidential candidate. Party leaders said the move was needed after former Prime Minister Han Duck-soo expressed an interest in the role, upending the consensus for Kim. The PPP’s disarray reinforces expectation that the liberal Democratic Party’s Lee Jae-myung is in the driver’s seat to take over as president.

United Kingdom: Prime Minister Starmer today announced a sweeping reform of the British immigration system that marks a sharp clampdown on inward migration. The dramatic changes appear in part to be a response to surging support for Nigel Farage and his anti-immigration Reform UK party. In any case, the reform shows how even center-left politicians throughout the West, such as Starmer and his Labour Party, are now trying to respond to the rise of populist nationalism in their societies, despite the potential negative impact on labor supply.

• Among other measures, Starmer’s reform ends automatic “settlement,” or permanent legal residency, for immigrants after five years. Instead, immigrants will only get settlement after living legally in the UK for 10 years, unless they can show “a real and lasting contribution to the economy and society.”
• The reform will also tighten work visa rules.

US Drug Industry: Over the weekend, President Trump indicated he will sign an executive order today requiring the federal government to pay “most favored nation” prices for prescription drugs. In other words, rather than pay today’s ultra-high prices for many key drugs, the policy would require cutting the US prices to the same low levels paid by many foreign governments. If fully implemented, the policy might help some medical providers and healthcare consumers, but it would likely cut into the revenues of major pharmaceutical firms.

US Beef Industry: Recent price data and food firms’ earnings reports show US beef prices are surging as ranchers reduce their herds in response to drought, lost grazing land, and higher input costs. For example, the latest consumer price index shows the price of ground beef is now up 12.8% year-over-year, standing at a record $5.79 per pound. The rise in beef prices will likely spur consumers to shift more toward cheaper types of protein and potentially undermine President Trump’s political support.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting the latest trade developments this morning. In sports news, the Edmonton Oilers secured a commanding 2-0 series lead against the Vegas Golden Knights. Today’s Comment will focus on the UK’s positioning in trade negotiations with the US and India, progress in US-China trade talks, and other key market-moving developments. As always, we’ll provide a comprehensive roundup of domestic and international economic data releases.

Starmer the Dealmaker: The Brits have been able to secure better trade treatments with two key partners as the UK looks to boost its economy.

• On Thursday, the UK became the first country to secure trade concessions from the US following President Trump’s decision to impose tariffs on imports. The agreement ensures a reduction in US tariffs on British automobiles, covering up to 100,000 vehicles — an amount that aligns with the UK’s historical annual exports to the US. Furthermore, the deal eliminates all tariffs on UK steel and aluminum. In return, the UK has committed to allowing greater imports of American beef and has agreed to purchase Boeing aircraft.
• Although a 10% tariff remains on British exports to the US, the UK secured favorable terms without significant concessions. It avoided demands to lower its digital services tax, open healthcare markets to American firms, or relax food standards — all key priorities for the Trump administration. With negotiations ongoing, the deal demonstrates how running a trade deficit with the US can provide leverage in securing flexible terms.
• Progress in US-UK trade negotiations coincided with the finalization of a landmark UK-India trade agreement. The deal grants India tariff-free access for 99% of its exports to the UK, while India will cut duties by 90% on British goods, with most tariffs gradually removed over the next 10 years. The agreement is particularly advantageous for the automotive sector as India’s affluent consumers will gain access to luxury British vehicles at significantly lower prices.

• While the UK’s trade agreements with the US and India may appear unrelated, they offer valuable insights into how nations are adapting to the new global economic landscape. The UK’s experience demonstrates that securing a swift deal with the US may be less disruptive than anticipated and that businesses can mitigate declining US exports by forging compensatory partnerships elsewhere.
• As the US turns inward, countries are forging new trade alliances and reshaping the global economic order into one less centered on American dominance. While this shift could gradually erode the dollar’s primacy in trade, its status as the world’s reserve currency remains secure for now. The more immediate effect, however, will be a redirection of capital toward foreign firms as businesses adapt to this evolving landscape.

US-China Trade Talks: The two sides are scheduled to hold talks this weekend, marking the start of formal trade negotiations between the longtime rivals.

• As a goodwill gesture, President Trump has announced plans to reduce punitive tariffs  — currently as high as 145% — in exchange for substantive progress in trade talks. The Trump administration is reportedly considering cutting tariffs to 80%, a move China is expected to reciprocate. The proposal comes after repeated demands from Chinese negotiators who have insisted that any agreement must include tariff relief.
• In the lead-up to the meeting, both sides engaged in posturing, unwilling to appear weak ahead of negotiations. Beijing has sought to project strength despite the trade war’s toll on its economy. Since the conflict began, Chinese firms have struggled to replace lost American buyers, with bankruptcies expected to rise sharply as a result. China’s decision to withhold wage data further suggests an effort to conceal the economic damage inflicted by the trade war.

• Meanwhile, the US has faced increasing pressure to de-escalate trade tensions. There is speculation that a prolonged trade war could lead to summer supply shortages as firms and households struggle to secure alternatives to Chinese imports. These economic anxieties have depressed both consumer and business confidence, while dragging down the president’s overall approval ratings.
• Recent progress in trade talks between the world’s two largest economies suggests tensions may be easing, a development likely to bolster market optimism. This shift could reignite risk appetites as investors cautiously re-enter the markets following earlier volatility. However, the longer-term economic impact of tariffs on corporate profits and consumer spending remains a critical concern.

Trump Backs Taxing the Rich: Initially opposed to raising taxes on high-income earners making $1 million or more, the president now seems to have reversed his stance.

• The president has formally endorsed a plan to restore pre-2017 tax rates for individuals earning over $2.5 million annually. This move follows other progressive tax initiatives, including closing the carried interest loophole that has long been exploited by private equity firms, as part of a broader effort to fund middle-class tax relief. By supporting higher taxes on top earners, the president has made a decisive break with traditional Republican orthodoxy, which has historically rejected all tax increases as a matter of principle.
• The president’s proposed tax increases have deepened internal divisions as lawmakers attempt to balance his promised “big, beautiful” tax cuts with spending cuts. Although officials have pursued deficit reduction through eliminating redundancies and targeting fraud, these measures have yet to generate sufficient savings to offset the legislation’s projected costs. Meanwhile, it is still unclear whether tariff revenue will also be enough to offset the spending increases.
• Further exacerbating the issue are internal party disagreements regarding the SALT deduction, a provision the president has characterized as largely favoring blue states. The current point of contention involves lawmakers’ efforts to increase the SALT deduction limit in the new bill from $10,000 to a potential $30,000, a substantial jump from the originally suggested $20,000.
• While the bill is expected to pass by summer, several key details remain unresolved. Nevertheless, we anticipate that provisions like reduced corporate tax rates will deliver the most significant benefits for investors. Additionally, the proposed income tax cuts should help offset financial pressures on households grappling with higher costs from tariffs on everyday goods.

India-Pakistan Conflict Grows: The rivals continue to fight as concerns about an expanding war grow.

• The conflict has now expanded beyond the Kashmir region, with hostilities escalating across both nations. India has conducted airstrikes targeting Pakistan-administered Kashmir as well as mainland Pakistani territory. In retaliation, Pakistan has struck Jammu, an Indian-controlled city within Kashmir. Neither side shows signs of de-escalation, with both increasingly relying on drone warfare — a development that has already resulted in civilian casualties on both sides of the border.
• Although the two nations have engaged in multiple wars throughout their history, the current confrontation represents their most serious escalation to date. While President Trump has offered to mediate the conflict, India has firmly rejected third-party intervention. The growing tensions threaten to destabilize the Indo-Pacific region if left unchecked, with significant potential to negatively impact global risk assets.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting yesterday’s pivotal Fed rate decision, while also keeping an eye on an exciting NBA playoff series where the New York Knicks have surged to a 2-0 lead against the Boston Celtics. In today’s Comment, we’ll analyze the implications of the Fed’s latest move, examine the Trump administration’s evolving foreign policy vision, and cover other key market developments. As always, we’ll also provide our signature roundup of critical domestic and international economic data releases to keep you fully informed.

Fed Patience: The Federal Reserve vowed that it will not cut rates without solid evidence that the economy is in trouble.

• As expected, following its two-day meeting the central bank kept its federal funds target range steady at 4.25%-4.50% and maintained the current pace of balance sheet reduction. The decision to delay policy easing underscores officials’ beliefs that, despite economic uncertainty, growth remains resilient. They also noted that uncertainty surrounding the scope and scale of potential tariffs could prolong the pause until there is greater clarity on their economic impact.
• During the press conference, Fed Chair Powell reaffirmed the central bank’s commitment to a patient policy stance. He underscored that future policy actions would be primarily determined by the extent to which tariffs affect employment and inflation. While preserving optionality, Powell appeared to dismiss the possibility of rate increases, signaling that the Fed’s subsequent move would likely be either a continuation of the current rate or a reduction.

• Despite Powell’s moderately hawkish tone, the 10-year Treasury yield fell following the policy announcement — a sign that markets remain confident in the Fed’s commitment to its inflation target, even amid growing political pressure for rate cuts. In recent weeks, the president has repeatedly urged the Fed to lower rates, though he has explicitly denied any intention to dismiss Powell should the central bank maintain its current stance.
• While the Fed has maintained its stance that it will not raise rates unless necessary, the market still anticipates at least three rate cuts this year, with the first potentially arriving in July. This optimism stems partly from expectations that an economic slowdown could force the Fed to act. However, we maintain that without substantial evidence of a weakening economy, aggressive rate cuts this year remain unlikely.

New AI Standards: In a policy shift from the previous administration, the White House aims to make its AI restrictions more inclusive of nations interested in investing in the United States.

• Just one week before their scheduled May 15 implementation, the Trump administration has rescinded Biden-era regulations on AI-related semiconductor exports. This move addresses criticisms from both international allies and technology companies. The timing is notable as US officials are poised to engage in high-level discussions with the United Arab Emirates and Saudi Arabia, focusing on American AI infrastructure investments and bilateral trade.

• The “AI Diffusion Rule,” a late-term Biden administration regulation, restricts the sale of high-performance chip technology to certain nations. This framework compels countries to comply with US standards or face losing access to critical technology. It further segments the global market into three tiers: top priority is given to US allies, who receive unfettered access to advanced semiconductors, while Russia and China — effectively barred from importing key technologies — are relegated to the lowest tier.
• The rule has drawn significant criticism from foreign governments dependent on US technology to achieve their strategic ambitions. This is particularly true for Middle Eastern nations placed in the second tier, despite their growing AI aspirations. Saudi Arabia, for instance, has made AI investment a cornerstone of its Vision 2030 initiative to reduce oil dependence. Similarly, the UAE aims to establish itself as a global AI leader by 2031.

• The semiconductor industry stands to benefit from the AI regulation rollback, though the Trump administration has already signaled plans for revised rules, suggesting any relief may be temporary. Officials aim to craft a lighter-touch framework, while still preserving US AI leadership. The policy shift could accelerate investment in domestic AI infrastructure, which appears central to the administration’s tech strategy.

UK Trade Deal: As noted in yesterday’s report, the US and UK are poised to announce a trade deal that could serve as a blueprint for other nations willing to align with Washington’s trade priorities.

• The White House is expected to announce the deal this morning as the president seeks to demonstrate progress in his push for trade agreement negotiations. While details of the arrangement remain undisclosed, sources indicate it will likely include reduced tariffs on US automobiles and agricultural products, along with the elimination of British taxes targeting American tech firms. However, the agreement is expected to serve as a framework for future talks rather than a finalized deal.
• The agreement to begin formal talks is significant as it may reveal what concessions the US is prepared to make in negotiations with its trading partners. Unlike most other nations, the UK already faced minimal tariff rates before their temporary suspension and maintains a trade deficit with the US, making widespread tariff reductions unlikely. Consequently, the focus of US-UK negotiations is expected to shift toward addressing tariffs on specific products rather than pursuing broad, economy-wide cuts.
• Facing the dual headwinds of weak global demand and steep 25% US steel tariffs, the UK is aggressively pursuing relief. The impact of these tariffs is clear: British steel exports to the US plummeted by nearly 30% in 2023, falling from 235,000 to just 165,000 metric tons. As a potential point of negotiation, the Trump administration has indicated it will push for stricter monitoring of transatlantic steel shipments to address concerns about the distortion of Chinese overproduction on global markets.
• Automobiles represent another critical sector affected by product-specific tariffs. As the US serves as the largest export market for British vehicles, these tariffs pose a significant threat to the UK automotive industry. This substantial economic vulnerability explains why securing tariff relief has become a key priority in negotiations.
• However, certain red lines remain firmly in place — most notably, the UK’s refusal to accept US agricultural standards. A key sticking point is chlorine-washed chicken, which Britain has explicitly rejected due to concerns it could jeopardize ongoing efforts to secure a trade deal with the EU.
• Progress in US trade negotiations is expected to bolster risk assets as markets focus on potential easing of trade restrictions. While this development may provide near-term support for equities, sustained gains will ultimately depend on the economy’s ability to demonstrate resilience amid ongoing trade changes.

Growing EU-US Friction: The EU is prepared to impose its own tariffs on the US if a mutually agreeable trade solution cannot be reached.

• The EU plans to impose $108 billion in tariffs on US goods, including cars, planes, and bourbon, starting Thursday. This retaliatory measure follows previously administered US tariffs and comes as both sides prepare for upcoming talks.
• This announcement likely represents strategic posturing by the EU to strengthen its negotiating position. Key areas the US administration seeks to address include reform of the EU’s VAT system and an end to the bloc’s scrutiny of digital services, which predominantly affects large US tech companies.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is digesting the latest trade updates. In sports news, Inter Milan has knocked FC Barcelona out of the Champions League semifinals. Today’s Comment will focus on positive trade developments, ongoing conflicts in the Indo-Pacific and the Middle East, and other key market-moving stories. As always, we’ll also provide a roundup of today’s international and domestic data releases to keep you informed.

Positive Trade News: The White House has announced progress in ongoing trade negotiations, a move intended to mitigate concerns regarding potential supply chain disruptions.

• The US and China are set to hold their first face-to-face talks next week, marking the first high-level discussion between the two powers since tariffs were imposed in April. Treasury Secretary Bessent acknowledged the talks as a positive step but cautioned that the meeting would likely focus on preventing further escalation rather than resolving existing disputes. Meanwhile, Chinese officials have mentioned that they are engaging in talks due to the possibility of tariff relief.
• The ongoing dispute between the two nations comes amid growing evidence that tariffs are weighing heavily on both economies. China has attempted to circumvent the measures by rerouting exports through third countries or undervaluing shipments to reduce duties. Meanwhile, concerns are mounting over potential shortages as reduced Chinese imports mean fewer goods being shipped to the US, leading to speculation that some firms may be hurt due to their hidden exposure to Chinese suppliers.
• The decision by China and the US to hold talks suggests that other nations may soon follow suit. Treasury Secretary Bessent noted that, aside from China, all 18 of America’s other major trading partners have already engaged in discussions in hopes of securing tariff relief before the July deadline. While several countries have submitted proposals, President Trump has made clear that he does not intend to lift all tariffs.

• The UK is poised to become the first country to secure a trade deal with the US under the Trump administration. On Tuesday, officials announced a plan that will exempt certain UK exports from full tariffs under a quota system. In return, Britain has committed to scaling back its digital services tax, which has disproportionately affected major US tech firms.
• So far, trade negotiations appear to be progressing, with the US leveraging tariffs not only to reduce trade barriers but also to secure regulatory concessions that currently disadvantage American firms. While hopes of a trade deal may provide some relief to equities hit hard by tariffs, we believe a sustained market boost would require clear evidence that tariffs have had minimal demand-side impact or, better yet, moderated significantly from their current level.

India’s Response: India and Pakistan appear to be on the brink of war as tensions escalate following an April terrorist attack.

• India executed targeted military strikes against nine locations inside Pakistan, identified as “terrorist infrastructure.” The action was perceived as measured due to its avoidance of Pakistani military facilities. Prior to the attack, Pakistan’s defense minister had warned that the country was prepared to retaliate against any Indian aggression. While the Pakistani government has confirmed plans for a response, it has not disclosed the timing or nature of its countermeasures.
• So far, it remains unclear how far either side is willing to escalate the conflict. The last full-scale war between India and Pakistan erupted in 2019 after a suicide bomber targeted Indian security forces. Both nations now claim to be acting in self-defense, yet their increasingly aggressive posturing risks triggering a dangerous cycle of retaliation that could push the confrontation to a perilous new level.
• The US and China are expected to monitor the conflict closely, given their strategic interests in the region. Washington has sought to maintain strong ties with both India and Pakistan as key partners in its geopolitical orbit. Meanwhile, Beijing has a vested interest in preventing a destabilizing war near its borders, particularly given its close alliance with Pakistan and complex rivalry with India.
• The critical issue to watch now is how both nations handle the Indus River Basin dispute. Following recent hostilities, India suspended a key water-sharing treaty that regulates the flow of river water into Pakistan. This decision has already begun threatening Pakistan’s agricultural output, particularly its vital cotton and rice crops, potentially exacerbating regional tensions.
• While US financial markets have yet to meaningfully price in geopolitical risks, escalating tensions may soon prompt investors to reassess their risk appetite. This uncertainty emerges during an already fragile period for markets, with lingering trade tariff concerns continuing to pressure sentiment. In this environment, we believe quality defensive plays, particularly established companies with consistent earnings track records, may offer investors prudent hedges against potential volatility.

Powell Is on the Clock: While interest rates dominate market focus ahead of the central bank’s decision, its balance sheet is another key element to watch.

• The Federal Reserve is widely expected to leave its benchmark interest rates unchanged at today’s meeting. This decision follows weeks of policymakers voicing concerns about the uncertain inflationary impact of tariffs, even amidst indications of easing price pressures. While some market participants had anticipated that softening economic data might compel Fed action, unexpectedly strong employment figures and resilient consumer spending have tempered dovish expectations.
• If the Fed doesn’t cut rates, it might instead change how it handles its bond holdings. At the last meeting, Fed officials decided to slow down how quickly they were shrinking the bond portfolio because of the debt ceiling fight in Congress. There was even some talk of stopping the reduction indefinitely, and with the economy now sending mixed signals, that idea may be revived.

• The potential conclusion of quantitative tightening should help relieve pressure in the Treasury market. Ending this policy would mean the Fed reinvests proceeds from maturing securities rather than continuing to reduce its balance sheet. This move would boost market liquidity and support bond prices. The policy’s significance was underscored Wednesday when the Fed made its largest participation in a 10-year Treasury auction in over three years, contributing to the auction’s strong performance.
• If the Fed agrees to hold rates steady this month, its policy statement and economic projections will offer critical clues about a potential June cut. Policymakers have adopted a cautious stance, seeking clearer evidence of how tariffs will impact the economy — especially inflation and employment — in the coming months. While resurgent price pressures would likely delay any easing, a sharp deterioration in labor market conditions could force the Fed’s hand toward more substantial rate cuts this summer.

Weak Dollar Problem? There are growing concerns that the strength of the US currency is starting to have an impact abroad.

• Across Asia, there have been signs that central banks are intervening in markets to support their currencies. The Hong Kong Monetary Authority was forced to offload dollar holdings to defend its peg. Meanwhile, Taiwan’s typically stable exchange rate has experienced sharp fluctuations amid rumors of potential intervention to secure a trade deal with the US. Lastly, China has cut its key interest rate and reduced reserve requirements in an effort to prevent further appreciation of the yuan against the dollar.
• While a weaker dollar generally reduces the price of imported goods for foreign consumers, its impact on the wider economy presents a trade-off. It may diminish profits for foreign companies exporting goods to the US, and a declining greenback could incentivize foreign investors to rebalance their portfolios away from US assets. This trend, while not currently critical, deserves careful monitoring.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today starts with a new report confirming that China’s industrial strategy has not only leaned heavily on unfair trade practices, but it has also helped close China’s technology gap with the US and reduced its dependence on imports. We next review several other international and US developments with the potential to affect the financial markets today, including the German parliament’s unexpected failure to confirm Friedrich Merz as chancellor and a new strike at a major US aerospace firm.

China: The US Chamber of Commerce yesterday released a new study confirming that Beijing’s “Made in China 2025” industrial policy is helping close China’s technology gap with the US and has reduced the country’s reliance on imports. The study provides the latest evidence that Beijing has used a range of restricted trade policies — such as massive tax subsidies, low-cost public funding, protectionist trade barriers, and forced technology transfers — to undermine US industry. The report is therefore likely to further exacerbate US-China economic tensions.

• In one especially interesting section, the report shows the results of a survey conducted among US Chamber member firms facing Chinese competitors. The survey asked the Chamber members what forms of government support were most instrumental to helping their Chinese competitors gain domestic or global market share.
• The three most effective types of support listed were easy and cheap access to credit, direct subsidies, and public procurement regulations favoring domestic producers.

Malaysia: Prime Minister Anwar yesterday announced a fiscal relief package equal to about $356 million to help shield Malaysia’s small and medium-sized enterprises from the effects of President Trump’s “reciprocal” import tariffs. Even though Trump has paused the 24% tariff against Malaysia until early July, Anwar told parliament the money will be made available to SMEs in the form of increased loan guarantees and low-interest loans.

European Union-United Kingdom: In a new sign of post-Brexit reintegration between the EU and UK economies, the European Commission today will reportedly propose new legislation that would ease the recognition of British professional certifications. If approved by the European Parliament, the proposed law would be especially helpful for British lawyers, bankers, engineers, and other skilled workers hoping to work in the EU. In turn, that could allow firms to rebuild some cross-Channel business relationships that were disrupted by Brexit.

European Union-Russia: The European Commission today will announce a 2027 deadline for EU companies to end their contracts for Russian energy. While Brussels has already clamped down heavily on Russian oil and coal deliveries via sanctions, it has struggled to end all natural gas imports because some member countries oppose further sanctions. The outright restriction on import contracts aims to get around that opposition. Of course, the new rules may worsen the EU’s shortage of cheap energy, which has weighed on economic growth.

• The new rules would reportedly require companies to end all spot market gas contracts with Russian suppliers by the end of this year and to end all long-term contracts by 2027.
• Once announced, the measure would still need to be approved by a majority of EU member states and the European parliament.

Germany: Friedrich Merz, leader of the center-right CDU party, today unexpectedly lost a parliamentary vote to confirm him as chancellor. Merz last week had sealed a deal with the center-left Social Democratic Party that gave the coalition 328 of the 630 seats in the Bundestag, but in secret balloting today he only got 310 votes. Merz will still likely prevail in a follow-on vote, but the unprecedented first-round loss will leave him politically wounded as he tries to renew German leadership in Europe and reform the domestic economy to boost growth.

• The embarrassing vote will also likely boost support for Germany’s surging radical populist parties, especially the far-right Alternative for Germany.
• In financial markets, the unseemly show of chaos and instability drove down the value of German assets today, with the DAX stock index closing down 1.3%.

US Monetary Policy: The Federal Reserve today begins its latest policymaking meeting, with its decision due tomorrow at 2:00 pm ET. Based on interest rate futures trading, investors widely expect officials to hold their benchmark fed funds rate steady at the current target range of 4.25% to 4.50%. The next rate cut is expected in late July. However, investors will be paying close attention to any hints Chair Powell may give on the trajectory of rates and any change in the Fed’s bond-buying program.

US Immigration Policy: The Department of Homeland Security yesterday said it will cover the transportation costs and pay $1,000 to any illegal alien who leaves the country voluntarily. Officials said the government would still come out ahead financially in spite of the cost, but they did not indicate where the funding for the program would come from. In any case, we suspect that $1,000 is not enough to spur massive numbers of illegals to “self deport,” but if it is, one result would likely be more labor shortages and costlier workers for some industries.

US Labor Market: Some 3,000 workers in the International Association of Machinists and Aerospace Workers yesterday launched a strike against jet engine maker Pratt & Whitney, a subsidiary of defense giant RTX. The unionized workers at the company’s Connecticut facilities are demanding better wages, retirement benefits, and job security as the company reportedly mulls moving some production to its plants in Georgia. The strike also suggests that the union believes it has increased leverage as the US defense budget increases.

US Energy Market: Diamondback Energy and Coterra Energy, which are active in the prolific Permian Basin oil fields, yesterday both said they are significantly cutting their capital spending this year as they face increased foreign production and lower global oil prices. The statements have sparked concern that US oil output may have peaked already, despite President Trump’s goal to rapidly boost output. Any significant drop in oil drilling could also feed into concerns about future weakness in the US labor market.

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