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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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the announcement of another big output boost by the Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led partners. We next review several other international and US developments with the potential to affect the financial markets today, including a slew of important election results in Asia and Europe and a hint by President Trump that he may keep some of his controversial tariffs permanent.

Global Oil Market: One month after the OPEC+ group announced an unexpectedly large production boost of 411,000 barrels per day, members of the group announced another output boost of the same magnitude over the weekend. The new output boost is scheduled for June. With global economic growth slowing, the output boosts have driven oil prices sharply lower so far today. At this writing, Brent crude is down 1.9% to $60.13 per barrel, and WTI is down 2.2% to $57.02.

China: Several articles in state media last week argued for China to conduct mass purges of corrupt military officials to better prepare the People’s Liberation Army for war or a major crisis. The sudden appearance of such articles may signal that General Secretary Xi will soon ratchet up his ongoing purge of high-level officers and defense industry officials. We discuss these purges and put them into context in our upcoming Bi-Weekly Geopolitical Report to be published on May 12, 2025, titled, “Update on the US-China Military Balance of Power.”

China-United States: According to new data from Juwai IQI, the US in 2024 lost its position as the top destination for mainland Chinese purchasers of homes costing $5 million or more. The data show that the US ranking dropped below those of Thailand, Australia, and Canada last year as US-China geopolitical tensions worsened and Washington and China took steps to restrict bilateral investments. The report said Chinese investment in US high-end residential properties last year was down about 50% from its peak in 2017.

South Korea: The ruling People’s Power Party on Saturday chose conservative hard-liner Kim Moon-soo to be its candidate for the June 3 presidential election. In his acceptance speech, Kim vowed to take a hard line against North Korea and develop new incentives for business, while also pledging stronger support for young workers and the underprivileged. However, opinion polls suggest Lee Jae-myung and his liberal Democratic Party retain a huge advantage.

• In the latest polls, about 50% of voters support the DP’s Lee, while just 15% support the PPP’s Kim.
• The PPP has lost considerable support since the previous president, Yoon Suk Yeol, attempted to declare martial law late last year and was thrown out of office.

Singapore: In parliamentary elections yesterday, Prime Minister Wong and his long-ruling People’s Action Party won handily with 65.6% of the vote, up from 61.2% in the 2020 elections. Observers on the ground said the improved performance mostly reflected safe-haven voting as citizens accepted the PAP’s message that political stability and retaining trusted officials would help the city-state defend itself in the US tariff war. The election results suggest global investors will continue to see Singapore as an attractive, stable investment destination.

Australia: In parliamentary elections on Saturday, Prime Minister Albanese and his center-left Labor Party retained power with a win over the center-right Liberal Party. The election mirrored the recent Canadian and Singaporean balloting, where the ruling party secured another majority by tagging the opposing candidate as too similar to US President Trump or unable to stand up to Trump’s tariff war. Indeed, Treasurer Jim Chalmers yesterday said the Albanese government will now prioritize protecting Australians from the “dark shadow” of US tariff policies.

United Kingdom: Illustrating the UK’s sluggish investment, new data from the Department for Transport show the country built no more than 65 miles of new highways over the last decade and just 422 miles since 1990. In contrast, some other European countries have built thousands of miles of new motorways. Observers ascribe the UK’s weak investment to many issues, from local opposition and strict environmental rules to a hangover from robust building in the 1960s. In any case, weak investment is seen as a key cause of the UK’s slow economic growth.

Romania: In the first round of Romania’s presidential election re-run yesterday, right-wing nationalist George Simion came in first with more than 40% of the vote, while the centrist mayor of Bucharest, Nicusor Dan, appeared to be on track to grab second place. If confirmed when the counting is finished, the two will meet in a run-off on May 18. In contrast to the elections in Canada and Australia, the success of Simion in the first round shows that Europe’s right-wing populists appear to benefit from their ideological association with President Trump.

Israel-Hamas: The Israeli security cabinet has formally adopted a plan to occupy and hold the Gaza Strip, shifting from its previous strategy of attacking the Hamas militants governing the territory and then retreating. Besides requiring Israel to commit significantly more military and economic resources to its war against Hamas, occupying Gaza over the long term may well produce ongoing international political costs for Israel and ensure continued instability in the energy rich region.

US Monetary Policy: The Fed begins its latest policymaking meeting tomorrow, with its decision due on Wednesday at 2:00 pm ET. Based on interest rate futures trading, investors are nearly unanimous in expecting 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 only at the meeting 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 Tariff Policy: In a television interview aired yesterday, President Trump said he may keep some import tariffs permanent to ensure continued incentives for firms to invest and produce in the US. As the administration negotiates with other nations and responds to corporate lobbying for relief, the slightest news of tariff rollbacks has recently encouraged investors to jump back into stock buying. Trump’s statement is a warning against such complacency, since he is likely to keep some level of market-disrupting tariffs despite limited or temporary rollbacks.

• Separately, Trump last night announced that he is imposing 100% tariffs on foreign-made films to protect the US movie industry.
• US movie industry officials said they were given no prior warning of the move and were scrambling to figure out how it would affect their business. Along with the threat of foreign retaliation, US movie-making companies have seen their stock prices fall significantly so far this morning.

US Stock Market: At the Berkshire Hathaway annual meeting on Saturday, chief executive and investing icon Warren Bufffett announced that he will retire from the company by year’s end and recommend his chosen successor, Greg Abel, take over. According to Buffett, “I would still hang around and could conceivably be useful in a few cases, but the final word would be what Greg said in operations, in capital deployment, whatever it might be.”

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a Chinese government statement confirming that it is considering a request for trade talks from the Trump administration. We next review several other international and US developments with the potential to affect the financial markets today, including a new trade offer from the European Union and news that President Trump today is releasing his proposed budget for the upcoming federal fiscal year.

China-United States: The Chinese commerce ministry today confirmed that US officials have “conveyed messages to China, through various channels, expressing a desire to engage in discussions” about President Trump’s tariff policy. Moreover, the ministry said Beijing is “evaluating” the US request. Investors appear to be taking the statement as a sign that the two sides could soon start talks to end their trade war. In response, global stock prices and the values of other risk assets are rallying so far this morning.

• However, despite today’s market optimism over the statement, investors should probably keep in mind that General Secretary Xi may have interpreted the US approach as a sign of weakness or of sufficient kowtowing to China.
• If Xi does believe the US has blinked, he could be emboldened to strike a hard negotiating stance against Trump. It is therefore probably much too early to expect an end to the trade tensions in the near term.

European Union-United States: In an interview with the Financial Times, Trade Commissioner Maroš Šefčovič said the EU will offer to hike its annual purchases of US exports by €50 billion to stave off Washington’s 20% “reciprocal” tariffs, which are currently paused until early July. However, he suggested the EU offer would only apply if the US also drops its 10% baseline tariff against the EU.

• Although the Trump administration is focused heavily on the US trade deficit in physical goods, the country typically has a sizable surplus in service exports, such as tourism and digital services. According to Šefčovič, the US trade deficit with the EU is only about €50 billion when considering the US’s big service surplus with Europe.
• In his interview, Šefčovič argued the EU could fairly easily make up the total imbalance by buying more liquefied natural gas, agricultural products, and other items from the US.
• Coupled with the Chinese statement about evaluating talks with the US, the statement from Šefčovič adds to evidence that Washington has indeed had some success in forcing negotiations over its bilateral trade imbalances. All the same, the progress is likely to be slow, meaning the current tariffs in place will remain a threat to the economy in the near term, even if they are lowered to more sustainable levels in the future.

United States-Iran: To increase his pressure on Iran to force it into a deal restricting its nuclear program, President Trump yesterday said he will impose “secondary” sanctions on Iranian oil. Under the sanctions, any entity buying Iranian crude or petrochemicals would be frozen out of the US financial system. If implemented, the sanctions would theoretically reduce the amount of oil on the global market, potentially boosting prices and exacerbating consumer price inflation.

India-Pakistan: India and Pakistan today stand on the brink of war after New Delhi said Islamabad was responsible for last week’s terrorist attack on its Kashmir region. The two nuclear-armed neighbors have been trading small arms fire over the last week, and reports yesterday said India may be preparing a major attack on Pakistan. Any large-scale war between the countries would likely spark fears of a potential nuclear conflict and could send global risk markets into a tailspin.

Eurozone: The March consumer price index was up 2.2% from the same month one year earlier, matching the annual increase in February but exceeding expectations that inflation would ease to just 2.1%. Excluding the volatile food and energy components, the March core CPI was up 2.7% on the year, exceeding both the 2.4% rise in the year to February and the expected increase of 2.5%. The hotter-than-expected inflation print raises the chance that the European Central Bank may not cut interest rates at its June policy meeting.

US Politics: President Trump yesterday named embattled National Security Advisor Mike Waltz to be his ambassador to the United Nations, deftly “kicking him upstairs” over the recent Signalgate scandal and other controversies within the White House. The move also facilitates keeping New York Rep. Elise Stefanik in her House seat after Trump asked her to give up her previous nomination to the UN job.

US Fiscal Policy: President Trump today will release his proposed budget for federal fiscal year 2026, which begins October 1. The proposed budget includes far-reaching tax cuts and big reductions in nondefense discretionary expenditures related to environmental, renewable energy, education, foreign aid, and other programs. However, the proposed budget will be heavily amended as it works its way through Congress, so at this point it is largely just a signal of the administration’s fiscal priorities and goals.

US Treasury Market: In a television interview today, Japanese Finance Minister Kato admitted that Tokyo considers its holdings of $1.3 trillion in US Treasury obligations to be a “card” that can be played in its current trade negotiations with Washington. According to Kato, “It does exist as a card. Whether or not we use that card is a different decision.” The statement is likely to increase concerns about foreign capital fleeing US securities, either as a negotiating ploy or as a reflection of increased worries about US stability and friendliness to foreign capital.

• On a related note, the Financial Times today carries a long read looking at how the Chinese government is deliberately diversifying its foreign exchange reserves away from US Treasurys.
• The article includes a number of useful graphs showing that Beijing has gradually been reducing its exposure to US Treasurys for at least a decade.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently digesting the latest tariff announcements from the president. In sports news, OKC Thunder guard Shai Gilgeous-Alexander scored 51 points in the team’s recent victory, making his team the first in the competitive Western Conference to reach 50 wins this season. Today’s Comment will explore how tariffs are already impacting economic activity, why the Federal Reserve’s independence is being called into question, and other market-related developments. As usual, the report will also cover key domestic and international data releases.

Stagflation Fears Rise: The latest Purchasing Managers’ Index (PMI) from the Institute for Supply Management revealed that manufacturing output growth has stagnated, while prices surged at their fastest pace since 2022. The weak reading has heightened concerns that ongoing trade tensions are starting to weigh on economic output.

• The February ISM Manufacturing Index came in at 50.3, down from the previous month’s reading of 50.9. Although the report remained above the contraction threshold of 50, the expansion was primarily driven by a sharp increase in manufacturing prices, which have reached their highest level since June 2022. Meanwhile, new orders and employment both fell into contraction territory.
• While the recent reading remained above the 12-month average of 48.6, the frequent mentions of uncertainty among respondents suggest that firms are growing more concerned about their economic prospects in the future. Their worries appear to center on navigating US trade tensions with Mexico, Canada, and China, as businesses struggle to determine how to invest in this evolving environment. This challenge is further compounded by fluctuating tariff rates and uncertainty over potential policy responses.
• On Monday, President Trump announced plans to follow through on his threat to impose tariffs as a punitive measure against countries he claims are not doing enough to curb the flow of fentanyl into the US. Mexico and Canada will face a 25% tariff on all goods, with the exception of Canadian energy products, which will be subject to a lower import tax of 10%. Meanwhile, tariffs on Chinese goods will double from 10% to 20%. He is also weighing additional tariffs on steel, aluminum, and food imports.
• In response, Canada has imposed a 25% tariff on $20.6 billion worth of US goods, including orange juice, peanut butter, wine, and coffee. A second round of tariffs targeting cars, trucks, and steel is also expected to take effect in the coming weeks. Meanwhile, China has retaliated by targeting US agricultural products with a 15% tariff, and Mexico plans to announce its response later today.

• Economic data is already beginning to reflect the impact of trade war concerns. Following the report’s release, the Atlanta Fed’s GDPNow forecast for Q1 2025 fell further into contraction territory, dropping from -1.5% to -2.8%. This decline was driven by a rise in imports, as well as a slowdown in consumption and investment, all of which have weighed heavily on GDP growth.
• While it is still too early to assess the full economic impact of the ongoing trade war, US equities may continue to find support as investors attempt to gauge the extent of rising trade tensions. So far, the S&P 500 has fallen by as much as 5% from its all-time high, but a rebound could occur if there are signs that these tariffs are being reversed.

Fed Independence in Focus: A group of Republican lawmakers are turning their attention to the Federal Reserve, aiming to review the central bank’s authority over monetary policy and bank regulation. This scrutiny marks an early sign that the Fed’s independence could be at risk.

• On Tuesday, a House task force that was established to scrutinize the Fed will hold its first hearing. The committee will begin its examination of the Fed’s authority by reviewing its original 1913 charter. This review comes amid the president’s ongoing efforts to test the limits of executive authority, as he seeks to expand his control over government operations.
• While the president has shown relative restraint in his criticism of the Fed — with Treasury Secretary Scott Bessent noting that the administration aims to focus on long-term yields — he has repeatedly expressed dissatisfaction with its reluctance to cut interest rates. Several days prior to the January 28-29 FOMC meeting, President Trump went so far as to claim that he understands interest rates better than the central bank’s officials.
• Currently, pressure on the Fed is likely to undermine the central bank’s ability to maintain autonomy in its decision-making, as it grapples with inflation persistently above the 2% target and an economy showing signs of slowing. New tariffs are likely to add to those challenges as they will further contribute to price pressures at a time in which goods have been a reliable source of drag on the overall index.

• The US dollar may face significant risks from increased scrutiny of the Fed, as a perceived lack of central bank independence could undermine global confidence in investing in the United States. However, this scenario may strengthen the case for gold, as investors could turn to the precious metal as a safe-haven alternative.

US Suspends Aid: President Trump has decided to withhold additional aid to Ukraine following President Zelensky’s reluctance to agree to a peace deal without security guarantees. While the decision was widely anticipated, its potential spillover effects remain unclear.

• The order specifically targets military weapons used to prolong the conflict, as President Trump has repeatedly expressed his desire to achieve peace on the continent after years of fighting. He has also stated that he would welcome President Zelensky back to the White House once Zelensky demonstrates a genuine commitment to pursuing peace.
• In response to the US’s reluctance to provide assistance to Ukraine, Europe has swiftly moved to increase its defense spending. European Commission President Ursula von der Leyen announced that the EU will activate a mechanism enabling member states to allocate an additional 650 billion EUR ($685 billion) toward defense over the next four years. Additionally, the bloc plans to issue 150 billion EUR ($158 billion) in loans to further support these efforts.
• The combination of the US’s reluctance to provide financial support and growing doubts about its commitment to global security has sparked widespread concern. Several figures within President Trump’s orbit, including Tesla CEO Elon Musk, have openly questioned the US’s role in NATO. This has prompted European officials to pursue a dual approach with some pushing for reconciliation with the Trump administration, while others are advocating for greater unity among European nations.
• While it is unlikely that the EU will be able to fully assume responsibility for its security in the short term — given budgetary constraints and limited experience — a shift toward greater spending and independence from the US is expected to benefit European defense companies. These firms are likely to see significant gains from increased military expenditures.

Big Beautiful Bill: The Senate is working on revising the House budget bill to align with some of President Trump’s tax promises. However, disagreements have emerged over the figures, as the Senate aims to ensure that the budget impact from the tax changes remains minimal.

• Senate Republicans are working to revise the House budget bill, with a particular focus on the SALT (State and Local Tax) deductions, which have been a point of contention. While the House aims to raise the deduction cap, the Senate prefers to keep it at the current level.
• The two sides will need to resolve their disagreements to pass a tax bill through budget reconciliation, a process that allows them to bypass a Senate filibuster, which would otherwise require 60 votes for passage.
• While the bill is likely to pass, the scale of the tax cuts remains uncertain. That said, a final version could be ready by summer, barring any significant setbacks.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are weighing the threat of new tariffs. In sports news, Bayern Munich secured a Champions League playoff spot with a dramatic last-minute goal. Today’s Comment covers the latest tariff developments, updates on the Ukraine-Russia peace talks, and other key market news. As always, we’ll also spotlight crucial domestic and international data releases.

Tariffs Are Coming? Howard Lutnick has been confirmed as the new Commerce Secretary, just in time to assist the president in imposing new tariff measures. He will oversee the implementation of the president’s tariff and trade policies, with direct responsibility for managing the Office of the US Trade Representative.

• On Tuesday, President Trump unveiled a plan to impose 25% tariffs on automobiles, semiconductors, and pharmaceuticals as part of his strategy to overhaul international trade. The tariffs will be rolled out in stages, with auto tariffs set to take effect on April 2, while tariffs on pharmaceuticals and semiconductors will follow at a later, yet-to-be-determined date.
• These new tariffs are designed to achieve two of the three key trade objectives — restriction and reciprocity — as the president aims to leverage reciprocal measures to pressure Europe into reducing its auto tariffs, which are currently four times higher than those in the US. Additionally, restrictive tariffs are intended to incentivize companies to reshore production of pharmaceuticals and semiconductors to the US, bolstering American manufacturing capabilities.
• As the president begins rolling out tariffs, early signs indicate growing unease among households and businesses. According to CreditCards.com, consumers have already started accelerating purchases in anticipation of the new tariffs. Meanwhile, the National Association of Home Builders has reported that the tariffs are dampening sentiment, driven by fears of rising costs associated with the increased duties on materials such as steel.

• So far, the tariffs have had little meaningful impact on the economy, and their influence on equities appears to be fading. As a result, US stocks may begin to demonstrate greater resilience, provided companies continue to deliver strong earnings. The real challenge, however, lies abroad. International markets, particularly in Europe, have had a strong start, with the Stoxx Europe 600 up 9.11% compared to the S&P 500’s 4.45% gain. US tariffs on EU exports could undermine this trend.

Trump Pressures Ukraine: As the US and Russia continue discussions aimed at resolving the conflict in Ukraine, speculation is growing about the potential terms of a deal. The Trump administration’s efforts to rebuild ties with Moscow have added further intrigue to the negotiations, raising questions about the direction of US-Russia relations and the broader implications for energy prices.

• President Trump has adopted a firm stance toward Ukraine, controversially suggesting that the country bears some responsibility for the Russian invasion. He has also insisted that Ukraine must hold elections before it can participate in peace talks, a position that has drawn scrutiny and raised questions about the administration’s commitment to the region.
• The development comes as the US weighs whether to lift sanctions on Russia’s energy sector. US Secretary of State Marco Rubio has emphasized that the sanctions are likely to remain in place until a final agreement is reached, signaling a cautious approach to any potential easing of economic pressure on Moscow.
• His reluctance may be related to how the reintroduction of Russian energy will impact global markets. Discussions about ending the conflict were held in Saudi Arabia and included both Russia and the US, leading many to speculate that the location was chosen to align all parties on the potential market implications of resuming Russian energy supplies.

• The US would like to push oil prices lower to ease inflationary pressures. However, other key players, particularly major producers, favor keeping prices higher to protect profit margins, creating a delicate balancing act in the energy market. As a result, sanctions are likely to remain in place until all parties reach an agreement on how to reintegrate Russian energy into the global market in a way that balances economic and geopolitical interests.

ECB to Hold Steady? The European Central Bank is considering pausing further interest rate cuts after its next meeting as it evaluates whether its current policy stance is sufficiently restrictive following six consecutive rate cuts since June 2024.

• The ECB’s current rate stands at 2.75%, roughly 100 basis points above the estimated neutral rate or the level at which rates neither stimulate nor restrict growth. ECB officials have been gradually cutting rates in an effort to prevent further economic slowdown.
• The decision to reassess the pace of easing follows growing concerns over the central bank’s ability to achieve its 2% inflation target. Recent data from January showed overall price levels rising by 2.5% year-on-year, further complicating the path to reaching its goal of hitting its target by 2026.
• While the ECB is anticipated to announce another rate cut at its March meeting, a potential pause in further easing measures could lend some support to the euro against the dollar. This is because it would prevent the interest rate differential between Europe and the US from widening further.

BOJ to Pay for Schools? Japan’s opposition party is calling on the Bank of Japan to sell its exchange-traded funds (ETFs) to finance free high school education nationwide. The proposal emerges amid ongoing uncertainty about how the central bank plans to unwind its massive balance sheet.

• The focus on ETFs arises as the central bank nears the completion of offloading stocks acquired during the financial crisis. BOJ policymakers have proceeded cautiously with the sell-off, staggering the process to avoid potential market disruptions that could have occurred if stocks and ETFs were sold simultaneously.
• Under the proposal, the BOJ would sell its ETFs to the government in exchange for grant bonds, and the dividend income from those shares would be used to fund policy initiatives aimed at reversing declining birth rates and education.
• The Japanese proposal highlights how lawmakers are increasingly exploring unconventional methods to fund policy initiatives, particularly as they seek to manage the country’s substantial government debt burden.

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