by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of a US-China deal that would allow Chinese social media app TikTok to keep operating in the US, although virtually no details have been released. We next review several other international and US developments with the potential to affect the financial markets today, including a report on weak production growth in the world’s oil and gas fields and a preview of this week’s Federal Reserve policy meeting.

United States-China: According to a social media post by President Trump last night, US and Chinese negotiators in Spain have reached a “framework” deal on US ownership and operating rights of Chinese social media firm TikTok. Although few details are available, it appears the basic deal will allow TikTok to keep operating in the US in return for concessions. Those concessions probably include selling the US operations of TikTok to a domestic company. If so, the US buyer could gain a lucrative social media asset with a huge usage base.

US Monetary Policy: The Fed today begins its latest policy-setting meeting, with its decision due tomorrow at 2:00 pm ET. Based on interest rate futures trading, investors are nearly unanimous in expecting the central bank to cut its benchmark fed funds interest rate by 25 basis points to a range of 4.00% to 4.25%. Investors also expect at least one more rate cut by the end of the year. The prospect of falling interest rates continues to buoy US stock prices despite clear signs that economic activity is slowing.

• Separately, a federal appeals court last night rejected an emergency Trump administration request to remove Fed Governor Lisa Cook ahead of the policy meeting. Despite allegations of mortgage fraud by Federal Housing Finance Agency Director Pulte, documents seen and reported by major media sources indicate Cook correctly listed her properties as owner-occupied or vacation-oriented. If Cook remains on the policymaking board, she seems likely to vote against an interest rate cut at this time.
• In another development yesterday, the US Senate voted to confirm White House economic advisor Stephen Miran to fill the current vacant seat on the Fed’s board of directors. Miran should therefore be able to participate in this week’s policy meeting, at which we suspect he will vote to cut interest rates as President Trump desires.

European Union: A year after publishing his influential report laying out the causes of Europe’s faltering economic competitiveness and offering recommendations, former European Central Bank Governor Mario Draghi today warned that slow adoption of the plan has led to further deterioration in the region’s ability to compete. Despite the warning, however, hurdles such as political resistance and high debt seem likely to limit long-term progress, even if new fiscal stimulus and higher defense spending spur faster growth and stronger markets in the near term.

Russia-Poland: In an interview, Poland’s deputy minister for digital affairs said Russian operatives are currently launching 20 to 50 cyberattacks against critical infrastructure every day. Most of the attacks have been thwarted, but a few have temporarily closed down facilities, including hospitals. The minister said the attacks have forced Warsaw to hike its cybersecurity budget to €1 billion this year from €600 million in 2024. The news is a reminder that Europe’s current defense spending hikes include opportunities for cybersecurity firms.

United States-Mexico: In a little-noticed report last week, Reuters revealed that the Central Intelligence Agency has been more deeply involved in helping Mexico’s security services than previously known. For example, the report said the CIA has leveraged its eavesdropping assets to help locate drug cartel members, while its analysts have helped develop target lists. Mexico has even relied on CIA polygraphs to vet members of its security services. The news suggests the US has more leverage than previously known in its trade negotiations with Mexico.

United States-Venezuela: President Trump yesterday said the US military has destroyed a second boat operated by Venezuela drug cartels in the Caribbean Sea. The administration provided no further details. Nevertheless, the incident illustrates the US’s strong new military focus on regional operations, including drug interdiction in the Caribbean. The new approach continues to raise concerns among Latin American countries about US interference in their internal affairs.

Global Energy Market: The International Energy Agency today said production is declining faster than expected at oil and gas fields across the globe. According to the IEA, the fall in output largely reflects today’s greater reliance on shale resources, where production declines relatively quickly unless there is ongoing capital investment. The report says that since 2019, roughly 90% of global oil and gas investment, or $500 billion, was just to keep production steady. The report says the market has therefore become more precarious and at risk of price spikes.

Global Aluminum Market: According to the Financial Times, global aluminum prices have now risen 17% since their recent low in April, while regional prices within the US have jumped even more dramatically. The report says prices have climbed in response to factors such as a clampdown on production in China, limited smelting capacity elsewhere, the new US import tariffs, and rising demand for the product. Naturally, the jump in prices holds out the prospect of strong stock performance by aluminum producers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with key news on the US-China and US-Russia relationships that could affect US technology companies and global energy supplies. We next review several other international and US developments with the potential to affect the financial markets today, including a further slowdown in Chinese economic growth and signs that the European Central Bank is close to ending its campaign of interest rate cuts.

United States-China: In a report on the first day of its pre-orders for the new Series 17 iPhone on Saturday, technology giant Apple said Chinese pre-orders were even stronger than for the Series 16 last year, even though its ultra-thin model is still unavailable because of regulatory issues. The strong Chinese orders came despite the worsening of US-Chinese geopolitical and economic tensions. They therefore highlight how top US brands retain significant loyalty in China, which may limit Beijing’s ability to target them as part of the US-China rivalry.

• On the other hand, Beijing today said US artificial intelligence giant Nvidia was found to have violated Chinese antitrust law. The announcement didn’t lay out any punishment for Nvidia, but it did say the company would be subject to further probes, which will likely weigh on the firm’s stock price. In pre-market trading, Nvidia’s stock was down 1.4%.
• Separately, Beijing on Saturday announced that it has opened an anti-dumping probe into US analog computer chips and initiated an anti-discrimination investigation over Washington’s handling of Chinese chips.
• The Chinese probes could well lead to tariffs or other trade barriers against US chips, so they could serve as a threat ahead of the new round of US-China trade talks in Spain this week. If such tariffs or trade barriers are eventually implemented, US chip firms could lose access to the large, important Chinese market, especially if they don’t enjoy strong brand loyalty like Apple does. That could lead to further bifurcation of the global tech industry and hurt the profits and value of US chip firms.

United States-Russia: Politico over the weekend said Sen. Lindsey Graham (R-SC) and Rep. Brian Fitzpatrick (R-PA) will try to attach their bill imposing major economic sanctions against Russia to the upcoming legislation to keep the US government funded. Senate Majority Leader Thune is reportedly supportive of the idea, and it seems consistent with President Trump’s pledge this weekend to level “major sanctions on Russia” when NATO countries stop buying Russian oil and levy tariffs on China.

• The effort by Graham and Fitzpatrick probably raises the possibility of major new US sanctions against Russia.
• The result could be new geopolitical tensions between the US and NATO versus China and Russia and possible disruptions in global energy markets. However, the moves may not be enough to convince Russia to stop its war against Ukraine.

US Monetary Policy: Mortgage-related documents seen by media sources appear to show that Fed board member Lisa Cook properly listed her Atlanta condominium as a vacation property, contradicting allegations of mortgage fraud by Federal Housing Finance Agency Director Bill Pulte. Those allegations, apparently based on other documents, were the basis for President Trump’s effort to fire Cook. The effort to fire Cook is now mired in judicial proceedings, but the new documentary evidence suggests she may have a fighting chance to stay in her position.

US Stock Market: President Trump this morning threw his support behind the idea of allowing companies listed in the US to issue their earnings reports every six months, rather than quarterly. In a social media post, Trump wrote that, “This will save money, and allow managers to focus on properly running their companies.” Such a change would require action by the Securities and Exchange Commission, which has required quarterly reporting since 1970.

Eurozone: In an interview with the Financial Times, Martin Kocher, the newly appointed governor of Austria’s central bank, said the European Central Bank’s monetary easing has now essentially ended, leaving the benchmark interest rate at 2.00% or slightly lower for the time being. If Kocher is right, the differential between US and eurozone interest rates could finally begin to narrow as the Fed re-starts its rate-cutting campaign this week.

China: As a reminder that the US-China tensions are occurring against a backdrop of slowing economic growth, Beijing today said August retail sales were up just 3.4% from the same month one year earlier. That was much weaker than expected and significantly slower than the increase of 3.7% in the year to July. Other data showed slowing growth in fixed investment and industrial production as well, at least in part reflecting the government’s effort to rein in excess capacity and untenable price competition.

Russia-Romania: Bucharest over the weekend said one Russian drone had entered and exited Romanian airspace, marking the second time Russian drones have violated NATO territorial skies in the last week. The Romanian air force monitored the drone but didn’t take it down. The incidents suggest Russia is taunting NATO, testing its defenses, and gauging its willingness to respond to Russian aggression. The incidents point to a growing risk that the Kremlin will go too far and spark a kinetic conflict with NATO that would likely be negative for global financial markets.

Turkey: A judge today postponed a decision on ousting Özgür Özel as chair of the opposition Republican People’s Party over allegations of vote-rigging at a 2023 party congress. Since the effort to force out Özel has been seen as a ploy by President Erdogan to weaken the opposition and stay in power beyond the end of his current term in 2028, the postponement has raised hopes that the judiciary is pushing back against Erdogan’s authoritarian approach to governance. Turkish stock prices have therefore jumped about 4.5% today.

Global Critical Minerals Supply: New reporting by the Financial Times shows that global supplies of germanium, which is critical for high-technology military products such as thermal imaging systems, have practically dried up in response to a recent export ban by China. Although the US convinced China to quickly reverse a separate clampdown on rare earths earlier this year, it appears the restrictions on germanium and related minerals remain in place, driving global prices higher and threatening to disrupt high-tech manufacturing around the world.

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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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