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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