by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will begin by exploring the market’s optimism for a rate cut at the upcoming Fed meeting. We will then analyze other key stories shaping the market, including the intensifying AI competition between the US and China, diplomatic efforts to bring Iran to the negotiating table on its nuclear program, and the factors keeping crude prices low. We will conclude with an assessment of other major international and domestic developments influencing financial markets.

 September Rate Cut: The latest CPI report aligned with expectations, prompting investors to price in another rate cut at the Fed’s upcoming meeting. The data showed that overall inflation rose 2.7% year-over-year, while core inflation, which excludes volatile food and energy prices, climbed from 2.9% to 3.1%. The increase has largely eased concerns about tariff-driven inflation, giving the Fed more flexibility to shift focus from its price stability mandate and toward maximizing employment.

• The most notable takeaway from the CPI report was that services inflation was the primary driver of price increases in July. Airline fares increased by the most in three years, while medical care and recreational services also contributed to the uptick. Meanwhile, commodity prices, which are more sensitive to tariffs, moderated, largely due to declining gasoline prices.
• Even though the increase in core CPI isn’t ideal, the market seems to believe that Federal Reserve officials will view the impact of tariffs as transitory and instead focus on the labor market. The Fed appears to be split into three groups: some officials want to cut rates, others favor holding them steady, and a final group is still undecided.
• The upcoming payroll report will likely be a decisive factor in the Federal Reserve’s decision on whether to cut rates and by how much. A strong report will probably result in a minimal rate cut, or possibly none at all. Conversely, another weak report would likely prompt the Fed to implement a 50-basis-point cut, compensating for its earlier inaction.
• The market’s attention appears to be divided between monetary policy and trade policy. Investors are seeking clarity on trade deals while also hoping for lower interest rates to improve lending conditions. A rate cut would likely support equity and bond prices but would also put downward pressure on the US dollar.

 China’s AI Push: The country is rapidly expanding its AI capabilities in a bid to rival the US in the field. Recently, China’s open-source AI advancements have drawn significant attention from American tech firms, which have predominantly kept their models proprietary. US observers worry that broader access to these open-source models could accelerate their adoption, potentially establishing them as the global standard.

• These concerns follow the release of several AI models from Chinese companies this year, including DeepSeek’s R1 Model. Other notable releases making an impact in the field are Alibaba’s Qwen, as well as models from Moonshot, Z.ai, and MiniMax.
• Competition from China is a significant risk to the AI sector’s growth, and US companies, particularly those in the Magnificent 7, are facing scrutiny over their capital expenditures. There is some worry that long-term demand may not be sufficient to justify these large investments.
• The US’s reliance on foreign revenue remains a significant concern, particularly since China’s continued ascent could threaten American companies’ earnings. While US tech firms currently maintain some momentum, the stretched valuations of major players and mega cap tech stock’s overwhelming dominance in the S&P 500 suggest that exploring other sectors may also add some portfolio value.

 EU Borrowing: European leaders are debating the structure of joint debt issuance and how to mitigate fiscal spillover risks among member states. One proposed solution would link debt obligations to each country’s spending plans and would necessitate a repayment of borrowed funds if nations exceed their budget allocations. The framework also includes provisions for emergency crisis loans, which would require unanimous approval from all member states.

• A move toward fiscal union within the EU could increase borrowing capacity and lower the cost of borrowing for member states. This, in turn, may help boost asset prices across the region.
• While reforms are expected to face opposition from countries like the Netherlands and Germany, we anticipate that potential progress on EU reforms will be a key driver of sustained optimism for the region.

 Panama Canal: The Panama Canal Authority is preparing to launch a tender for the operation of ports on both the Atlantic and Pacific coasts. This move would allow the Authority to retain ownership of the ports while outsourcing their management to a third party. The decision to maintain control over both ports comes amid rising US-China tensions over the strategic waterway and follows US concerns about growing Chinese influence in the canal’s operations.

• A surge in regional trade, driven by recent US tariffs, has heightened the importance of the ports, particularly for the US, which aims to closely monitor trade flows.
• A potential takeover of the ports illustrates how nations may attempt to remain neutral while navigating the growing rivalry between the US and China.

 Iran Talks: Germany, the UK, and France have issued a joint statement warning they are prepared to reimpose sanctions on Iran unless it resumes nuclear negotiations with the US. The European powers have set an August deadline for Tehran to return to talks or face renewed sanctions. Iran has countered by threatening to withdraw from the nuclear agreement entirely if punitive measures are reinstated.

 Crude Price Weakness: A supply surge and weak demand are expected to pressure oil prices in the coming months. According to the IEA, global inventories are projected to increase by 2.96 million barrels per day, driven by rising production (led by Saudi Arabia) and an economic slowdown concentrated in Asia. However, the agency cautioned that the outlook remains uncertain, particularly if sanctions on Iran and Russia intensify.

 Trump-EU: President Trump is set to speak with European leaders ahead of his planned talks with Russian President Putin later this week. The discussions will focus on a potential land swap deal, which may require Ukraine to cede some territory to Russia in exchange for a peace agreement. Both sides aim to negotiate terms that ensure a fair and lasting resolution.

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