by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with new data that is showing a resurgence in US economic activity this month. Next, we delve into several pivotal global developments including the EU’s push to create a digital euro, the growing trend of tariff evasion through transshipment, and the mounting pressure on postal services to implement new trade rules. We will conclude with an overview of additional global and domestic factors shaping the financial landscape.

Stronger Growth: On Thursday, the S&P Global PMI data revealed that US economic activity accelerated in August, exceeding market forecasts and fueling optimism for a strong third quarter. The composite PMI, a key indicator of business sentiment, rose to 55.4 from July’s reading of 55.1. A value above 50 signifies economic expansion, while a reading below 50 indicates contraction. The growth is likely to add to optimism that the economy is in good shape despite tariffs.

• The most notable surprise came from the manufacturing sector, where the PMI surged to 53.3 from 49.8, far surpassing expectations of 49.5. Similarly, the services PMI also beat forecasts, moderating slightly to 55.2 from 55.7 but still well above the anticipated 54.2.
• Still, there are reasons to be cautious about whether this will last. Much of the recent improvement was driven by companies increasing their inventories. A similar trend was seen in other areas, such as the UK, eurozone, and India, which also showed an increase in economic activity.
• Further compounding economic concerns is the potential for this new inventory buildup to exacerbate price pressures. Evidence from the latest PMI data shows that firms are already raising selling prices in response to increased costs — a trend publicly corroborated by Walmart’s announcement of impending price hikes on select products.
• While the resurgence in economic activity is positive, our focus now shifts to the consumer. We believe the key factor for continued corporate success will be their ability to protect margins, whether by passing higher costs to consumers or securing discounts from foreign suppliers. However, we will monitor closely for any signs of consumer resistance. Given the elevated risk level, we maintain our stance that investors should exercise prudence.

EU Digital Stablecoin: The European Union is accelerating its development of a digital euro, driven by a desire to maintain monetary sovereignty and compete with the United States’ progress on stablecoins. The US has recently passed the Genius Act, which facilitates the creation of US dollar-denominated stablecoins. This legislation, along with the growing dominance of private, US-backed digital currencies, has prompted the EU to expedite its own digital currency project.

• A key technical distinction between the projects lies in their underlying infrastructure. While the digital euro proposal favors public blockchain technology (such as Ethereum or Solana), which emphasizes transparency and accessibility, the anticipated US approach is expected to utilize a private, permissioned ledger.
• The move to develop a digital euro as a rival to potential US initiatives exemplifies how digital currency is becoming a new arena for global economic influence. A key economic incentive for these stablecoins is their potential to create demand for short-term government bonds. This could, in turn, facilitate the financing of mounting public debt.
• We will closely monitor the development of stablecoins, as they are becoming an integral part of the financial system. Their growth necessitates adaptation and has significant implications for both monetary and fiscal policy. This area demands attention, as it presents opportunities for new rewards but also carries the potential for unforeseen risks.

German Economy: The German economy contracted by 0.3% in the second quarter, a sharper decline than the initially reported 0.1%. This downward revision follows a strong first quarter, where robust export growth had pushed expansion to 0.3%, suggesting the recent contraction may represent a partial normalization. Nevertheless, persistent weaknesses in manufacturing and investment spending remain a concern, which will likely increase pressure on the government to introduce further stimulus measures.

H20 Chips: Nvidia, the world’s largest chipmaker, has reportedly paused production of its H20 AI chip. This move follows increased scrutiny from Chinese officials on companies buying the chips, sparking concerns about weak demand. Nvidia’s performance has been a key indicator for the broader AI boom, and its consistent ability to beat expectations has driven market sentiment. As the company prepares to report earnings next Wednesday, any perceived weakness could fuel market uncertainty. Despite this, the broader tech sector still appears to have momentum.

US Transshipments: In a bid to circumvent China’s 10% levy on US goods, American metal dealers are reportedly rerouting China-bound shipments through intermediaries like Vietnam, Mexico, and Canada. This strategy has emerged as a direct response to the tariffs, leading to a notable decline in the volume of metal exports shipped directly from the United States to China. While the full extent of this activity remains unclear, it highlights an important and evolving tactic in the ongoing trade dispute.

Global Postal Service: Postal services worldwide are halting certain international shipments to comply with a deadline for ending a key tax exemption. This follows the president’s elimination of the de minimis rule, which previously allowed low-value packages to enter the country without import tariffs. While the long-term impact is still unfolding, this change is likely to cause short-term complications and delivery delays as foreign shippers scramble to adapt to the new compliance requirements.
South-North Korea: South Korean President Lee Jae-myung is set to meet with President Trump to discuss a recent trade deal and security agreement. During the meeting, President Lee plans to urge President Trump to reopen diplomatic dialogue with North Korea. This push for renewed talks comes amidst ongoing efforts to address security concerns on the Korean Peninsula.

Chipmakers Safe: The Trump administration has decided against requiring companies that receive CHIPS Act funding to surrender equity in exchange. This decision follows the separate case of the administration offering direct aid to Intel in return for a stake. By removing this requirement, the administration is reducing a key deterrent for foreign companies considering major investments in the US, thereby strengthening the program’s economic impact.

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