by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a discussion of how a key Pentagon official is roiling relations between the US and its allies. We next review several other international and US developments with the potential to affect the financial markets today, including President Trump’s latest major tariff announcement (against the European Union and Mexico) and a modestly more optimistic poll of economists by the Wall Street Journal.

United States-Japan-China: A Saturday report said US Undersecretary of Defense for Policy Elbridge Colby has been pressuring Japanese and Australian officials to clarify how they would respond if the US went to war against China over Taiwan. The pressure has irked Tokyo and Canberra because it is being seen as an effort to make them commit to specific future actions to aid the US, even though the US itself officially maintains a policy of “strategic ambiguity” on whether it would help defend Taiwan from Chinese aggression.

• Colby is strongly focused on shifting US defense resources away from Europe and the Middle East and toward the Asia-Pacific region to deter China there. His disruptive pressure on Tokyo and Canberra regarding a Taiwan contingency is only the latest example of his penchant for pushing policies far beyond what the White House wants, sometimes forcing President Trump to override him.
• For example, Colby has also “gone off the reservation” by pushing the US’s allies in Asia to hike their defense spending to the same 5%-of-GDP standard asked of its NATO allies. He has also launched a review of the AUKUS defense deal in which the US and the UK will help Australia acquire nuclear-powered submarines. More recently, he was evidently instrumental in the Defense Department’s temporary cutoff of arms transfers to Ukraine before Trump overruled him last week.

United States-European Union-Mexico: President Trump on Saturday revealed that he plans to impose 30% tariffs on the EU and Mexico starting August 1, separate from his 50% levies on steel and aluminum imports and his 25% tariff on auto imports. EU and Mexican officials said they would continue to negotiate until the deadline in an effort to reach broad trade deals with lower tariffs. Nevertheless, since the EU and Mexico are among the top trading partners for the US, the latest Trump tariff threats could potentially weigh on financial markets on Monday.

Germany: Research from the Bundesbank today shows German GDP would have grown 50% more from 2021 to 2024 if its export industries hadn’t been held back by problems such as labor shortages and bureaucracy. The report says those challenges have kept German exports from rising in line with demand in key markets, leading to a loss of market share. The report may add to the growing fervor for deregulation, industrial policy, and other market-friendly reforms in Germany and the broader EU.

France: In his annual speech to the armed forces on the eve of the Bastille Day national holiday, President Macron said yesterday that his government will hike its defense spending to the equivalent of $74.8 billion by 2027, about double the defense budget when Macron became president in 2017. French defense spending is still only equal to about 2% of the country’s gross domestic product, but Macron argued that with growing threats and an uncertain US commitment, European militaries must become more formidable in their own right.

US Military: Reports say the country’s newest aircraft carrier, which was due to be delivered to the US Navy this month, will now be delayed by two years until March 2027. The delay of the USS John F. Kennedy mostly reflects challenges in perfecting and integrating new technologies, as well as supply-chain and labor-force issues. Given the upcoming retirement of the 50-year-old USS Nimitz, the delayed delivery of the USS John F. Kennedy would leave the US temporarily with just 10 operating carriers even as China continues to expand its carrier fleet.

US Defense Industry: As cheap, expendable drones become essential weapons in modern warfare, Defense Secretary Hegseth last week signed an order designed to rapidly scale up the US military’s procurement of unmanned aerial systems. The memo loosens restrictions on the military’s drone procurement programs and encourages the purchase of commercial drones that can be used for military purposes. Nevertheless, a lack of pure-play drone makers in the public equity markets continues to make it hard for investors to benefit from the move.

US Critical Minerals Industry: Several mining firms are reportedly in talks with defense giant Lockheed Martin to exploit two seabed mine licenses for critical minerals that Lockheed owns in the eastern Pacific Ocean. The firm has owned the licenses since the early 1980s but has never used them. The possible use of the licenses underscores the US rush to develop its own critical-mineral resources and end its dependency on China. It also suggests Lockheed could have an unexpected new revenue stream, but the firm hasn’t said how big that stream could be.

US Economic Growth: In the Wall Street Journal’s latest quarterly poll, economists expect fourth-quarter GDP to be up 1.0% year-over-year, slightly better than the 0.8% gain, which was forecast last quarter but still only half what they expected at the beginning of the year. The economists now put the probability of a US recession in the next year at 33%, down from 45% last quarter but still higher than the 22% chance seen in January. In perhaps the best aspect of the report, they see GDP growth rebounding to 1.9% in 2026.

View PDF