by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion on the deepening relationship between Silicon Valley and Washington by examining recent political and economic developments. Additional key topics to review will include Stephen Miran’s Senate confirmation hearing, China’s new tariffs on EU pork imports, and escalating tensions between the US and Venezuela. We’ll also provide a summary of recent international and domestic economic data releases to give a complete picture of the current financial landscape.

United Chip Policy: The president hosted a dinner for Silicon Valley leaders in the White House Rose Garden on Thursday, where he called on them to increase their spending on AI. He also used the event to announce his intention to impose significant new tariffs on semiconductor chips. In a statement on Thursday, the president said the duties would be “fairly substantial” and that an official announcement with more details would be imminent.

• The dinner served as a clear signal of the government’s strategy to deepen its partnership with the private sector in the race for AI dominance. The United States views China as its principal rival and is relying on the expertise and financial strength of Silicon Valley to ensure that it maintains a technological edge, not just for the economy, but for military applications as well. This collaboration is a key component of the nation’s effort to secure its dominance in the global AI landscape.
• To enhance US capacity, the government has used its trade policy to incentivize foreign investment in American infrastructure. Most recently, the president finalized a deal with Japan through an executive order. This agreement commits Japan to invest $550 billion in exchange for a reduction in US tariffs, including a cut on autos tariffs from 25% to 15%. This deal operates under the condition that a failure by Japan to meet the investment goal would result in the re-imposition of higher tariffs.
• Spurred by this trend, a strategic push for supply chain sovereignty is taking shape through key industry partnerships. A prime example is the newly announced collaboration between OpenAI and US-based Broadcom to co-develop custom AI chips, creating a viable domestic alternative to Nvidia. This effort signals more than just competition; it underscores a fundamental shift in corporate strategy toward bolstering US self-sufficiency by prioritizing and nurturing local suppliers in critical technologies.
• The deepening collaboration between the public and private sectors will likely provide support for equities, particularly for large tech companies, as the government acts to mitigate systemic risks. While this environment should allow growth stocks to maintain their momentum, firms will also face new cost pressures as they adapt to this “new normal.” Consequently, we believe that complementing a growth strategy with a value approach will be beneficial for diversification.

Miran Confirmation Hearing: The White House’s nominee for the Federal Reserve Governor, Stephen Miran, testified before the Senate on Thursday, addressing concerns about the president’s potential influence. He pushed back against claims that the president would sway his policy decisions, but he also affirmed the president’s right to have an opinion. Markets reacted positively to his comments, seeming to grow confident that Miran would be confirmed and be a reliable vote for future rate cuts.

• He faced tough questions on his commitment to Fed independence, particularly in light of his past proposals to overhaul the central bank, which some viewed as undermining to the Fed’s autonomy. He also tackled concerns about a potential conflict of interest from his role as head of the Council of Economic Advisors, pledging to remain independent and to resign from the Council if his Fed term is renewed in January.
• Over the past week, growing expectations for a Federal Reserve rate cut have boosted both equity and bond prices. We anticipate this trend will continue, provided upcoming job market data justifies the need for easier monetary policy. A significant risk, however, would be if the Fed cuts rates despite an acceleration in economic growth. Such a scenario could lead to a pullback in long-duration US Treasurys, but it could be supportive of large cap US equities.

Peace Deal Near? French President Emmanuel Macron stated that the US is preparing post-war security guarantees for Ukraine, in a signal of confidence that the conflict is nearing its endgame. As part of this strategy, the US may cut funding for military training in nations bordering Russia to incentivize greater European defense spending. This prospect of resolution is a positive catalyst for European equities, which would benefit from reduced geopolitical and energy security risks.

ISM Services: The latest PMI data confirms the economy remains in expansion, rising from 50.1 to 52.0 in August. This increase above the 50.0 threshold indicates a return to growth and a gain in momentum from the previous month. However, the expansion is not without its headwinds; a sharp rise in business activity was accompanied by rising input prices and weak hiring. This combination of robust activity and rising costs presents a challenge for firms, leading us to maintain a cautiously optimistic outlook on the market.

EU-China Trade War: Beijing has implemented 62% tariffs on EU pork, citing anti-dumping violations. This move appears to be retaliation for recent EU tariffs on Chinese electric vehicles. While these tariffs will hurt European exporters, who were already seeing declining sales to China, they may ultimately push the EU to prioritize and develop new export markets, such as those in South America.

German Output: German factory orders unexpectedly fell 2.9% in July, sharply contrasting with forecasts of a 0.5% rise. The decline was driven by a lack of large-scale orders, signaling that firms may be postponing major investments. In response to the weak report, there have been calls for action to address structural challenges, including the country’s energy policy, high non-wage labor costs, and burdensome regulatory framework. Nevertheless, optimism about the broader economic outlook remains positive due to expectations for more government stimulus.

Venezuela-US Tensions: In a provocative move, two Venezuelan aircraft flew dangerously close to a US naval ship, according to the Department of Defense. This action is widely perceived as a retaliatory response to US military strikes against drug cartel ships in the Caribbean. Although the probability of a full-scale conflict between the US and Venezuela remains low, this incident marks a notable escalation of risk and regional instability.

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