by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a couple of notes on Japanese monetary policy and the Japanese stock market. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the European Union will impose steep tariffs on imported aluminum in response to the impending US tariffs, as well as a couple of notes on monetary and regulatory policy at the Federal Reserve.

Japan Monetary Policy: The Bank of Japan today starts its latest policy meeting, with its decision due to be released tomorrow. Even though strong Japanese wage growth and continuing price pressures would seem to argue for higher interest rates, uncertainty regarding US trade policy is expected to convince the policymakers to hold their benchmark rate unchanged at 0.50%, after they hiked it by 25 basis points at their last meeting in January.

Japan Stock Market: According to a report in the Financial Times yesterday, Warren Buffett’s Berkshire Hathaway has increased its shareholdings in five Japanese trading houses after negotiating to lift a 10% limit on Berkshire’s investments in the companies. Buffett’s willingness to hike his exposure to the firms will likely be taken as a vote of confidence in them. It will also probably be seen as a sign that overall Japanese stock valuations remain attractive, at least in the eyes of one of the world’s most admired value investors.

European Union: The European Commission today is expected to announce a probe into the EU aluminum market and whether third countries are dumping the metal in Europe to get around the Trump administration’s high tariffs. The investigation suggests that the EU is prepping its own tariffs to protect domestic producers. If so, the action would help validate fears that the US-EU trade war could widen to affect other economies and roil global economic growth.

United Kingdom: Struggling to contain the UK’s growing debt, the Labour Party government of Prime Minister Starmer today will propose a series of welfare reforms aimed at cutting about one million people from the health and disability programs to save some 5 billion GBP ($6.5 billion) per year. The proposed reforms would require a vote of parliament, but many junior Labour lawmakers are threatening to oppose them. If they do, it will mark a major rebellion against the center-left party and potentially limit any further efforts at fiscal consolidation.

Russia-Ukraine War: According to the Wall Street Journal today, Ukraine in December launched what appears to be the world’s first large-scale, drone-only military attack. The attack involved dozens of coordinated land robots and aerial drones to successfully destroy a Russian position in northern Ukraine. The attack illustrates the rapid development of robot warfare in the Russia-Ukraine war.

• The rapid development of autonomous vehicles in the war is likely to have massive implications not only for future military force structure, strategy, and tactics, but also for military budgets, industrial structure, economic growth, and even national educational systems.
• If a peace agreement is reached, the war could well leave both Russia and Ukraine as leaders in the new military capability. For example, when the Pentagon’s “Artemis” program awarded contracts on Friday to four companies to build prototypes for the next generation of long-range aerial attack drones, two of the contracts went to US firms and the other two went to Ukrainian companies.

Israel-Hamas War: After the Hamas militants governing the Gaza Strip halted the release of more Israeli hostages and rejected US pressure to extend the recent two-month ceasefire, Tel Aviv today launched a large campaign of airstrikes across Gaza. The airstrikes have reportedly killed hundreds of Gazans and threaten to rekindle the full-scale war that Israel launched against Hamas following its attack on Israel in October 2023. If the war resumes, it would threaten to again destabilize the energy-rich Middle East after a short period of calm.

United States-Canada: In a little-noticed provision in one of President Trump’s recent orders, about one million Canadian seniors or “snowbirds” who spend their winters in the US will be required to first register with the US government. The rule will apply to all Canadians aged 14 years and older who plan to stay in the US for 30 days or longer. Economists estimate that Canadian snowbirds spend billions of dollars in the US each year, so if the new regulation deters many of them, it could weigh on popular snowbird destinations, such as Arizona.

US Monetary Policy: Like the Bank of Japan, the Fed starts its latest policy meeting today, with its decision due to be released tomorrow at 2:00 PM ET. The policymakers are widely expected to hold their benchmark fed funds interest rate unchanged at 4.25% to 4.50%. Futures trading suggests that investors are now expecting two or three additional rate cuts of 25 basis points by the end of this year, but the policymakers may hold their fire until consumer price inflation cools further, economic growth slows sharply, or both.

US Financial Regulation: President Trump yesterday nominated Michelle Bowman, a member of the Fed’s governing board, to be the new vice chairman for supervision. If confirmed by Congress, Bowman would become one of the federal government’s key bank regulators, along with the heads of the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Indeed, her confirmation by Congress appears highly likely.

• Bowman is seen as friendly to banking interests and supports lighter bank regulation.
• Therefore, her nomination has been heralded by both the American Bankers Association and the Independent Community Bankers of America.

US Stock Market: According to Bank of America’s closely watched survey of investment-fund managers, investors have reduced their exposure to US stocks this month by the largest amount ever. The survey showed that the average allocation to US stocks plunged by 40 percentage points, from 17% overweight in February to 23% underweight in March. The big drop reportedly reflects investor concerns about factors such as the Trump administration’s global trade war, the potential for US stagflation, and changing domestic economic policies.

• In our 2025 Economic and Financial Market Outlook, we projected that the S&P 500 price index would rise about 10.5% for the date of publication to end the year at approximately 6,735. We flagged the possibility of even stronger returns, based on factors such as investors’ large holdings of money market funds “on the sidelines,” but we also noted the potential for increased volatility.
• This month’s correction in the US stock market is consistent with the potential volatility that we saw, so it has not yet prompted us to adjust our projection. However, we continue to monitor important evolving issues, such as the administration’s unexpectedly aggressive moves in foreign and domestic policy. If there are any major adjustments to our forecasts, they would likely be published in a mid-year update to our Outlook.

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