by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with key takeaways from Treasury Secretary Scott Bessent’s remarks at the Economic Club of New York. We then examine rising tensions between the US and its NATO allies and the implications for its strategic positioning against China. Next, we briefly cover the latest Fed stress test results, deepening US-Taiwan ties, and another strong earnings report from a major chipmaker. As always, we include a review of recent domestic and international economic data.

Bessent Speaks: During a speech to the Economic Club of New York, US Treasury Secretary Bessent offered additional insight into how the Trump administration intends to better align economic strategy with national security objectives. His remarks shed light on the motivations behind several recent policy initiatives and provide a glimpse of what may lie ahead. Overall, his comments underscore the administration’s broader goal of reshaping the economy to feature a greater role for government involvement.

• Bessent outlined five principles that define the White House’s economic agenda: building national capacity by strengthening US supply‑chain resilience, promoting trade reciprocity by ensuring that other countries treat US firms fairly, maintaining economic leadership by helping to shape global trade rules, sustaining financial leadership by protecting the US dollar’s reserve‑currency status, and fostering household prosperity by encouraging broader participation in the ongoing economic build‑out.
• His comments suggest a significant departure from the traditional US model, under which the US positioned itself as the hub of global trade and the primary provider of international security to reinforce its central role. Instead, the administration appears to be moving toward a more state‑centric, inward‑looking framework that prioritizes resilience over pure efficiency.
• While he emphasized the need for the US to become more self‑reliant, he also made clear that this does not imply a total retreat from global engagement. He noted that it would be unrealistic and unnecessary for the US to do everything from start to finish. However, he also indicated that certain strategic industries — such as critical minerals, pharmaceuticals, semiconductors, artificial intelligence, and quantum computing — will need a strong production base at home due to their strategic importance.
• As we have noted in previous reports, the United States appears to be shifting away from globalization while adopting a more interventionist economic posture. This transition is likely to reduce allocative efficiency and increase inflation volatility. In such an environment, commodities tend to outperform, as heightened competition for resources and supply chain frictions place upward pressure on prices and incentivize inventory accumulation.

NATO Fracturing: As the US-China rivalry intensifies, Washington is showing increasing signs of distrust toward its traditional allies. On Wednesday, President Trump criticized NATO members for what he described as a delayed response in supporting US efforts during the Iran conflict, speaking alongside NATO Secretary-General Mark Rutte. The remarks come amid persistently elevated geopolitical tensions, as China continues to expand its espionage activities and military preparedness in pursuit of its challenge to US global leadership.

• President Trump’s criticism comes ahead of next month’s NATO summit, where he has signaled a clear reluctance to attend, citing the alliance’s failure to provide meaningful support during the Iran war and its failure to adequately increase its defense spending. White House officials, such as Peter Hegseth, attending the summit are expected to use the platform to call out specific member states that have fallen short of their commitments as the administration looks to hold allies more accountable.
• As US-NATO tensions simmer, China is leveraging the distraction to fast-track its AI and defense modernization. Alibaba faces allegations from Anthropic of illicit model scraping, a cost-cutting shortcut to AI advancement. At the same time, the Chinese military has built mock US destroyers to test its anti-ship technology. Taken together, these moves reveal a deepening sense of urgency in Beijing as it races to erode America’s military edge.
• The rising competition with China will make it difficult for the US to completely abandon NATO. Even as relations between the US and its European allies grow strained, Washington will likely need to keep Europe within its sphere of influence in order to sustain its technological and military edge over Beijing. That said, the US may be able to leverage these very tensions to extract further concessions. We expect Europe to increase defense spending, not only on its own defense firms, but on US companies as well.

Fed Stress Tests: The Federal Reserve gave passing grades to the largest US banks following its annual stress test of their crisis readiness. According to the report, the banks would collectively lose $708 billion in a severe economic downturn yet would stay above regulatory capital requirements. While the results offer some reassurance that the banking system remains stable, they come at a time when capital rules have been loosened making the findings somewhat less meaningful.

Taiwan Flights: Taiwanese carrier EVA Air will begin direct flights to Washington, DC on Friday. The route is expected to facilitate greater access for Taiwanese officials to US policymakers, a development likely to draw scrutiny from Beijing. The move echoes past episodes of heightened tension, including former House Speaker Nancy Pelosi’s 2022 visit to Taiwan, which led to increased Chinese military intimidation of the sovereign island. As engagement between Washington and Taipei expands, friction with China is likely to intensify.

Chip Rally Lives On! Micron Technology exceeded sales expectations, helping to drive a broader rally in semiconductor stocks. The company expects fourth-quarter revenue to be above $50 billion, well ahead of the $43.2 billion consensus estimate. It also highlighted 16 strategic partnerships secured over the past three years, reinforcing visibility into sustained demand. The market’s reaction underscores the extent to which AI-linked equities are increasingly reliant on continued earnings strength to justify elevated valuations.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment focuses primarily on Venezuela’s efforts to reassert itself on the global stage following the removal of Nicolás Maduro. We then examine rising concerns around AI and monetary policy as investors reassess valuations. Finally, we briefly review the latest developments in US-Iran talks, a major chipmaker’s equity issuance, and the evolving political landscape in US cities. As usual, we include a summary of recent domestic and global economic data.

Venezuela Comeback: Venezuela is seeking to shed its pariah status after a recent thaw in relations with the United States. In a bid to repair its fractured finances, the government has announced plans to restructure its sovereign debt, marking its first major step toward re-entry into international capital markets after nearly a decade of isolation. The rapprochement highlights the economic dividends of stronger US ties in South America and offers a potential roadmap for Cuba, if it follows suit.

• The country is expected to unveil over $240 billion in bond sales, significantly surpassing initial estimates of $150 billion to $200 billion. Official plans to place the government on solid fiscal footing are slated for release by early July, with its macroeconomic framework due to be published in the coming days. The economy is currently estimated at roughly $100 billion, while its debt-to-GDP ratio remains above 200%.
• While Venezuela’s improving fiscal outlook is a welcome development, the political landscape merits equally close attention. Although no election date has yet been set, interim leader Delcy Rodríguez appears to be already mobilizing support for her presidential bid, with María Corina Machado expected to mount a challenge. Recent polling underscores the scale of that challenge. Machado leads by a staggering margin, with 82.6% of voters backing her compared to just 4.5% for Rodríguez.
• Venezuela’s reemergence onto the global stage could offer a roadmap for Cuba’s own potential return from the diplomatic and economic isolation it has endured since 1962. Notably, Havana has already pushed through a series of free-market reforms, a shift accelerated by President Trump’s decision to tighten the embargo and cut off energy imports as part of his “maximum pressure” campaign aimed at forcing the regime to overhaul its economic and political systems.
• We see the United States actively working to draw Latin America back into its strategic orbit, a dynamic we have described as a modern Monroe Doctrine, or “Donroe Doctrine.” As regional governments deepen ties with Washington, they are likely to benefit from preferential access to trade, capital, and policy support. Coupled with prospective structural reforms, this shift supports increasingly attractive opportunities across South America.

AI Angst: Major tech stocks sold off on Tuesday amid growing concerns that persistently high interest rates could derail the artificial intelligence infrastructure build-out. The sell-off was triggered by renewed anxiety over Federal Reserve policy, following the central bank’s latest Summary of Economic Projections, which showed that an overwhelming majority of officials favor raising rates later this year to curb inflation. The market’s reaction underscores a broader unease about how restrictive monetary policy will impact tech valuations moving forward.

• The market response appears to be a reaction to mounting signs that the labor market is regaining momentum. ADP’s four-week moving average of private payrolls shows that the economy has added an average of 30,750 jobs per week. While this pickup is not particularly unusual, it does suggest that the labor market is less strained than it was a year ago, thereby increasing the likelihood that the Federal Reserve may be more inclined to prioritize price stability over maximum employment.
• Interest rates have become an increasingly critical factor in the markets, particularly as more hyperscalers turn to debt financing to fund their AI infrastructure build-outs. Earlier this week, SpaceX announced a $25 billion bond issuance, less than two weeks after its public debut, in a move that underscores just how capital-intensive the AI race has become. The development raises questions about whether these companies may take longer to deliver returns to shareholders as their debt burdens grow.
• Despite Tuesday’s sell-off, we see little evidence that the Fed has committed to a preset rate path. As Chair Kevin Warsh underscored in last week’s press conference, the committee intends to prioritize underlying trends over any single data release. In our view, this suggests investors may be over‑interpreting the latest labor market print and extrapolating too much about the policy outlook from one month of data. As a result, we think the event may be short-lived.

US-Iran: Concerns are mounting over the fate of the peace deal amid confusion surrounding the conditions under which Iran would gain access to frozen funds. According to President Trump, Iran would be permitted to use the money solely for food and medical supplies. Iran must also allow the International Atomic Energy Agency (IAEA) to inspect its nuclear sites. Tehran, however, has rejected both claims as false. While we expect tensions to remain calm, uncertainty about talks could push up energy prices.

AI Spending: SK Hynix is the latest tech name to tap public markets for expansion, targeting a $29.4 billion US listing. The deal would be one of history’s largest, following recent equity raises by SpaceX and Alphabet, plus upcoming IPOs from Anthropic and OpenAI to fuel AI spending. The shift toward equity over debt suggests companies may see stock sales as cheaper financing, possibly because they view their own shares as overvalued.

Democratic Socialism? Left-wing populism appears to be gaining momentum in US cities. On Tuesday, three democratic socialist candidates in New York secured their primary victories following endorsements from New York City Mayor Zohran Mamdani. This comes just a week after a democratic socialist mayoral candidate won the party’s primary in Washington, DC. While these wins may ultimately make it easier for conservatives to compete in deep-blue urban areas, they also underscore the nation’s deepening political polarization.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on this week’s rout among technology stocks and the broader equity markets. We next review several other international and US developments that could affect the financial markets today, including a major US concession to Iran on selling its oil in dollars and more evidence that investors are trying to pull funds from the US private-credit market as they worry increasingly about defaults.

Global Stock Markets: Investors are selling stocks aggressively so far this morning, pushing prices lower and especially punishing large technology shares. The main South Korean stock price index, which is dominated by Samsung and SK Hynix, fell approximately 10%, but European tech shares fell sharply as well. In the US, SpaceX and other tech shares have driven the NASDAQ index down about 2.5%. The selloff appears to have stemmed mostly from concern about rising interest rates around the world and rich tech valuations.

United States-Israel-Iran: The US Treasury Department yesterday said it will temporarily waive longstanding sanctions that had prevented Iran from selling oil in dollars. The move will allow Iran to sell oil at market prices, including to US buyers, and earn potentially billions of dollars. Vice President Vance later said the waiver is to reward Iran for agreeing to allow nuclear inspectors from the United Nations to once again visit the country’s facilities.

• Investors initially interpreted the US move as a sign of progress toward a lasting peace deal. Global oil prices therefore initially dipped on the news, but they have rebounded so far this morning.
• We would also note that the US move, if extended, could help reverse the widely held narrative that the US dollar is losing its status as the world’s reserve currency. With the removal of sanctions, for example, Iran would likely prefer to sell its oil for dollars at market prices rather than for Chinese renminbi at distressed prices.

Eurozone: S&P Global said its composite purchasing managers’ index for June rose to 49.5 from 48.5. Like most major PMIs, this one is designed so that readings above 50.0 point to expansion, while readings below that level point to contraction. Importantly, the subindex on prices paid fell to its lowest level since the start of the Iran war, suggesting price pressures from the conflict are dissipating. Nevertheless, the data suggests that the eurozone economy will likely be flat or even contract a bit in the second quarter.

European Defense Industry: Franco-German tank manufacturer KNDS has struck a deal allowing the German government to buy up to 40% of the company, setting the stage for an initial public offering in the coming weeks or months. The French government has also agreed to cut its stake to 40%, with the remaining 20% to be floated to the public. The move will give investors yet another way to capitalize on Europe’s booming defense sector as the threat from Russia and US withdrawal forces European countries to boost their military budgets.

Germany: Chancellor Merz, a former chair of US asset manager BlackRock in Germany, endorsed a proposal today for his country to adopt a Swedish-style public pension fund that would invest a share of workers’ wages in capital markets. Under the proposal, a compulsory individual contribution of 2.0% of salaries would “be managed centrally and invested in capital markets” to help pay for rising benefits. The proposal could drive increased business for asset managers and potentially reduce fiscal stressors as the population ages.

United Kingdom: Newly elected member of parliament Andy Burnham, who is widely expected to become prime minister next month, is reportedly demanding that incumbent Prime Minister Starmer further delay his controversial 10-year military investment plan. Starmer’s government has struggled to identify credible funding for the defense buildup, but Burnham could cut it back to help make fiscal space for domestic civilian programs.

• The dispute illustrates how funding pressures are becoming a headwind for some of Europe’s defense rebuilding programs.
• In turn, that has prompted a pullback in pricing for some European defense stocks, although we remain bullish on the sector over the longer term.

US Private Credit Industry: Private investment giant Apollo yesterday said investors in the second quarter requested to withdraw 17% of the value of its flagship private-credit fund for retail investors, up from withdrawal requests of 11% in the first quarter. Per the fund’s rules, Apollo only allowed redemptions of about 5% of the fund in the latest quarter, but the requested redemptions were still consistent with elevated concerns about rising debt defaults in the sector.

US Quantum Computing Industry: President Trump signed two executive orders yesterday aimed at speeding the development of advanced quantum computers and mitigating the security threats they present. The effort to boost the industry with the new orders is consistent with our discussion of quantum computing in our Mid-Year Geopolitical Outlook report, which we published yesterday.

• As noted there, quantum computing is rapidly evolving from a speculative niche to a strategically important sector.
• That, coupled with government support, could eventually draw capital now focused on artificial intelligence firms, leading to a rotation in favor of quantum computing.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a recap of key events over the weekend in the US-Israeli war against Iran. We next review several other international and US developments that could affect the financial markets today, including the increasing risk of a trade war between China and the European Union and news of yet another new, innovative deal to provide energy to a data center focused on artificial intelligence.

United States-Israel-Iran: While the 60-day ceasefire signed last week between the US and Iran continues to hold, fighting between Israeli forces and Hezbollah militants in Lebanon over the weekend appears to have left it hanging by a thread. In response to the Israeli attacks and the US’s decision to threaten Iran anew over its support for Hezbollah, the Iranians say they have again shut the Strait of Hormuz, although it isn’t clear that they have really done so. In any case, Vice President Vance and Iranian leaders have now begun direct negotiations in Switzerland.

• Reports this morning say that the Switzerland talks have yielded a mechanism to end the Israeli-Hezbollah fighting, but it is still too early to know if it will be effective. If not, the ceasefire will likely be quite fragile, as both Israel and Hezbollah have reasons to scuttle it and keep the US-Iran fight going.
• In any case, the Strait of Hormuz remains effectively closed. For example, the latest satellite imagery shows more than 400 large tanker-sized vessels waiting to enter the strait from the East, as shippers remain reluctant to send their vessels through the waterway until the US-Iran ceasefire is more certain. The continued effective closure of the strait will likely keep alive the possibility of further price spikes for energy and other commodities.
• Under the ceasefire agreement, the direct talks in Switzerland are supposed to center on Iran’s nuclear program. The 60 days allotted are already exceedingly short for a deal as technically complicated as a nuclear one, but with every day that the talks are focused on Israeli-Hezbollah fighting in Lebanon, there will be even less time to discuss Iran’s nuclear program.

China-Japan: New customs data shows China continues to limit or ban exports of tungsten and rare earth minerals to Japan, months after it began to punish the country for Prime Minister Takaichi’s statement that a Chinese effort to take over Taiwan would require Japan to respond. The dispute has largely fallen out of the news, but the latest Chinese customs data shows that Japan-bound exports of some key types of tungsten, as well as rare earths dysprosium and terbium, stayed at zero in May, and some other rare-earth categories were also at unusually low levels.

• The selective Chinese embargo has forced some Japanese industrial firms to find costlier alternative supplies, but it hasn’t necessarily caused production of any key items to cease.
• All the same, the Chinese action illustrates its newfound economic leverage when it comes to key supplies of minerals and other industrial inputs. It also shows China’s recent willingness to use that leverage to punish adversaries — a willingness that helps explain why the US administration is working to establish a kind of détente with China.

Japan: Defense Minister Koizumi has announced that the Japanese armed forces recruited over 11,000 personnel in fiscal 2025, up 14.9% from the previous year. Officer candidate recruitment rose by roughly 35%. The results reflect efforts to improve pay, working conditions, and career opportunities to offset the challenges of Japan’s shrinking population. Still, as in other countries, the shrinking pool of potential recruits will probably further incentivize the use of automation in the military, which in turn should boost Japan’s prospects as a major arms exporter.

China-Philippines: In an interview with the Financial Times, the Philippine defense minister said his country is increasingly concerned that China will try to take permanent control over the disputed Scarborough Shoal in the South China Sea, based on recent naval maneuvers. The recent aggressive moves by China have raised concerns that the US’s effort to ease bilateral frictions may have emboldened Beijing to take even more aggressive territorial measures against its Indo-Pacific neighbors, raising the risk of miscalculation that leads to a security crisis.

European Union-China: At a summit on Friday, national leaders from the EU directed the European Commission to prepare a revised strategy to protect the bloc’s producers from China’s predatory competition. Importantly, even German Chancellor Merz delivered a blistering criticism of China for flooding foreign markets through the use of “high subsidies” and an artificially weak currency. The tough talk suggests an EU-China trade war could evolve in the coming months, threatening companies on both sides.

China: New reports show that China’s rapid shift to electric vehicles has created a fiscal problem for local governments, as heavier electric cars boost the cost of road maintenance and repair. Now that EVs make up more than 60% of the nation’s automobiles, local governments are also facing a drop in the gas-tax revenues that once covered more than 80% of road upkeep costs. The report suggests that China’s enormous problem with local-government debt could continue to worsen and create financial risks for the broader economy.

United Kingdom: Ballot results on Friday showed Manchester Mayor Andy Burnham decisively won a parliamentary by-election that would return him to the national legislature and allow him to challenge the unpopular Keir Starmer for prime minister and head of the Labour Party. Saddled with Labour’s dismal polling and seeing the writing on the wall, Starmer today announced that he will immediately resign as party leader but stay on as prime minister until Burnham secures the post in a leadership process that could wrap up as early as mid-July.

• Importantly, Burnham has marketed himself as being to the left of Starmer. In the past, he has talked up the idea of “business-friendly socialism” and insisted on the need to decentralize power from London, have greater public control over utilities, and re-industrialize left-behind regions of the country.
• Even though investors are wary that Burnham might increase borrowing and raise taxes to boost social spending and military outlays, British markets today are celebrating the likely end of the recent political instability. British stocks and the pound have appreciated modestly so far today. UK government bond prices have also risen a bit, pushing yields modestly downward.

Indonesia: Index provider MSCI has announced that it is increasingly concerned about transparency, operational procedures, and other issues in the Indonesian stock market, raising the risk that it will soon downgrade the country from “emerging” to “frontier” market as early as next week. If MSCI does downgrade the country, investors would likely pull billions of dollars out of the market, driving down stock prices and potentially causing broader economic problems.

Colombia: In the second and final round of presidential elections yesterday, right-wing populist Abelardo de la Espriella appears to have won with about 49.7% of the vote. If confirmed, it would mean that Colombia will swing back toward its more traditional conservative policies after four years of leftist rule under outgoing President Gustavo Petro. De la Espriella’s pro-business agenda includes a crackdown on crime, an opening up of the countryside to fracking for oil and gas, an easing of restrictions on mining, and improvement in relations with the US.

US Energy and Artificial Intelligence Industries: In the latest example of how the AI data center boom is prompting increased energy demand, Chevron and a partner have struck a deal to provide 2.7 gigawatts of electricity to a new Microsoft data center in the Permian Basin. The electricity will be generated on site by turbines fueled with natural gas from Chevron’s wells in the region. The deal shows how data-center developers are increasingly focused on having assured local power generation.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will focus primarily on the Federal Reserve meeting and the outlook for monetary policy under new leadership. We begin by examining potential shifts in the Fed’s operating framework, including a possible pullback in forward guidance. We then turn to the policy decision itself and its implications for rates. Finally, we briefly assess the agreement between the United States and Iran to reopen the strait. As usual, we include a review of recent domestic and global economic data.

First Meeting: Fed Chair Kevin Warsh held the first FOMC meeting of his term and signaled a potential shift in the Federal Reserve’s relationship with financial markets. During his press conference, Warsh indicated that he plans to establish a task force to review several aspects of the Fed’s operations. He also suggested a move away from forward guidance, marking a significant departure from recent communication strategy. If implemented, these changes could materially alter how markets interpret and respond to Fed policy decisions.

• While Warsh has announced his intention to implement changes, they are not expected to occur overnight. The new Fed chair has stated that he will establish a task force to examine the central bank’s communications, balance sheet management, inflation framework, data sources and uses, as well as productivity and its impact on the economy. Although he has not yet named the individuals who will lead these efforts, he expects the work to be completed by the end of the year.
• Chair Warsh has made it clear that he wants to reduce forward guidance to limit the central bank’s market footprint. While he didn’t outline specific changes, he consistently refused to comment on the Fed’s future policy path during the press conference. Furthermore, the official statement was drastically shortened, removing individual voters’ names. He was also non-committal about the future of the Summary of Economic Projections (SEP) as well as whether he would maintain a press conference after every meeting.
• Given his past statements, Warsh appears to be aiming to return the Federal Reserve to its pre-financial crisis roots. This would likely entail less communication about policy decisions, a reduced influence over the bond market, and greater flexibility in interpreting economic data; specifically, becoming less reactive to any single report. During the press conference, Warsh mentioned that he envisions the bank focusing more on underlying trends.

• While the push for change is notable, its durability is uncertain — particularly in a rising inflation environment. In 2022, both the ECB and the Federal Reserve attempted to step back from forward guidance after upside inflation surprises allowed for larger-than-expected rate hikes. However, both central banks ultimately retained the tool to manage market volatility and mitigate recession fears.
• As he settles into leading the Fed, the more important test will be how Warsh responds to market reactions, particularly if investors perceive a decline in transparency. The 10-year Treasury yield has been especially sensitive to shifts in expectations around Fed policy, underscoring the importance of clear communication. As a result, while we expect some adjustments to operations and forward guidance, these changes are unlikely to be as aggressive as Warsh may prefer at this stage.

Rate Decision: The latest two-day FOMC meeting concluded with a notable hawkish shift. Although the Federal Reserve voted to hold rates steady at 3.5%–3.75%, the accompanying statement and forward guidance revealed growing policymaker unease. Officials are increasingly concerned that recent inflationary upticks may necessitate an additional rate hike later this year. Yet, the Fed resisted locking in that outcome, choosing to keep its options open while it works through pending changes to its policy-setting approach.

• The SEP reveals that much of the hawkish shift stems from rising inflation anxiety and diminishing growth concerns among Fed officials. The latest forecasts show upward revisions to inflation across all three projection horizons, with the most striking adjustment coming this year. Core PCE is now expected to reach 3.3%, up from the previous 2.7% estimate. By contrast, GDP and employment projections remained largely unchanged, underscoring that inflation, not growth, is driving the current policy debate.
• The latest projections underscore how sharply Fed sentiment has shifted since March. Back then, when the Iran conflict was still in its early stages, the median SEP path still pointed to one rate cut in 2026, with no support for hikes. By contrast, the latest projection now shows a clear hawkish tilt, with roughly half of participants anticipating at least one rate increase, and most of those expecting more than one, while only a single member still projects a cut this year.

• That said, Chair Warsh reiterated that the Fed’s overriding goal is to return inflation to target, while cautioning that markets should not prejudge policy on the basis of the projections alone, since the dots do not represent a preset path for rates. He noted that views on 2026 remain divided and stressed that much could change before the Committee meets again, underscoring that policymakers’ preferences are conditional and likely to evolve with the data and the outlook.
• Although the Federal Reserve has clearly turned more hawkish since its last meeting, it does not appear to be in a rush to raise rates. The outcome of the next FOMC meeting will likely hinge on how the recent Iran-US ceasefire agreement feeds through to inflation in the coming weeks. If the data suggests that the worst of the inflationary pressure has passed, the Fed may step back from further hikes and keep rates on hold. However, if inflation remains stubborn, then policymakers could opt to raise rates before year’s end.

Deal Signed: The US and Iran have signed a memorandum of understanding regarding the conflict in the Strait of Hormuz. The decision to sign came ahead of schedule and will take effect immediately. The agreement follows the release of a 14-point plan and will likely be followed by discussions over Iran’s nuclear program. While the waterway is set to reopen immediately, ships may not move until it is safe, as there are signs that mines still remain in the strait and need to be removed before shipping can commence.

Note: Due to the holiday, there will be no Comment published tomorrow.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of how the United States is leveraging AI capabilities to keep key allies within its strategic orbit. We then turn to the Federal Reserve, outlining our views on its next policy direction. Next, we provide briefings on SpaceX’s rising valuation, newly released details of the US-Iran ceasefire agreement, and risks of a potential oil glut next year. As always, we include a review of recent domestic and international economic data.

AI Foreign Policy: The United States is increasingly turning to artificial intelligence as a tool to reshape its foreign policy. Just one week after the White House prohibited foreign nationals, including those working within the US, from using the Anthropic tools Mythos and Fable 5, Washington has initiated talks with European partners regarding access to American-made AI tools. These discussions reflect the US’s growing willingness to leverage its technological edge as an instrument of geopolitical influence.

• During the G7 Summit, the United States discussed a “trusted partner” scheme that would grant close allies privileged access to the latest AI models. The scheme could mean that AI providers would be restricted from selling their products to certain countries — or, in some cases, specific companies. A broad agreement may allow participating nations to leverage these advanced technologies in order to assist in the ramping up of their defenses against rivals such as China.
• The decision reflects growing US concern over the capabilities of Anthropic’s latest models. Last week, Commerce Secretary Howard Lutnick warned that the company may require special export licenses to provide certain tools to foreign nationals, citing national security risks. While the White House has not formally explained the directive, it is widely believed to be linked to the discovery of a jailbreak in Fable 5 that could circumvent Anthropic’s safety guardrails.
• The move to restrict AI exports mirrors the semiconductor controls that expanded from 2022 to 2024, which sharply limited advanced chip sales to China and other “countries of concern.” In both domains, Washington aims to guarantee allies’ access to US technology while constraining rivals, underscoring how protective it has become of its technological edge and how it is using that edge to keep key states within its strategic orbit.
• The government push to limit advanced AI-model use by foreign nationals is likely to weigh on the earnings of major technology firms, which are more dependent than most sectors on international revenue. These restrictions also highlight the risk that tech valuations may be elevated relative to rising policy and regulatory headwinds. We continue to advocate sector diversification as a way to hedge against over‑concentration, given the growing dominance of large technology companies within equity indexes.

Warsh Takes the Lead: All eyes will be on Fed Chair Kevin Warsh this afternoon as he presides over his first meeting since taking office. Markets will be focused on how the central bank assesses the inflation outlook, particularly in light of recent progress toward de-escalation in Iran. While easing geopolitical tensions should help improve the near-term inflation outlook, uncertainty around the policy path remains elevated amid persistent signs of underlying price pressures.

• Warsh inherits a more hawkish Federal Reserve than his predecessor. Ahead of today’s meeting, several Fed officials have signaled that further rate hikes may be warranted if inflation remains above the 2% target, citing not only pressures from the Iran conflict but also demand strength from the AI boom and a firming labor market. The departure of a noted dove, Governor Stephen Miran, further removes a key counterweight to tightening.
• Further reinforcing the hawkish bias are recent moves by peer central banks. Despite the agreement between Iran and the US to reopen the strait, policymakers elsewhere remain cautious about declaring victory on inflation. The Bank of Japan raised rates on Tuesday, citing ongoing inflation concerns, while ECB Chief Economist Philip Lane signaled that additional tightening remains possible following this month’s hike.

• Markets will be paying very close attention to Warsh as he offers his views on the direction of Fed policy. Over the past several years, the dollar has grown increasingly sensitive to shifts in interest rate differentials, as investors have come to view central banks with relatively dovish stances less favorably against a backdrop of persistently elevated inflation. Against that environment, any hawkish tilt from the Fed could lay the groundwork for another sustained dollar bull market.
• Heading into his first meeting, we expect Warsh to signal that the Fed will stay the course while keeping its options open. Such a stance would leave room for potential rate cuts later this year, which could act as a headwind for the dollar. That said, any shift toward a more hawkish tone could prompt a reassessment of current equity valuations while simultaneously supporting the dollar.

SpaceX’s Rise: The Musk-owned company’s stock is off to a strong start, having just surpassed Amazon’s valuation to become the fifth-largest firm by market capitalization. The sharp move reflects robust post-IPO demand, but much of the recent upside also appears tied to a broader relief rally following progress in Iran-US talks. The rise of SpaceX reflects the growing dominance of tech companies in the S&P 500.

Iran Deal: There remains significant debate surrounding the reported agreement between Iran and the United States to reopen the Strait of Hormuz later this week. While the official framework has been released, subsequent leaks suggested the possibility of a $300 billion investment fund tied to Iran’s compliance with the terms of the deal. The White House has denied any direct US involvement in such a mechanism, but the emergence of these reports underscores the intensifying political pressure and scrutiny surrounding the agreement.

Oil Glut? The International Energy Agency warns that the Middle East agreement could set the stage for oil overproduction during the next few years. Although it does not expect exports to rebound immediately once the conflict ends, it anticipates that as shut‑in capacity and war‑affected facilities gradually return to operation, global output could rise sharply, creating a substantial supply overhang by next year. This prospective increase in production is likely to exert downward pressure on oil prices and related inflation measures in the coming months.

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