by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an update on the escalating conflict in the Middle East, particularly as Saudi Arabia becomes more deeply involved. Next, we discuss how Fed officials continue to keep forward guidance alive even as the Fed chair tries to do away with it. We then briefly cover Fed Governor Lisa Cook’s decision not to attend a hearing, as well as the global pressure on Putin to join an energy truce. As always, we conclude with a roundup of key domestic and international economic data.

Broadening Conflict: The war in Iran continues to show signs of spreading across the Middle East. This week, the Houthis stepped up their attacks on Saudi Arabia, while Iran intensified its attacks on ships transiting the surrounding waterways. The escalation marks a sharp rise in regional tensions that has continued to push energy prices higher worldwide. However, while the conflict has added to price pressures, it is important to remember that not all regions will necessarily be affected equally.

• Saudi Arabia is being drawn deeper into the conflict as Houthi attacks target major cities, including Riyadh, hitting both civilian areas and critical energy infrastructure. To counter these threats, the kingdom has relied on a coalition of member states to help repel incoming strikes. This escalation comes as Saudi Arabia actively seeks alternative export routes to ship oil and relieve global supply strains caused by the conflict with Iran.
• Simultaneously, Iran has escalated its maritime operations. To sustain pressure on the Strait of Hormuz despite having its primary radar infrastructure destroyed by US strikes, Tehran adapted its strategy by relying on unarmed spotters to maintain surveillance and target identification for the Islamic Revolutionary Guard Corps. This tactical pivot has driven the sharpest increase in commercial tanker attacks since the war began in February.

• Iran and its partners are escalating attacks, adding to upward pressure on oil prices and weighing on US voter sentiment. However, the US oil market has been relatively sheltered from the disruption. WTI is trading at a substantial discount to its competitors, reflecting domestic supplies’ lower direct exposure to shipping risks in the Middle East. Meanwhile, US exporters still face soaring freight costs, making their crude more expensive to deliver overseas and helping sustain that discount.
• The recent escalation in the Middle East may reflect Iran’s desire to pressure the White House ahead of the midterm elections. Tensions could ease after the vote, when Tehran has a clearer sense of its negotiating leverage. Such an outcome would likely support US equities, but foreign markets, particularly those more exposed to higher energy costs, could offer greater upside if oil prices retreat.

Forward Guidance? While Fed Chair Kevin Warsh has been reluctant to offer insights into the central bank’s next moves, other FOMC members have been more vocal. On Tuesday, New York Fed President John Williams stated that he does not see a need for a rate hike in 2027. His remarks suggest that the rate-hiking cycle may be significantly shorter than markets currently price in. If so, this could provide much-needed relief for bond markets, which are presently under pressure on multiple fronts.

• Williams explained that while he has not ruled out another rate hike this year, he sees a path for inflation to decline next year. He noted that inflation could ease significantly toward the Fed’s 2% target as the effects of tariffs and energy shocks begin to roll off. This cooling, along with easing stress in other areas, should help offset price increases driven by the ongoing AI buildout.
• Williams’ commentary on the rate path follows similar remarks from other Fed officials. Cleveland Fed President Elizabeth Hammack, a voting member this year, advocated for returning interest rates to restrictive territory to contain inflation. Meanwhile, Richmond Fed President Tom Barkin, an alternate voter this year who becomes a full voting member next year, also maintained that monetary tightening could occur before the end of the year.

• Expectations surrounding Federal Reserve policy remain a primary driver of rising long-duration bond yields. The Fed’s more hawkish posture has significantly influenced long-term rates, helping push the 10-year Treasury yield to its highest level since 2002. Since the Fed’s September FOMC meeting, at which officials raised rates for the first time since 2023 and the dot plot signaled at least one further hike this year, the 10-year yield has risen roughly 30 bps.
• Although Chair Warsh has been reluctant to offer forward guidance, markets have been able to read signals from the rest of the committee. This increased communication could reduce some of the volatility in the bond market. That said, recent remarks from Fed officials suggest they still favor at least one more hike, while the path in 2027 remains uncertain. Signs of dovishness could weigh on bond yields over the coming months.

Fed Pressure: Fed Governor Lisa Cook will not attend a November 5 White House hearing on allegations of mortgage fraud. Her attorney said that Cook will be in Europe that day on official business at financial and monetary policy meetings, and any hearing would need to take place no earlier than the conclusion of the December 8-9 FOMC meeting in order to allow time to prepare. The inquiry is the White House’s latest attempt to remove Cook from the Federal Reserve Board; so far, she has not been charged with a crime.

Ukraine Ceasefire: German Chancellor Friedrich Merz and Ukrainian President Volodymyr Zelenskyy have requested that Russia agree to an energy truce. The move follows US President Donald Trump’s announcement of a diesel deal with Russian President Vladimir Putin, which included an agreement that Russia and Ukraine would refrain from attacking each other’s energy infrastructure. However, the deal quickly collapsed when neither side formally acknowledged the arrangement, leading Russia to strike a Ukrainian oil refinery and prompting Ukraine to retaliate in kind.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an overview of the International Monetary Fund’s latest forecasts for global economic growth. We next review several other international and US developments that could affect the financial markets today, including an update on the war in Iran and a comment from a major US semiconductor leader that appears to be putting downward pressure on artificial intelligence stocks.

Global Economy: The IMF said in its latest World Economic Outlook today that global gross domestic product should increase 3.1% in 2026, up from its previous estimate of 3.0%, in part reflecting investment related to artificial intelligence. The IMF figures show global GDP growth will accelerate to 3.4% in 2027. All the same, the organization warned that government budget deficits in the advanced countries will likely rise to 5.2% of GDP this year, the highest level since the coronavirus pandemic and enough to threaten financial stability.

United States-Israel-Iran: According to The Wall Street Journal this morning, the Iranian government is actively rebuilding its defenses, rallying its citizens to resist new attacks, and warning US allies in the region that it will unleash a wider, harsher response against them if the US renews its attacks on Iran after the midterm congressional elections. The preparations are reportedly aiming to deter the US and Israel from renewing their war. Meanwhile, new reports say Iran attacked six commercial ships in the Strait of Hormuz on Sunday alone.

• If the US and Israel escalate again anyway, the Iranian preparations may mean that bigger and longer-lasting attacks may be necessary before they can force an Iranian surrender.
• In any case, the Iranian preparations and the renewed surge in attacks on shipping in the strait serve as the latest evidence that the war is likely to continue for some time, as neither side appears to have the ability to enforce its will on the other.

US Artificial Intelligence Industry: Hock Tan, the chief executive of AI semiconductor giant Broadcom, said at a conference yesterday, “A lot of investors [in artificial intelligence] have no clue what they are investing in … They set very extreme expectations only to find out that it’s almost like they are in a casino.” The statement, which was seen as undermining the current AI investment frenzy, apparently helped push down technology stock prices yesterday. So far today, the sell-off has continued in Asia and is threatening to continue in the US as well.

US Banking Industry: Several major banks kicked off the third-quarter earnings season today, with JPMorgan Chase, Goldman Sachs, Wells Fargo, and Citigroup all reporting higher profits than a year ago, although some of the firms failed to beat analyst expectations or match their strong second-quarter growth rates. Importantly, the firms generally expressed cautious optimism about the US economy despite rising interest rates.

European Union: Dutch TTF gas futures, a European benchmark, today rose to 86.79 EUR ($97.15) per megawatt hour, marking their sixth straight daily increase and hitting their highest level since shortly after Russia launched its invasion of Ukraine in 2022. The jump in prices stems in part from Europe’s seasonal gas stockpiles being at only 74% of capacity, versus a normal level of 90% at this time of year. On top of that, prices have risen in response to a cold snap in Central Europe and concern over US policy related to Russia and Ukraine.

France: The government yesterday said it will invest 500 million EUR ($560 million) in miner Eramet to shore up the firm’s finances and protect French access to critical minerals. The agreement will boost the state’s stake in the firm from the current 27% to 49% when the deal closes. The group has nickel operations in Indonesia as well as historic concessions in New Caledonia, a French territory. It also produces lithium, manganese, and mineral sands in Argentina, Gabon, Senegal, and the US. The move highlights the priority nations now put on ensuring supplies of key materials.

Indonesia: This coming Sunday, the government is expected to introduce some of the world’s toughest halal rules, which will require firms selling everything from clothing and cosmetics to toilet paper and office supplies to demonstrate that their products are permissible under Islam. While foreign companies see Indonesia and its massive population of 280 million as an attractive market, the labeling rules are expected to be a hurdle for those trying to export to the country. The new rules could also complicate production processes within the country.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on the war in Iran, focusing on a major new attack on Saudi Arabia by Iran-backed Houthi rebels in Yemen. We next review several other international and US developments that could affect the financial markets today, including the latest on the new claim of a Russia-Ukraine “energy ceasefire” and the associated Russia-US diesel fuel deal, as well as signs that the US administration is preparing to toughen its regulation of the country’s artificial intelligence industry.

United States-Israel-Iran: On Saturday, Iran-backed Houthi rebels in Yemen staged an apparent missile or drone attack on a passenger terminal at an international airport in Riyadh, Saudi Arabia. The attack killed at least 12 people and injured more than 300, many of them critically, while also forcing the closure of the airport. The incident illustrates how the US-Israeli war against Iran appears to be drawing in other countries. The widening conflict therefore will pose an ongoing risk to global energy supplies and likely keep commodity prices higher than they otherwise would be.

United States-Russia-Ukraine: Ahead of a new round of multilateral talks in Miami aimed at ending the Russia-Ukraine war, President Trump on Friday announced a deal under which the US will waive certain sanctions against the Kremlin in return for Russia releasing large amounts of diesel fuel into global markets. The president also pressured Ukraine to stop attacking Russian oil refineries. At the same time, however, Russia launched a major drone attack on Ukraine over the weekend that damaged some of its critical energy infrastructure.

• The administration’s gambit was almost certainly aimed at bringing down diesel prices to help Republicans in the November midterm elections. However, the lack of details on the deal makes it difficult to gauge how much of an impact it could have.
• In any case, Ukrainian officials complained that the deal made it appear as if the US was simply using the Miami negotiations as a smokescreen while it negotiated with the Russians behind Kyiv’s back. By easing Russian fuel exports, the deal could help the Kremlin bring in billions of dollars in new revenues while weakening Ukraine’s bargaining position.
• News of the deal has therefore generated not only vociferous complaints from the Ukrainian government but also pushback from US lawmakers. On Saturday, for example, Rep. Brian Fitzpatrick (R-PA) vowed to force a House vote to block any Russian oil purchases.

European Union-China: In high-level trade talks that concluded on Friday, China reportedly agreed to ratchet back its hybrid auto exports to the EU by “several million” vehicles over a four-year period. China also agreed to expedite EU applications for rare-earth export licenses and improve market access for EU goods including car parts, olive oil, and textiles, among other, lower-profile provisions.

• The bilateral agreements may help head off threatened EU trade barriers as the bloc tries to protect its industry from an onslaught of low-priced Chinese goods. Since China now faces new trade obstacles in the US, especially tariffs, Beijing probably had a strong incentive to throw the Europeans a bone in order to maintain access to the EU market.
• However, the reports we’ve seen so far suggest the agreements don’t require China to rein in its exports of fully electric vehicles to the EU. The reports also don’t point to cuts in other critical Chinese industrial or consumer exports to the EU. That will probably keep alive the possibility of an EU-China trade war down the line.

Germany: Labor Minister Bärbel Bas, a member of the center-left Social Democratic Party, abruptly resigned today, citing a recent death in the family and attacks from Chancellor Friedrich Merz’s center-right Christian Democratic Union, which leads the governing coalition. The resignation will likely further weaken Merz politically, adding to recent pressure on him to resign. It could also slow the government’s effort to reform Germany’s expensive pension system and make labor regulations more efficient.

India: Police in New Delhi on Saturday arrested thousands of youthful protesters with the Cockroach Janta Party as they tried to stage another mass demonstration against a recent purge of the nation’s electoral rolls. The authorities later released leaders of the party, but the incident still shows how the group has increasingly become a thorn in the side of Prime Minister Narendra Modi. If the protests continue and Modi’s political position weakens, it could call into question political and policy stability in India and become a headwind for Indian stocks.

Indonesia: Reports over the weekend said the government has proposed a moratorium on new nickel smelters to curb global overproduction, boost prices, and protect local industries across its vast minerals sector. The proposed restrictions would halt the construction of smelters that produce semi-finished nickel products, which make up more than half of Indonesia’s industrial nickel output and are key to goods ranging from stainless steel to electric-vehicle batteries. If implemented, the moratorium could add to global price pressures.

US Economic Policy: Prof. Robert E. Hall of Stanford University and Prof. Michael Woodford of Columbia University today were awarded the Nobel Prize in economics for their work on the role of household and business expectations in providing economic stability. Their research highlights how important it is for governments and central banks to communicate clearly about their plans and their reasons for intervening in the economy. According to their research, such communication allows households and businesses to make better economic decisions.

US Wealth Distribution: In its latest Survey of Consumer Finances report, released Friday, the Federal Reserve said median family net worth rose just 2% from 2022 to 2025, after stripping out consumer price inflation. The data shows that median wealth for a family in the top 10% of earners increased 31%, but that was mostly offset by an outright decline in real wealth for the bottom 40% of earners. Coupled with weak real income growth for low earners, the disparity in wealth may point to deeper political polarization and growing popularity for leftist politicians.

US Artificial Intelligence Industry: Officials with the White House Super Intelligence Task Force have told Axios that they are now requiring AI companies to notify them of AI security incidents and take steps to correct them. According to the officials, “This notification and remediation process is not optional … It is a critical national security obligation.” The statement suggests the administration is backing away from its hands-off, low-regulation approach to AI as its desire to promote innovation collides with security and political issues.

• The change of heart apparently stems in part from an incident in which Anthropic testing models submitted almost two dozen nonimmigrant visa applications through the publicly available form on the State Department’s website. Separately, police in Philadelphia say they received a false homicide tip submitted by an Anthropic model.
• It’s not clear how far the administration’s new willingness to regulate will go, but if it becomes onerous, it could be yet another potential threat to the AI investment boom.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with concerns surrounding AI companies and their ability to meet soaring investor expectations. We then turn to geopolitics, examining the US-China AI race and its broader diplomatic fallout. Next, we briefly cover Italy’s recent electoral reform, provide an update on US-Iran relations, and examine the Treasury’s appointment of a controversial former Fed nominee. As always, we conclude with a roundup of key domestic and international economic data.

AI Concerns: As major AI labs prepare to go public, investors are once again questioning their valuations. On Thursday, OpenAI reportedly projected $20 billion less annualized revenue than investors had anticipated. This shortfall has added to market jitters and sparked fresh speculation about a bubble, even as the broader impact of the AI boom becomes increasingly evident across the economy. While the miss probably won’t deter these companies from going public, it is likely to raise concerns about the viability of the AI boom.

• OpenAI recently told investors it expects to report annualized revenue of $50 billion at the end of September, well below the roughly $70 billion figure reported earlier. The earlier number rested on a reported 70% jump from a $40 billion annualized rate in July, a baseline the company has since revised to $30 billion in an updated presentation. This discrepancy comes as investors have sought to make OpenAI’s figures comparable with those of its rival Anthropic, which calculates revenue differently.
• Doubts about the company’s figures come as it and its rival Anthropic prepare to go public. Both companies are looking to the equity market to help fund the infrastructure needed to serve customers and train their models. They have also come under scrutiny because their expenses far exceed their revenue, raising worries that the two companies are building faster than demand can justify.

• Spending by AI companies and the hyperscalers has been a key source of support for the economy. Business investment, much of it driven by AI, is projected to account for more than half of GDP growth in the third quarter of 2026, according to the Atlanta Fed’s latest GDPNow estimate. The AI investment boost is expected to keep economic growth above its potential through 2028.
• OpenAI’s revenue miss may simply be an error, but it could also signal that demand is not as strong as hoped. While this alone is unlikely to end the boom, it could lead to a slowdown in investment, which could then weigh on overall sentiment. However, we think the slowdown would likely benefit the sector, as companies that build too fast typically create overcapacity, which undermines their prospects for long-term profitability.

AI Race: The competition for AI supremacy between the US and China is intensifying. On Thursday, reports revealed that Beijing is accelerating its nationwide data center expansion to satisfy surging demand for computing power. Meanwhile, Washington is moving to secure critical mineral supply chains to reduce foreign dependencies. These parallel pushes underscore how direct government intervention is reshaping markets as both superpowers champion domestic tech leaders on the global stage.

• China is actively building data center hubs to link its energy-rich regions with high-demand urban centers. Under its “Eastern Data, Western Computing” initiative, Beijing is constructing major computing facilities in the country’s resource-abundant western provinces to avoid driving up land and electricity costs in the densely populated east. This nationwide push aims to close the gap with the US, which currently leads global data center capacity with roughly 56 gigawatts compared with China’s 24 gigawatts.
• At the same time, the US is making strides toward securing the critical minerals essential for the AI expansion. The federal government continues to back domestic resource development to reduce its reliance on Beijing. On Thursday, Houston-based Hertha Metals announced that it is nearing commercial production of high-purity iron — a key component in tech-grade permanent magnets. This progress aligns with broader US efforts to stockpile strategic materials following recent Chinese export restrictions.

• This intensifying rivalry reflects a delicate balancing act as both nations attempt to compete while maintaining a peaceful coexistence. Although China faces fewer supply chain bottlenecks for its data center expansion, it still lacks the sophisticated equipment required to take a decisive lead. Meanwhile, US energy constraints and critical resource shortages make it difficult for Washington to pull further ahead. As a result, both superpowers are still tethered by mutual dependencies.
• The economic decoupling between the US and China will probably happen much more slowly than many anticipate. Although both superpowers wish to operate independently, they remain deeply reliant on each other’s supply chains. Nevertheless, as they gradually break away, both nations are expected to stockpile critical AI resources — a trend that could drive up global commodity prices. Consequently, the ongoing AI buildout could introduce persistent inflationary pressures worldwide.

Meloni Win: Italy’s parliament approved Prime Minister Giorgia Meloni’s proposed electoral overhaul, shifting to a proportional representation system with a 42% majority bonus. Designed to streamline government formation and prevent post-election deadlock, the law grants winning alliances additional seats to secure a functional majority in both houses. The legislative win restores political momentum for Meloni following the defeat of her earlier judicial reform referendum.

Attack Off? President Trump has ruled out the possibility of attacking Iran before the midterm elections. His decision to pause military action follows recent “productive” diplomatic talks between Washington and Tehran. Additionally, political considerations appear to be playing a significant role, as Republicans struggle to maintain control of Congress amid public backlash over rising oil and gasoline prices driven by the conflict.

Treasury Hires Outsider: The Treasury has appointed economist Judy Shelton as a currency policy adviser. Her 2019 nomination to the Federal Reserve was blocked due to concerns over her political objectivity and conflicting economic views — specifically, her advocacy for easy monetary policy despite her historical preference for restrictive frameworks. Her appointment underlines the Treasury’s interest in rethinking financial strategy to increase resilience against foreign competitors.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with thoughts on the FOMC meeting as Fed officials focus on the AI buildout. Next, we examine rising civil unrest in Europe and why it may not be a reason to abandon the region just yet. We then briefly discuss Russia’s pickup in petroleum product exports, signs of a broadening conflict in the Middle East, and markets’ waning enthusiasm for chipmakers. As always, we conclude with a review of recent domestic and international economic data.

Hawkish Minutes: The minutes from the latest FOMC meeting revealed that the AI buildout played a role in the Fed’s decision to raise rates for the first time since 2023. Officials expressed concern that AI-related investment was accelerating faster than many had realized and was beginning to spill over into other parts of the economy. Those worries come amid signs that the buildout could contribute to an overheating economy. If that sentiment persists, the Fed may be prepared to tighten policy further to mitigate the buildout’s impact on the broader economy.

• Although Fed officials acknowledged that higher oil prices would add to inflation, most of the discussion appears to have centered on AI. Several members noted that the AI buildout could intensify inflationary pressures just as the effects of tariffs, which had contributed to rising core goods prices, begin to fade. More worrisome was that officials noted business contacts were having greater success passing higher costs on to customers, raising the risk that inflation expectations could move higher.
• The risk of higher inflation expectations appears to be driven, at least in part, by a sudden rise in growth estimates. The latest staff projections showed growth outpacing potential into 2028, a more optimistic outlook than at the previous meeting, when the staff expected growth to only slightly outpace potential through 2027. The upgrade came largely from a pickup in business investment, stronger investment spending, and supportive financial conditions.

• While the minutes were largely hawkish, a few officials offered a more dovish view of the economy. They noted that although financial conditions remained broadly supportive of growth, housing was the exception, with mortgage rates still elevated. Some officials also raised concerns about the labor market, noting that while layoffs have remained low, so has hiring. Others observed that aggregate wage growth was moderate and consistent with inflation returning to 2%.
• September’s meeting minutes revealed that the Fed is clearly leaning more hawkish, but that may not be enough to guarantee another rate hike. The latest jobs report, which showed a sharp slowdown in hiring, has weighed on expectations for a hike at the October 27-28 meeting. We continue to believe that further hikes will depend on the incoming data as the Fed works to bring inflation back to its 2% target.

Europe Problems: Several political issues are coming to a head across the Continent. The most notable is a wave of protests in a number of EU member states, with demonstrators pointing to high property prices and the cost and quality of education. The unrest comes as the region contends with mounting concerns over its debt burden and elevated energy prices. That said, Europe’s resilience may be underestimated.

• Protests that began in Spain and France have since spread to Belgium and possibly Austria and have led to arrests as demonstrators press for change. In Spain, the anger centers on private investment and mass tourism, which residents blame for pushing home prices out of reach. Elsewhere in the bloc, the grievance is underinvestment, particularly in higher education, where universities are seen as overcrowded and increasingly expensive.
• These protests come as the region appears headed for a political realignment. Across Europe, voters are shifting away from establishment candidates and toward populist (and most recently right-wing) alternatives. Support is rising for Vox in Spain, the National Rally in France, Vlaams Belang in Belgium, and the AfD in Germany. The trend points to growing demand for policies that prioritize domestic interests, such as higher public spending and tighter immigration controls.
• The rising popularity of populists is likely less of a bad omen than markets are pricing in. Although populists have long been viewed as risky for investors, many populist governments have proven less damaging to public finances than feared. Portugal, Spain, and Italy, for example, all have populist governments, yet each is expected to see its debt-to-GDP ratio fall over the next five years.

• Rising discontent and higher energy prices should be a short-term headwind for the euro area, but opportunities remain. Even during this period of rising inflation and tighter monetary policy, the eurozone has remained resilient, which suggests the economy still rests on solid foundations. Investors therefore should not be deterred by the civil unrest, as it is unlikely to undermine the long-term viability of companies operating in the region.

Russian Shipments: Oil product exports from Russia have begun to rise even amid the conflict and government restrictions. These foreign sales have emerged as the country seeks to prevent overstocking now that domestic supplies have stabilized. Previously, the country had limited sales of oil products abroad after Ukrainian attacks on its refineries curbed production. The sales suggest Russia may have enough to satisfy domestic demand.

Broadening Conflict: The US appears to be preparing to increase pressure on Iran, while Saudi Arabia faces further attacks. The Pentagon has begun laying the groundwork for additional strikes on Iran, which could occur before the midterms. Meanwhile, Saudi Arabia has faced an attack on one of its airports by Houthi forces. The conflict in the Middle East appears to be spreading and may add to the pressure on energy.

Chip Shrug: Investors appear to be less impressed by earnings from chipmakers. Samsung reported a ninefold rise in operating profit, yet the result still fell short of investor expectations for a higher increase. Additionally, TSMC’s 51% jump in revenue failed to excite investors, who had hoped for more. The muted share-price reaction comes at a time when investors appear to be more worried about the future of the investment boom.

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