by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an assessment of the latest developments in Iran. We then turn to AI, where early signs of public resistance to data center expansion are beginning to emerge. Next, we examine Microsoft’s strategy to reinforce its competitive positioning against AI-native firms, the fading post-IPO momentum in SpaceX shares, and the growing controversy surrounding President Volodymyr Zelensky’s cabinet. As always, we conclude with a review of recent domestic and international economic data.

All Options Open? The White House appears to be bracing for a prolonged conflict. As the two sides continue to jostle over the Strait of Hormuz, President Trump has indicated that he is not yet prepared to engage in direct negotiations with Iran. He acknowledged that oil prices may remain elevated in the near term, given ongoing military objectives. While the standoff has fueled anxiety over the adequacy of existing crude stocks, there are signs that the US has not entirely closed the door on a diplomatic resolution.

• US strikes against Iran have now entered their fifth day, with the strait emerging as the central flashpoint in the conflict. While there has been some progress toward reopening the waterway, conditions remain highly contested. US officials report that naval support has enabled 10 vessels to transit the strait, though disruptions persist. Seven-day average oil flows have declined from 4.6 million to 3.9 million barrels per day.
• Efforts to keep the strait open have heightened concerns that global oil supply could tighten if the conflict persists. According to the IEA, member countries have already released roughly three-quarters of the 400 million barrels of emergency reserves pledged in March, raising the prospect that these buffers could be largely depleted within weeks. Absent additional supply, the drawdown risks amplifying existing pressures in an already constrained market.
• As the conflict drags on, the White House remains determined to keep all strategic options on the table. The Trump administration has signaled that, at least in theory, it could directly intervene in the energy futures markets to help curb surging oil prices. Meanwhile, the possibility of deploying ground troops has not been completely ruled out, though Vice President JD Vance has made it clear that a ground operation to change Iran’s government would not succeed without the genuine support of the Iranian people.
• On a positive note, even as fighting persists over the strait, both sides remain committed to the memorandum of understanding. Because the conflict appears strictly localized to this shipping corridor, there is hope that one side will eventually make concessions to break the deadlock. However, while a prolonged conflict will likely trigger near-term oil market volatility, we are confident that the US will intervene to keep prices in check.

AI Pushback: As more AI companies prepare to go public, early signs suggest they may face mounting headwinds. This week, New York became the first state to implement a data center moratorium, underscoring growing political resistance. The move has drawn criticism from the White House, with the president explaining that these data centers have more pros than cons. These tensions are emerging as the United States takes a more active role in integrating AI into the global economy.

• On Tuesday, New York implemented a one-year moratorium on data centers with power usage of 50 megawatts or more. The decision follows rising opposition from local communities over the strain these facilities could place on energy and water resources. The governor has also backed legislation to repeal tax exemptions for data centers. While this marks the first successful implementation of such restrictions, other states are considering similar measures.
• Following the signing of the bill, the president expressed dismay over the legislation and called for it to be reversed. In a Truth Social post, he described the decision as a mistake, warning that failure to change course could cost the state jobs and investment as activity shifts elsewhere. He also argued that slowing development could undermine the United States’ ability to compete with China in the AI race.
• Resistance to data centers has rapidly emerged as a volatile political flashpoint, driven by deep community distrust of these massive projects. A Gallup poll from March reveals that seven out of 10 Americans oppose local data center construction, with nearly half of all voters being strongly opposed. Consequently, this tension is poised to heavily influence this year’s midterm elections and will likely remain a defining challenge for candidates through 2028.
• While we do not expect this political disapproval to derail AI momentum in the near term, intermediate-term risks are starting to crystallize. Should localized opposition delay additional data center projects, the earnings outlook for infrastructure beneficiaries could face mounting pressure. Although the broader equity backdrop remains constructive, we anticipate elevated volatility within the technology sector. In this climate, a well-diversified portfolio is the best option.

 Microsoft Fights Back? Microsoft’s sales teams are increasingly positioning the company to compete more directly with AI-native firms such as OpenAI and Anthropic. Their pitch emphasizes that, despite the growing drive behind specialized AI providers, Microsoft retains key advantages in cost efficiency, enterprise-grade security, and the breadth of its integrated product suite. This effort comes as software companies more broadly seek to demonstrate continued relevance, in light of rapidly advancing AI tools.

 SpaceX Slide: Shares of SpaceX fell below their $135 IPO price on Wednesday as initial enthusiasm continued to fade. The stock, which once traded as high as $225, has declined roughly 40% from its peak. While such drawdowns are not uncommon for newly listed companies, the weak post-IPO performance could cast a shadow over anticipated offerings from Anthropic and OpenAI later this year.

 Zelensky Under Fire: President Volodymyr Zelensky is facing public backlash following the dismissal of his defense minister. The move appears to be part of a broader government reshuffle, reflecting a view that the war is entering a new phase. However, critics argue the decision may be tied to resistance against entrenched interests seeking to benefit from Ukraine’s expanding defense budget. The rare emergence of political friction comes at a sensitive time, as Ukraine has recently regained traction on the battlefield and risks undermining that progress.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our key takeaways on the latest escalation in the US-Iran conflict. We then turn to Fed Chair Warsh’s congressional testimony and its implications for inflation expectations. Next, we briefly discuss the State Department’s new grant initiative in Europe, IBM’s sharp sell-off on Tuesday, and the meeting between Supreme Court justices and lawmakers. As always, we close with a review of recent domestic and international economic data.

Iran Escalation: The ceasefire talks now appear effectively dead, as President Trump has opted to intensify strikes on Iran in an effort to reassert control over the strait. On Wednesday, he ordered an increase in airstrikes targeting Iranian assets until attacks on commercial shipping cease. The strikes follow a US decision to reinstate its naval blockade in order to ensure safe passage through the strait after repeated Iranian attacks. Oil prices have risen but remain below their prior highs during the conflict, offering some reassurance to markets.

• Although the tempo of strikes has increased, it remains below the peak levels seen before the ceasefire, pointing to a deliberate, gradual escalation with scope to surpass the earlier bombing campaign. The president has also signaled that he may begin targeting Iran’s power infrastructure as soon as next week if Tehran does not return to the negotiating table, raising the risk that the conflict may become even more intense than it was prior to the ceasefire.
• In response, Iran has threatened to halt all Middle Eastern exports transiting the strait. It has also launched attacks on targets in Kuwait, Jordan, and Bahrain, all of which host US airbases. These retaliatory moves are intended to signal Tehran’s ability to influence control over the Strait of Hormuz. While Iran lacks the military capacity to fully seal off the waterway, its capability to target commercial vessels has made passage increasingly hazardous for any cargo attempting to move through the strait.

• Oil markets have reacted to the latest escalation with prices drifting higher. Benchmarks around the world have moved above $80 per barrel as markets price in heightened geopolitical risk. Even so, the move has been relatively contained, in part because exporters are increasingly using routes that bypass the strait. Additionally, China has cut its crude purchases and drawn down some inventories, adding further relief on prices.
• The latest escalation is unlikely to generate the same degree of disruption seen at the outset of the conflict. As a result, we remain cautiously optimistic that equities can continue to advance even as tensions rise in the Middle East, provided the conflict stays relatively contained. That said, in periods of elevated uncertainty, maintaining some exposure to lower‑risk assets can be beneficial, helping to cushion portfolios against rising volatility.

Warsh Speaks: Federal Reserve Chair Kevin Warsh testified before Congress for the first time since assuming leadership of the central bank, using the appearance to address concerns about his commitment to returning inflation to the Fed’s 2% target. His remarks came amid renewed inflation risks tied to the escalating conflict in the Middle East, which has driven oil prices higher, and ongoing questions about the central bank’s independence as the administration continues to assert its preference for lower interest rates.

• Chair Warsh was unequivocal in his testimony before Congress that the Federal Reserve remains committed to returning inflation to its 2% target. He emphasized that inflation control is ultimately the Fed’s responsibility, regardless of external factors beyond its direct control. Warsh also underscored that the central bank retains the necessary tools to restrain inflation, including adjustments to interest rates and management of its balance sheet.
• Warsh also addressed the latest CPI report, which came in significantly softer than expected. According to the Bureau of Labor Statistics, headline inflation declined 0.4% month-over-month, marking its first drop since 2020 and well below the expected 0.1% decline. Core CPI was also weaker than anticipated, coming in flat relative to the prior month versus expectations of a 0.2% increase. Despite the encouraging data, Warsh emphasized that he remains unsatisfied, noting that inflation is still above the Fed’s 2% target.

• Since taking office, Warsh appears to be in a market honeymoon phase. He has reassured investors of his commitment to tackling inflation, and that credibility is beginning to shape expectations. The 10-year breakeven inflation rate has declined from roughly 2.5% to around 2.25%. While still above the Fed’s target, the move suggests markets have become more confident that inflation will be coming down over the long-term — even amid renewed hostilities between the United States and Iran.
• While we remain optimistic that Warsh can help restore credibility, given his reputation and emphasis on price stability, the real test will be how he responds if the data begins to move against him. A key area to watch is his focus on balance sheet management, which is emerging as a monetarist-leaning way to tighten policy without further rate hikes. Any meaningful shift in this direction is likely to occur only after his task force on the Federal Reserve’s balance sheet completes its review.

US Outreach: The White House is seeking to exert greater influence over European politics. The State Department is preparing to offer up to $3 million in grants to European organizations that align with its preferred political agenda. These funds are intended to support nongovernmental organizations, civil society groups, and educational institutions that promote US-backed values, with political parties explicitly excluded. Even so, the initiative effectively gives Washington a stronger voice in Europe’s political debate.

Tech Concerns? IBM suffered its largest single-day share price decline since 1972 after issuing its latest earnings guidance. The company warned that sales may come under pressure as more clients shift away from software purchases and toward hardware-focused spending. Management’s outlook reflects a broader pattern in which traditional software providers are seeing demand disrupted by the AI investment cycle. This reaction underscores how vulnerable many firms remain to abrupt shifts in the tech spending cycle.

Supreme Court: Two Supreme Court justices, Elena Kagan and Amy Coney Barrett, testified before Congress on enforcement of the Court’s new ethics code. The hearing is part of a broader effort to consider creating an independent body to review ethics complaints against sitting justices. Both expressed general openness to an ethics review mechanism but differed over how such a body should be structured and how its members should be selected. The push for greater oversight reflects the growing political scrutiny the judges have faced following their rulings.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the conflict in Iran, where the June ceasefire has essentially collapsed and produced an enormous spike in global oil prices. We next review several other developments that could affect the financial markets today, including new data showing that Chinese exports are benefiting from the global artificial intelligence boom in the same way that South Korean and Taiwanese firms are, and a preview of Federal Reserve Chair Warsh’s first semiannual testimony before Congress today.

United States-Israel-Iran: The US yesterday re-imposed its embargo against Iran’s ports and launched a new wave of attacks on the country, with President Trump also announcing that the US will begin to charge a 20% fee on international shipping through the Strait of Hormuz. In turn, the Iranian government said it would never allow the US to control the strait and launched its own new strikes against US and allied military targets across the region. As we asserted yesterday, it appears that the June ceasefire between the US and Iran is now abandoned.

• In response to the renewed fighting and the US’s reimposition of its embargo, Brent crude futures prices jumped 9.6% yesterday to settle at $83.30 a barrel. That marked the largest daily percentage gain for Brent since May 2020. The jump in crude prices yesterday brought prices essentially back to the level they were at one month ago, right before the announcement of the US-Iran ceasefire.
• Separately, Dubai-based port operator DP World reportedly plans to build a new port and container terminal on the United Arab Emirates’ east coast that would reduce Dubai’s dependence on its flagship Jebel Ali hub and bypass the Strait of Hormuz. The move is consistent with our expectation that Persian Gulf countries in the coming years will build many new pipelines and other infrastructure to cut their reliance on the Strait of Hormuz. Once completed, those facilities will reduce Iran’s importance in the region.

Israel: As the Israeli government announced that its next parliamentary elections will be held on October 27, several new opinion polls show voters now favor centrist former military chief Gadi Eisenkot over Prime Minister Netanyahu. The polls suggest Eisenkot’s new Yashar party could become the biggest faction in the new parliament, setting the stage for it to potentially lead the government. Such an outcome would likely shift Israel away from its current aggressive stance toward Iran, among other implications.

China: The June trade balance showed a surplus of $125.6 billion, beating expectations and rising from the May surplus of $105.4 billion. Exports in June were up 27.0% from the same month one year earlier, beating expectations and accelerating from their 19.4% rise in the year to May. The surge in export revenue mostly reflected higher prices for semiconductors and related computer equipment, showing that China is benefiting from the AI boom just as South Korea and Taiwan are.

Japan: New opinion polls show support for conservative Prime Minister Takaichi now stands at 65.9%, little changed from the similar reading of 71.9% in March. Support for Takaichi’s cabinet also remains unusually steady and robust, currently at 58.0%, versus 59.0% in March. The figures point to an unusually stable political environment in Japan, which is likely a positive environment for Japanese stocks.

• Separately, with the yen plumbing new lows, the Takaichi government has embarked on a push to encourage Japanese firms and individuals to invest more domestically.
• In the latest initiative, Finance Minister Katayama has proposed adding Japanese government bonds to a tax-free investment program for individuals and said the nation’s massive pension fund could adjust its asset allocation strategy to put more emphasis on domestic investments.
• However, it’s not clear whether those and other new initiatives would help buoy the yen and remove the headwind of currency depreciation for US investors with exposure to Japanese stocks and bonds.

France: Soaring temperatures yesterday forced state-owned electricity giant EDF to shut down three of France’s 57 nuclear reactors and reduce production at another seven, resulting in an 8.7% dip in power production. The shutdowns were driven by high temperatures in the river water used to cool the reactors. The problem wasn’t so much that the river water couldn’t sufficiently cool the reactors, but that returning the heated water to the rivers would kill aquatic life.

• The increasingly frequent problem could require billions of euros of new equipment and infrastructure to keep up production in France’s vaunted nuclear power sector.
• Without that investment, reduced electricity supply in the summer could threaten the government’s effort to attract AI and other energy-intensive industries to France.

US Politics: President Trump yesterday said on social media that he will deliver a televised address to the nation on Thursday evening at 9:00 PM ET. According to White House officials, the president will tackle a range of topics, from the war against Iran to election security. Given that Congress has refused to pass Trump’s high-priority “SAVE America Act,” with its strict voter identification rules, it appears that one reason for the speech will be to go over the heads of Congress and try to build support for the legislation directly with the voters.

US Monetary Policy: Federal Reserve Chair Warsh will deliver his first Semiannual Monetary Report to Congress this morning at 10:00 AM ET, giving investors a chance to potentially get more insight into his goals for interest rates, the Fed’s balance sheet, forward guidance, bank regulation, and other key issues. In our view, how he performs under the Congressional grilling could potentially prompt some market volatility today.

• Separately, Fed board member Waller warned yesterday that the central bank will need to consider raising interest rates soon if underlying inflation comes in “hot” this week.
• Specifically, Waller said an acceleration in inflation as measured by the “core” consumer price index would likely require consideration of rate hikes.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the on-again, off-again war in Iran (it now appears to be on again, driving up global energy prices today and weighing on stock values). We next review several other international and US developments that could affect the financial markets today, including a plunge in South Korean technology stocks that is weighing on the global tech sector and a few words on the implications of South Carolina Sen. Lindsay Graham’s death over the weekend.

United States-Israel-Iran: After former Supreme Leader Ali Khamenei’s weeklong funeral procession and Saturday’s burial ceremony, new Leader Mojtaba Khamenei warned that revenge for his father’s assassination “will most certainly be carried out.” According to other recent reports, Israel has also warned the US that it has intelligence that Iran is actively developing plans to assassinate President Trump. Separately, the US continued to launch renewed strikes against Iran over the weekend, and Iran responded with attacks against the US and its allies.

• Giving credence to the assassination threat, reports say that after last week’s NATO summit in Turkey, the president had to fly to the UK in the old Air Force One to ensure his safety. Consistent with longstanding security concerns about the new, luxurious Air Force One gifted to the president by Qatar, the new aircraft reportedly doesn’t have the same level of air-defense and other security equipment as the old one.
• The risk of the US president being assassinated by Iran is probably very small. All the same, if it happened, the event would likely cause a sharp downturn in global financial markets as investors braced for a sudden change in US policy and a high risk of a major US military strike to punish Tehran.
• In any case, the renewed fighting suggests that the celebrated June ceasefire has effectively collapsed, even though US and Iranian officials reportedly continue to talk. Importantly, Iran has threatened to shut down shipping through the Strait of Hormuz again, and its strikes against commercial vessels in the area over the weekend suggest it is serious. That means it remains too early to call the “all clear” for the global economy and markets.
• Indeed, the renewed fighting has pushed up global oil prices about 3.3% so far this morning, with near Brent futures trading at $78.55 per barrel. The jump in energy prices is also apparently contributing to a pullback in global technology shares.

China-Australia: New analysis by the Financial Times shows Australia has suddenly become a huge importer of large-scale batteries, mostly from China. According to the report, Australia accounted for almost 10% of new global battery capacity in March, with about 2,000 home batteries being installed every day this year. The report says the surge in battery installations is even starting to impact the nation’s peak electricity prices.

• Australia’s battery boom reflects multiple influences, including a subsidy implemented last year, extensive solar panel installations, unreliable coal-fired electricity generation, and connectivity issues between states.
• The surge of imports from China makes Australia even more dependent on economic ties with its huge neighbor to the north. It also reflects China’s huge excess industrial capacity and its ability, or even requirement, to unload its enormous output abroad.

South Korea: SK Hynix’s share price plummeted approximately 15% in Seoul today, helping drive the overall South Korea index down some 9%. The plunge came just one trading day after the company’s initial offering of American Depositary Receipts in the US on Friday. The ADRs traded up 13% on their first trading day, but premarket prices are down about 9% so far today.

• There is no apparent change in the firm’s fundamentals to account for today’s price drop. Rather, the pullback appears to reflect investors normalizing their positions now that the IPO is complete.
• For now, the artificial intelligence boom continues apace, buoying the value of just about anything related to AI data centers and other infrastructure, including processing and memory chips.

United States-Canada: In a sign of cooling bilateral trade tensions, President Trump over the weekend said he would allow the new Gordie Howe International Bridge linking Michigan and Ontario to open on July 27. Previous reports had suggested that Trump’s initial hold reflected a major political donation by the owner of the rival Ambassador Bridge at Detroit. However, according to the Canadian government, the president lifted his hold on the opening after the two sides agreed on changes in how toll revenue would be managed.

US Politics: Sen. Lindsay Graham of South Carolina died unexpectedly on Saturday, setting the stage for a quick Republican process to replace him on the November ballot. Republican Gov. McMaster can name a replacement for Graham, but he or she would only serve until January 3. Thus, the party is expected to hold a primary on August 11 and a potential run-off on August 25. It’s not yet clear who the frontrunner in the primary will be, but because South Carolina is so conservative, the winner would have the advantage over Democratic candidate Annie Andrews.

US Monetary Policy: Fed Chair Warsh will deliver his first Semiannual Monetary Report to Congress tomorrow morning at 10:00 am ET, giving investors a chance to potentially get more insight into his goals for interest rates, the Fed’s balance sheet, forward guidance, bank regulation, and other key issues. How he performs under the Congressional grilling could potentially prompt some market volatility today and tomorrow.

US Regulatory Policy: The Financial Times today carries a useful article showing that firms are increasingly concerned about populist policies in the US. The article highlights the president’s recent assertion that he has pressured Walmart to cut prices on thousands of goods, but other concerns include the government’s effort to push companies into investments, secure equity stakes, and extract payments in return for regulatory approval.

• While such efforts to intervene in the economy are especially notable for a Republican administration, given the party’s long embrace of private property and free markets, we reiterate our long-held view that both parties are increasingly influenced by populism. Republicans and Democrats both seem much more willing to intervene in the economy to advance working-class interests than they were in recent decades.
• Importantly, the threat of government intervention in corporate pricing, investment, and other decisions will likely weigh on stock values at some point. Indeed, government pressure to hold down highly visible consumer prices could be one reason why consumer staples stocks have been so out of favor recently.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our assessment of Chair Warsh’s newly announced task force and the group of experts selected to lead it. We then examine the White House’s push to have foreign chipmakers expand manufacturing capacity in the US. Next, we briefly cover the latest developments in the US, including relations with Iran and recent reports of AI companies providing services to blacklisted entities. As always, we include a review of recent domestic and international economic data.

The Task Force: Fed Chair Kevin Warsh has released a list of names of people who will be tasked with reshaping the Federal Reserve’s operational framework. The group will focus on five key reform areas identified by Warsh: inflation targeting, communication strategy, balance sheet management, data utilization, and the interplay between productivity and employment. The initiative aims to deliver research by year-end, potentially paving the way for significant institutional reforms. However, skeptics remain unconvinced that the task force will provide any meaningful insights.

• Warsh is driving the task force initiative to address two key concerns: the Fed’s recent credibility gaps and the disruptive impact of AI. He cites the “transitory” inflation misstep and the failure to hit the target as clear evidence of lost trust. He also worries that the existing framework is poorly equipped for an AI-altered world, and that conventional surveys may not detect shifts quickly enough to inform policy.
• The newly formed task force comprises a cross-section of experts from both the public and private sectors. Among the most prominent public-sector appointees are former Bank of England Governor Mervyn King, ex-Reserve Bank of India Governor Raghuram Rajan, former Fed Governor Jeremy Stein, and noted economic advisor Greg Mankiw. On the private side, the group includes venture capitalist Marc Andreessen and Chad Jones, a leading AI economist at Anthropic.
• While the task force boasts an impressive roster of names, questions linger over whether it can generate genuinely novel insights for the Federal Reserve. In 2025, the central bank completed a five-year review of its strategy, tools, and communications — an exercise that overlaps significantly with the very areas this task force seeks to address. Moreover, the five-month timeline allocated for this new research has raised doubts about whether a sufficiently comprehensive review is even feasible.
• That said, while there are still questions about the task force itself, markets appear to retain confidence in Chair Warsh. Bond market volatility has begun to ease, suggesting that investors view his proposed direction — at least in terms of the goals he has articulated — as broadly credible. As a result, we think this task force is likely to help restore some confidence in the Fed, even if it ultimately falls short of delivering a sweeping set of structural reforms.

Chip Onshoring: The US continues to press foreign companies to expand investment domestically as it seeks to boost its chipmaking capacity. Commerce Secretary Howard Lutnick has implicitly urged Samsung and SK Hynix to increase their US memory chip production in order to help ease emerging supply shortages. His comments underscore that the AI investment cycle has become so dominant that the administration is unwilling to rely solely on US firms, a stance that could intensify competitive pressure on domestic chipmakers.

• During a Micron-hosted event, Lutnick urged South Korean chipmakers to accelerate efforts to expand production in the United States. He acknowledged that greater participation from firms such as Samsung and SK Hynix could intensify competition for domestic players like Micron but argued that a broader manufacturing base would help create a more resilient supply chain for US companies dependent on advanced memory chips.
• His comments come as SK Hynix and Samsung have emerged as major beneficiaries of the AI infrastructure boom. In recent months, US imports of memory chips from South Korea have surged as demand has far outstripped domestic supply. The strength of this cycle has led SK Hynix and Samsung to commit to massive capacity expansion plans, running into the hundreds of billions of dollars, in an effort to keep pace with the current shortfall.
• Lutnick’s comments on South Korean firms expanding manufacturing in the US point to a broad, “big‑tent” approach to building out domestic chip capacity. While the White House remains keen to support homegrown players such as Micron and Intel, it also wants to reduce vulnerability to supply chains centered outside US borders by encouraging allied foreign producers to localize more production. Therefore, this could be a sign that the US may start to target chip firms that are not invested in the US.
• We see the US push to have foreign chipmakers invest domestically as a clear example of a more hands‑on governmental approach to the economy. Over time, this is likely to foster tighter coordination between the public sector and firms in strategic industries. While such policies may be supportive in the current boom, they could leave domestic companies relatively more disadvantaged in a downturn, as added capacity and competition weigh more heavily on local producers.

Ceasefire On? Iran and the US appear to be continuing talks even as tensions remain elevated. A US official has indicated that the two sides have begun technical discussions. While there were clashes earlier in the week, the pause in negotiations was reportedly tied to Iran’s funeral ceremonies for the ayatollah killed in the initial strikes. The fact that dialogue is ongoing is likely to help ease fears of a broader conflict between the two countries.

AI Crosshairs: OpenAI and Google were reported to have supplied AI services to blacklisted Chinese firms, activity that was legal under current rules but has raised national security concerns. Officials have signaled that such dealings could put future government contracts at risk, increasing pressure on providers to police access more aggressively. OpenAI has since moved to restrict access from mainland China, and Alphabet has disputed any wrongdoing, but the episode is likely to spur calls for stricter limits on AI exports and usage.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with key takeaways from the latest escalation between the US and Iran. We then turn to the Federal Reserve, providing a breakdown of the most recent meeting minutes. Next, we briefly cover the US decision to expand support for Ukraine, China’s move to permit limited purchases of US chips, and forthcoming changes to key inflation measures. As always, we conclude with a review of recent domestic and international economic data.

Iran Escalation: Concerns of a possible breakdown in ceasefire negotiations continue to weigh on markets. On Wednesday, the US carried out a second consecutive day of strikes on Iran, aiming to degrade the country’s ability to control transit through the Strait of Hormuz. The escalation has provoked a response from Iran, which has signaled it has no clear red lines when it comes to defending its interests. These developments are reinforcing doubts about the durability of the ceasefire, adding to broader market uncertainty.

• The escalating back-and-forth increasingly points toward a renewed slide into open conflict. As of Thursday morning, the US reported that its latest round of strikes targeted 90 sites, up from 80 the previous day. In response, Iran launched strikes on military installations in Kuwait, Bahrain, and Qatar.
• The latest escalation in tensions follows President Trump’s declaration that he believed the ceasefire was over, though he later clarified that he would allow negotiations to continue, stating he did not want a resumption of war. In the wake of the attacks, maritime traffic through the strait appears limited. Ships authorized by Iran have been able to transit the waterway, while the US-supported shipping corridor along Oman has remained quiet.
• Despite rising friction in the Strait of Hormuz, the markets have remained relatively stable compared to the onset of the conflict. Oil prices continue to fluctuate between $70 and $80 per barrel, well below the $100 peak seen earlier. Equities closed only slightly lower on Wednesday, with the Nasdaq even managing to finish higher. Meanwhile, the bond market showed the greatest anxiety, driven by lingering concerns over elevated inflation.
• At this stage, we believe the market is interpreting the recent skirmish as a sign that both sides will remain engaged in dialogue. However, any escalation in hostilities could trigger a significantly stronger negative reaction. In light of this uncertainty, we continue to advocate for a well-balanced portfolio. Specifically, we recommend limiting duration risk to help mitigate volatility, while favoring dividend-paying equities, which can provide a stable income stream during turbulent periods.

Fed Speak: The Federal Reserve released the first set of minutes following Kevin Warsh’s assumption of leadership, offering additional insight into the June 16-17 policy meeting. The minutes highlighted a notable divergence of views among policymakers regarding the outlook for the economy, inflation, and the labor market, though the overall tone carried a hawkish tilt. While the decision to hold rates steady was unanimous, several members signaled openness to a rate increase at that meeting.

• The minutes indicated that Fed officials remain confident that inflation will return to the 2% target over the intermediate to longer term. Policymakers attributed the recent uptick in inflation to factors including the AI investment cycle, Middle East tensions, and tariff pass-through effects. While there was broad agreement that the worst of the geopolitical disruption may be behind them, concerns persist that inflationary pressures could reemerge over time due to the other lingering factors.
• AI-related demand has emerged as a growing area of concern. While some policymakers expressed confidence that productivity gains from AI could ultimately help ease inflationary pressures, there was recognition that, in the near term, the buildout is contributing to price pressures, particularly through increased demand for technology goods and rising electricity costs. Additionally, some officials noted that elevated AI-related capital spending could risk contributing to broader economic overheating.
• With respect to the labor market, the tone within the Fed appeared more constructive. Overall, the committee expressed confidence that labor market conditions remain solid, citing firmer hiring trends, an unemployment rate broadly in line with its long-run average, and relatively low jobless claims. However, some policymakers noted lingering concerns about a lack of dynamism in the job market, as well as the risk that geopolitical developments could trigger layoffs.
• While concerns about persistent inflation alongside a stable labor market point to a hawkish bias, the committee does not appear firmly committed to that stance. The minutes suggest policymakers are still seeking additional data before altering the policy path, with most indicating that holding rates steady, or potentially cutting, remains feasible moving forward. However, if the labor market continues to show resilience and inflation proves more persistent, many expressed openness to future policy tightening.

Ukraine Boost: The US has provided Ukraine with a fresh boost in its fight against Russia. On Wednesday, President Trump authorized Ukraine to coproduce Patriot missile systems, a move aimed at strengthening its air defense capabilities. The decision comes amid growing confidence in Ukraine’s recent battlefield momentum. While the US still appears to favor a negotiated end to the conflict, the move suggests diminishing faith in Russia’s willingness to return to meaningful talks.

China Loosens Restrictions: Beijing is expected to ease restrictions on firms seeking to purchase US-made chips. On Wednesday, Chinese officials informed leading AI companies that they may acquire a limited number of Nvidia’s H200 chips, subject to prior approval. The decision to relax these controls suggests a modest de-escalation in tensions between China and the United States, even as both sides continue to compete for leadership in AI.

Inflation Makeover: The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is set to undergo methodological updates that could result in more favorable inflation readings. While the changes are not expected to take effect until September, the BEA has announced revisions to components including legal services, software, and investment advice — categories that have drawn criticism for exerting an outsized influence on measured inflation. The change could reduce the urgency for rate hikes.

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