by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the weekend events related to the war in Iran. We next review several other international and US developments that could affect the financial markets today, including the naming of a new prime minister in the United Kingdom and the latest Chinese threat to the US’s cutting-edge artificial intelligence models.

United States-Israel-Iran War: The Iranian military continued to launch missile and drone strikes against US military bases throughout the Persian Gulf region over the weekend, killing at least two US troops at the Muwaffaq Salti Air Base in Jordan. The US had already been escalating its attacks on Iran again to short-circuit its effort to control the Strait of Hormuz, but we believe that because of President Trump’s “Jacksonian” approach to foreign policy, he will likely respond to the US troop deaths by ratcheting up the attacks even further.

• The expectation of US retaliation caused global oil prices to surge over the weekend, with the price of near Brent futures jumping about 6% to more than $90.00 per barrel. Nevertheless, oil prices have retreated so far this morning. As of this writing, they are only slightly above where they were late last week.
• Separately, Iran’s successful attacks have prompted questions about how the country is improving its technology so rapidly. US officials and military analysts say Iran’s missiles now fly faster and are more maneuverable than before, suggesting the country is getting help from Russia and/or China. If so, the continued attacks could inflame US tensions with those countries as well.

Russia-Ukraine War: At a defense industry conference late last week, CIA Director Ratcliffe said the average Russian recruit arriving on the front lines in Ukraine survives only 20 to 30 minutes before being killed or wounded. The statistic shows how violent the Russia-Ukraine war has become and how efficiently Ukrainian drones and other military technologies can kill. It also helps explain why so many Western defense firms have begun seeking deals with Ukrainian companies to gain access to their technologies and processes.

Japan: Defense Minister Koizumi on Friday said in an interview that Japan must begin debating whether and how it might adopt nuclear weapons, especially considering the precedent of Russia’s invasion of Ukraine and the way that France and Finland have responded by seeking a stronger nuclear deterrent. The statement underlines our expectations that the world could be on the cusp of a new nuclear arms race. Such a development would likely boost uranium prices.

China: Investment funds closely aligned with the government yesterday announced that they have bought approximately $8.9 billion worth of domestic stocks related to artificial intelligence, taking advantage of the sharp pullback in prices for the equities on Friday. The purchases by the “national team” suggest the government is deliberately trying to prop up the market. In response, the Chinese market has performed better today than many other Asian markets.

India: Thousands of youth-led “Cockroach” protesters demonstrated against India’s weak educational system today in New Delhi as the national legislature opened a new session. In response, police tried to disperse them by firing tear gas and beating the protesters with sticks and plastic batons. Even though Prime Minister Modi’s pro-business party recently did well in regional elections, the incident illustrates how the Cockroach movement appears to be gaining steam and could eventually threaten Modi’s grip on power.

European Union: The EU this week begins enforcing new rules that largely ban companies from destroying unsold clothes or footwear. The ban was approved in 2024 to help curb overproduction, reduce waste, and keep valuable materials in circulation for longer. Under the new rules, large companies will be prohibited from incinerating or sending to landfills unsold clothes, accessories, and footwear, including products returned by customers.

• The ban is anticipated to be especially problematic for luxury goods makers, which try to support their products’ high prices by strictly limiting what’s available on the market.
• Now, rather than destroying unsold merchandise, luxury firms may be forced to hold it in inventory and offer discounts to get it sold — initiatives that could hurt their ability to maintain high prices.

United Kingdom: Former Manchester mayor Andy Burnham today becomes the UK’s seventh prime minister in the last decade. Based on his left-wing reputation, Burnham is expected to push for an early package of spending hikes to boost economic growth. Over the longer term, he is also likely to push for measures to shift power out of London, give voters more control over public utilities, and increase spending on public housing.

US Artificial Intelligence Industry: Chinese AI firm Moonshot unveiled its new Kimi K3 open-source model on Friday, with third-party assessments suggesting it is more capable than the most cutting-edge US models, at a far lower price. The development has caused deep concern that the US models could soon become uncompetitive on both performance and price. In turn, that could prompt investors to rethink the value of the US’s leading AI firms and other stocks dependent on the AI investment boom.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an assessment of the latest escalation in the US-Iran conflict. We then turn to chipmakers, where there are signs that investors have grown hesitant to support capacity expansion plans. Next, we examine Iraq’s collaboration with an oil company to develop a route bypassing the Strait of Hormuz, China’s push to become an AI powerhouse, and the president’s election interference claims. As always, we conclude with a review of recent domestic and international economic data.

Escalation in Iran In another sign of escalating conflict, US forces have intensified their attacks on Iran. On Thursday, local news agencies reported that American forces have begun targeting airports, bridges, and railways as part of a broader effort to further degrade Iran’s military capabilities. The strikes represent a major escalation, signaling that Washington is following through on its plan to use aerial bombardment to cripple the country’s infrastructure. The latest developments suggest the conflict could worsen heading into the weekend.

• The attacks appear to mark the president’s follow-through on his threat to ramp up pressure on Iran, as he seeks a swift conclusion to the war. Earlier this week, the president warned that he would target the country’s bridges and power plants unless Iranian leaders returned to the negotiating table. While the recent campaign has not yet escalated to the worst-case outcome, the president has hinted that his most significant move could be unveiled as soon as next week.
• The president’s escalation appears to be fostering internal divisions within the White House, with competing factions emerging over the necessity of an aggressive approach. Vice President JD Vance used a three-hour appearance on Joe Rogan’s podcast to question the administration’s hawks regarding their strategic calculus, warning that an overly aggressive posture could replicate the Libya experience and precipitate a significant humanitarian crisis.

• Markets have so far shown little concern, with the muted response suggesting investors believe the conflict is contained and oil prices will remain stable despite heightened tensions. We expect this calm to persist as long as supply is not disrupted. However, any meaningful interruption to oil flows could quickly revive inflation fears and prompt markets to price in a higher likelihood of tighter monetary policy.
• It is too early to know whether the escalation will continue, but further action remains on the table. A diplomatic breakthrough with Iran could calm markets and ease regional tensions. Yet, the risk of an expanded US military campaign, even an outright invasion, cannot be dismissed. While that latter outcome faces significant political constraints given the war’s unpopularity, its likelihood increases over time. We expect this uncertainty may trigger portfolio rotations, as investors move to manage risk.

Chipmaker Worries: Growing signs of AI fatigue are emerging, as investors grow increasingly wary of elevated valuations. The latest market reaction followed Taiwan Semiconductor’s earnings release. Despite a strong earnings beat, sentiment soured after the company announced plans to commit an additional $100 billion to its US expansion. While the move is officially tied to strong demand, lingering concerns persist over the role of pressure from the White House in shaping the decision.

• TSMC’s second-quarter earnings failed to impress investors, despite the company’s strong performance. In the second quarter, net profit surged 77% year-over-year, comfortably beating the 51% consensus forecast. This time, however, the spotlight shifted to the company’s expanded Arizona capex, where the costly production ramp-up is projected to pressure gross margins, tempering enthusiasm for the earnings beat.
• The investor pushback appears to reflect concerns that the expanded Arizona capex may be influenced by geopolitical considerations alongside commercial demand. Earlier this year, the president threatened tariffs on countries that did not establish US production facilities. Following TSMC’s announcement, Commerce Secretary Howard Lutnick welcomed the increased spending, characterizing it as an endorsement of the administration’s broader trade and investment strategy.
• TSMC is not alone in facing pressure to expand US production. Just last week, Commerce Secretary Lutnick called out Samsung and SK Hynix — both major beneficiaries of the AI buildout — stating that they too need to bring more manufacturing to the United States. The move appears to be part of a broader US effort to persuade companies that American national security concerns must carry equal weight alongside their commitments to shareholders.
• Although the recent sell-off in chipmakers may prove temporary given the enduring nature of the AI buildout, questions regarding shareholder primacy are likely to emerge as these firms aggressively expand capacity. Consequently, investors may begin seeking returns outside the technology sector to diversify their holdings. We continue to believe a well-balanced portfolio is an excellent strategy for those seeking to mitigate outsized tech exposure.

Hormuz Alternative: Chevron and the Iraqi government are jointly advancing a pipeline project designed to provide an alternative to the Strait of Hormuz. The plan calls for the restoration of two pipelines originally slated to traverse Syrian territory to the port of Baniyas. The project would enable Iraq to resume oil exports that have been constrained by the conflict. Before proceeding, however, Chevron will conduct a feasibility study, given that substantial segments of the route traverse regions with active insurgency risks.

China AI Power? Xi Jinping used his opening speech at the World Artificial Intelligence Conference to present China’s open-source AI ecosystem as an emerging‑market alternative to US-led models. He framed it as a way to ensure that developing economies have a voice in and can help shape the global trajectory of AI. The remarks fit into his broader effort to position China as a standard‑setter in AI and coincided with Chinese startup Moonshot releasing a model pitched as a rival to offerings from OpenAI and Anthropic.

Election Interference? President Donald Trump used a prime-time address to accuse China of interfering in the 2020 US elections as he pushes Congress to pass his SAVE America Act. He dismissed prior US intelligence findings that no foreign actor altered votes in 2020, claiming evidence has been suppressed by the “deep state.” His comments are likely to raise concerns about election security going into the midterm elections as well as possibly undoing the truce with China.

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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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