by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with an update on the war in Iran, where Iran-backed rebels in Iraq have apparently forced the shutdown of a key Saudi Arabian pipeline, boosting energy prices and driving down stock values around the world today. We next review several other international and US developments that could affect the financial markets today, including the weekend call from key US artificial intelligence leaders to “pace” the industry’s development and a review of upcoming monetary policy moves by key central banks this week.

United States-Israel-Iran: Saudi Arabia said over the weekend that it had shut down its critical East-West pipeline, which had allowed the kingdom to bypass the Strait of Hormuz and get some 7 million barrels per day of its crude oil to market through the Red Sea. The government said the pipeline had been targeted and damaged by drones apparently launched by Iran-backed militias in Iraq. The government also said it is repairing the pipeline; nevertheless, the incident highlights the vulnerabilities there.

• Now that the US and Israel have eroded more Iranian military power and the US has been able to escort more oil tankers through the strait, it appears that Iran is implementing a plan to lean more heavily on its proxy forces in the region to hurt the US and its allies.
• As investors begin to understand that shift and the now-demonstrated vulnerability of the East-West pipeline, global oil prices today have jumped about 3.4%, with near Brent crude oil futures trading at about $108.18. In turn, the jump in energy prices is weighing on stock values as well.

US Artificial Intelligence Industry: Anthropic chief executive Dario Amodei on Saturday published a 3,800-word essay calling for AI model development to proceed more slowly to avoid doomsday scenarios such as a rogue-agent takeover of the entire internet. Remarkably, a range of top AI executives including Elon Musk at SpaceXAI and Sam Altman at OpenAI publicly seconded the idea. As consensus on the issue apparently grows, it is becoming increasingly probable that Congress will finally be spurred to action to impose guardrails on the industry.

• Of course, the Chinese government and AI firms in China are so far showing no concern about the models’ rapid development. They are likely to keep charging ahead even if the US modelers slow down. Because of that, President Trump and officials associated with his administration are pushing back against a slowdown and calling for full steam ahead.
• In our view, there are now multiple headwinds growing for the AI industry in the US, including a competitive threat from the increasingly capable and low-cost Chinese models, public pushback against the data centers needed to run AI applications, and the new pressure to tighten regulations on the industry. If those headwinds continue to intensify, the risk of a pullback in AI-related equity valuations is expected to grow.
• In any case, the weekend discussion about deliberately slowing or “pacing” the momentum in AI development is weighing heavily on technology stock prices so far this morning.

China: The Beijing municipal government yesterday announced a ban not only on flying drones in the city but also on possessing, storing, transporting, or bringing them and their core components into the city, except in exceptional circumstances. The ban responds to a June incident in which a small plane flew into Beijing’s tallest building. The ban may also signal that as civilian drones become more commonplace around the world, they are likely to become regulated as the inevitable accidents happen, potentially crimping the budding industry.

India: The government has announced that it plans to source virtually all of its newly approved $11.6-billion military equipment spending from domestic sources, including an expanded role for the private sector. The move illustrates how governments around the world are prioritizing resilience, supply chain security, and domestic industrial development as they boost their defense budgets and respond to greater geopolitical tensions.

Sweden: The country’s parliamentary election yesterday has become the closest ever, with fewer than 30,000 votes currently separating the left-wing opposition bloc from the right-wing government as hundreds of thousands of overseas votes and late ballots are still to be counted. Electoral authorities don’t expect to announce the final results until Wednesday or Thursday.

US Monetary Policy: The Fed begins its latest policy meeting tomorrow, with its decision due out on Wednesday at 2:00 PM ET. Based on the latest interest-rate futures trading, investors widely expect the policymakers to hike their benchmark fed funds rate by 25 basis points to a range of 3.75% to 4.00%. That expectation stems from both the continued high readings for consumer price inflation and recent hawkish statements by Chair Warsh and other policymakers.

• Still, because of the risk of political blowback from the White House or other concerns, there is probably still some chance that the policymakers could simply hold rates steady.
• Such a decision would likely spark significant volatility across a range of asset markets.

UK Monetary Policy: In contrast with the Fed, the Bank of England is expected to hold its benchmark interest rate steady at its policy meeting later this week. However, analysis by the Financial Times suggests that relatively brisk economic growth coupled with rising energy costs due to the war in Iran could force the central bank to boost rates later this year. Any such rate hike would be the BOE’s first in more than four years.

Japan Monetary Policy: Economist surveys also show that the Bank of Japan is widely expected to hike its benchmark interest rate again when it holds its latest policy meeting this week. Importantly, the normalization of Japanese interest rates after decades of extraordinarily low rates continues to contribute to an unwinding of the yen “carry trade.” In turn, that is causing significant volatility in the global currency markets and broader financial markets.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an assessment of the growing shift toward more hawkish monetary policy. We then turn to geopolitics, examining developments in the Middle East as the conflict broadens beyond the Strait of Hormuz. Next, we briefly consider the potential for an electoral upset in Brazil and the efforts by AI developers to slow work on some of their most potentially dangerous models. As always, we conclude with a review of recent domestic and international economic data.

Global Hawks: Many countries are considering tightening monetary policy to contain inflationary pressures caused by the rise in oil prices. This push comes as central banks try to curtail the pass-through effect of energy prices to other parts of the economy. Several central banks have either already hiked rates or signaled their willingness to tighten policy. This shift in expectations of policy rates has helped spur long-term yields globally, and the resulting increase in borrowing costs will likely add to the fiscal burden most countries are facing.

• On Thursday, the European Central Bank raised rates for the second time since the war began in February. The vote was unanimous, showing that members shared concerns about the rising inflationary pressures building throughout the economy. During the press conference, ECB President Christine Lagarde suggested that further hikes were likely, given the central bank’s expectation that inflation would remain elevated and not return to its target until 2027.
• The ECB’s adjustment comes as other central banks have also appeared to take a more hawkish view on monetary policy. The Bank of Japan is also reportedly considering moving in a similar direction, with expectations that it will raise rates by 25 basis points to 1.25% and signal faster tightening ahead. Meanwhile, implied policy rates suggest that both the Bank of England and the Bank of Canada could also hike interest rates by the end of the year.
• While much of the developed world appears to be leaning toward hikes, it is still not clear what the Federal Reserve will do on Wednesday. As of this writing, the latest CME FedWatch tool suggests that the central bank has about a 70% chance of raising rates by 25 basis points. However, there has been a push by the White House for the Fed to hold rates steady, due to the lack of evidence of sticky core inflation. As an exporter, the US is more resilient than other economies to energy shocks, making a rate hike less necessary.
• The shift toward more hawkish policy abroad is likely to weigh on growth and may persist as the war continues to add concerns about energy security. This could have a negative impact on growth, particularly abroad, as other economies could be more inclined to tighten policy to adjust to inflationary pressures. However, if worries about energy ease, we could see sentiment improve for international stocks.

Middle East Fears: The escalating conflict in the Middle East has raised concerns that supply disruptions could worsen. On Thursday, the Houthis were able to take over ports in the Red Sea as they look to close the Bab el-Mandeb Strait. The group’s advance increases the likelihood that there could be two compromised straits in the region, which would further strain trade, making it difficult to transport oil. The rising conflict in the Middle East has put pressure on other countries in the region to help put an agreement in place as they look to prevent the conflict from broadening.

• The Iran-backed Houthis have managed to secure the port of Mocha. The takeover is part of their effort to impose a blockade on Saudi ports as they look to expand the war throughout the Middle East. They have been able to make progress in taking control of the Red Sea coastline, which they believe will allow them to launch more successful attacks on ships moving through the Bab el-Mandeb Strait.
• While Iran itself has seen its success fade, it appears to have leveraged the help of its proxies in other regions around the world. The group has several alliances with groups in countries such as Syria, Iraq, Lebanon, and Yemen, as well as the Palestine area. These groups have demonstrated the ability to disrupt regional security, threaten infrastructure and shipping routes, and raise the risks for Gulf states and their partners. This network gives Iran a means of exerting pressure beyond its borders.
• The widening of the conflict will likely add to the supply and demand imbalance in oil markets. The conflict has pushed oil prices above $100 a barrel and kept them elevated over the last two days. The main worry for investors is that the lack of oil flows means the growing imbalance will likely worsen as Chinese demand returns to the market and strategic reserves start to dwindle. While US forces remain able to make some progress in the Strait of Hormuz, which could ease pressure, the Houthi advance suggests prices may remain elevated.
• Although the US is reluctant to hold talks, discussions involving Iran and Gulf governments are already under way. If they produce a credible de-escalation agreement, it could help restore safe passage through the Strait of Hormuz and reduce the risk of a broader regional conflict. That, in turn, could help bring down oil prices and offer some relief from rising bond yields. However, any deal would likely need some form of US support to be effective.

Bolsonaro Upset: As the Brazilian election approaches, Flavio Bolsonaro’s chances of winning appear to be increasing. The pickup comes as a new poll shows that Bolsonaro now holds a 1% lead, indicating that his popularity is rising. Growing expectations of a Bolsonaro win have led to an unwinding of hedges against the Brazilian real, since a victory is expected to pave the way for more sound fiscal policy as well as more preferential treatment from the US in terms of trade and investment.

Slow AI: The CEO of OpenAI has announced that he is considering the possibility of slowing down the development of some of the company’s more complex systems. The shift comes amid concerns that the technology is developing at a pace that at some point could pose a risk to humanity. While it is not clear whether other companies will follow suit, it does highlight the growing need for oversight of AI due to the potential dangers.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with an analysis of the Treasury Department’s decision to scale up buybacks and the subsequent market response. We then examine artificial intelligence and address growing concerns around safety risks associated with the technology. Next, we briefly highlight the president’s push to win over voters with cash incentives, as well as Iran’s decision to intensify regional conflict. As always, we conclude with a wrap-up of recent domestic and international economic data.

Bessent vs. Market: The US Treasury Department announced plans to buy back up to $6 billion in long-dated securities, well above the $2 billion operation communicated to the market on August 19. The larger purchase underscores Treasury Secretary Scott Bessent’s effort to dampen market volatility. The Treasury’s more active role in the bond market, however, has also tested investors’ willingness to take Bessent’s guidance at face value as the department seeks to manage the government’s expanding fiscal debt burden.

• The announcement was poorly received by the market. Treasury securities sold off immediately, driving the 10-year yield above 4.85% for the first time since 2023. That rise was likely the opposite of what Treasury Secretary Scott Bessent intended, since the buyback was meant to help calm the bond market, not intensify the selloff. The adverse reaction highlights the difficult task facing the Treasury as it seeks to steady market conditions and exert greater influence over borrowing costs.
• The Treasury’s decision to expand buybacks of government bonds comes amid debate over the market’s appropriate equilibrium price. According to Bessent, the intervention is intended to address periods when market sentiment prevents bond prices from reaching that equilibrium. He has also argued that removing off-the-run Treasury securities from corporate balance sheets would free up capacity for financial institutions to participate more actively in Treasury auctions.
• Treasury buybacks have been in operation since 2024. When Secretary Yellen launched the program, it was designed to shift issuance toward shorter durations, redirecting liquidity out of the Federal Reserve’s reverse repo facility and into Treasury bills to help ease funding stress and lower term yields. This strategy was intended as a temporary fix while awaiting expected Fed rate cuts, after which the Treasury could extend duration at lower interest rates.

• Secretary Bessent faces a similar market environment, albeit without the buffer of excess cash in the reverse repurchase facility. However, coordination with the Federal Reserve’s reserve management purchases has provided welcome relief. This policy framework has allowed the Treasury to facilitate a rotation out of longer-dated bonds and into shorter-duration securities without triggering broader market disruptions.
• Consequently, Bessent’s expanded buyback strategy is meant to serve as a temporary bridge to manage upward pressure on yields. The Treasury is likely using buybacks to contain borrowing costs stoked by geopolitical tension with Iran, which has heightened inflation expectations and term premiums. Assuming the conflict resolves — an outcome the White House suggests could materialize following the midterms — we expect the Treasury to gradually scale back its active intervention in the bond market.
• If this thesis holds, interest rates could remain elevated over the next few months, but yields may not rise materially above current levels. Consequently, this environment could present an attractive entry point for investors seeking to extend duration. Over the long term, however, total returns for fixed income will remain tied to achieving price stability and seeing credible fiscal progress, whether through spending restraint or accelerated economic growth.

AI Fears: Growing concerns over artificial intelligence safety intensified this week following the resignation of an Anthropic employee, who warned that advanced AI could pose an existential threat to humanity within a matter of years. This departure highlights the escalating risks associated with rapid AI development and the government’s struggle to keep pace with regulation. Consequently, lawmakers face mounting pressure to establish oversight committees and effectively regulate the technology.

• A former Anthropic employee claimed that researchers are developing models at a pace that could soon escape human control, with some workers even referring to their current project as “endgame.” Industry experts share these worries, with one prominent figure estimating a less than 10% chance that a rogue AI could destroy humanity within the next decade.
• Concern about the potential dangers of advanced AI has prompted lawmakers to consider new regulatory measures. Texas Senator Ted Cruz has discussed introducing legislation aimed at limiting AI’s use in potentially catastrophic areas, including biological and nuclear threats. Meanwhile, Democrats are weighing the creation of a dedicated AI oversight committee with subpoena power to question technology executives and gain a clearer understanding of how advanced AI systems are being developed.
• The growing difficulty of containing AI will probably take a toll on rising AI companies, especially as they look to go public. As a result, the push for greater oversight — probably leading to more regulation that will slow development — could make it harder for these companies to reach the profit goals needed to justify the lofty valuations that are likely to come.

Trump Dividend: In an effort to boost Republican voter turnout for the November midterms, President Trump delivered a high-stakes pitch at the party’s Texas convention: a $5,000 check for every adult US citizen if the GOP holds both houses of Congress. The pledge reflects a wider White House trend toward leveraging financial incentives to rally political support. It comes shortly after discussions emerged regarding a policy draft to pay stay-at-home parents $9,000 per child annually to offset child-rearing costs.

Iran Intensifies: Tehran maintains that it is willing to escalate its conflict with the US over the Strait of Hormuz. The warning comes as Iran struggles to export oil under a US naval blockade and faces diminishing control over the strategic waterway. Fears of a broader conflict have pushed oil prices past $100 a barrel. While the immediate risk of all-out war remains low, that calculus could shift if Iran targets key US allies outside of the gulf.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with takeaways from the latest escalation in US-Canada trade friction, before turning to recent geopolitical developments between the US and Iran. We then cover Treasury Secretary Bessent’s announced intent to intervene in bond and currency markets, along with the EU’s push for closer ties with Canada. As always, we include a summary of recent domestic and international economic data.

US-Canada Trade War: The US-Canada trade dispute escalated on Tuesday as both countries exchanged new trade restrictions. Canada moved first, imposing tariffs on US goods in response to duties that Washington had placed on Canadian imports two weeks earlier. The United States then threatened to block sales of its military aircraft and announced it was considering restrictions on certain dairy products and alcoholic beverages. That said, although tensions are rising, there are still few signs that this will have an impact on market momentum.

• The president’s latest actions come amid heightened scrutiny of the US-Canada relationship, as he seeks to realign bilateral terms to better serve American interests. Earlier this week, he questioned the fairness of the Canadian exchange rate, characterizing it as imbalanced. He has also suggested that Bombardier may need to start building more of its jets in the US or risk losing market access to government contracts. The remarks show that US grievances with Canada are not solely based on trade.
• Prime Minister Mark Carney has responded to US actions by acknowledging that the trade dispute will probably hurt Canada’s economy, but he is also pushing for alternative paths forward. His administration is reportedly exploring new free trade arrangements, possibly with the US and others, while accelerating infrastructure spending nationwide. While these steps are unlikely to resolve the issue in the long run, they are designed to soften the blow in the near term.
• The measures are unlikely to materially affect either economy, but the political fallout could be greater. Canada’s tariffs may pressure US policymakers ahead of the midterms, particularly in swing states such as Maine and Wisconsin, while US tariffs target manufacturing hubs in Ontario, New Brunswick, and Quebec. Canada’s retaliation could modestly weigh on the US economy, while US tariffs are likely to be a larger drag on Canadian growth. Even so, they are not expected to push Canada into recession.
• While the latest measures are unwelcome, their immediate market impact is likely to be limited because most US-Canada trade remains governed by the USMCA. The more important question is whether the dispute will spill over into other trade relationships, particularly as the United States prepares for talks with China. A broader rise in trade tensions could add to market volatility, but there is currently little evidence that this dispute is spreading beyond the bilateral relationship.

Iran Escalation: The conflict between the US and Iran has flared up once again, with both sides escalating retaliatory strikes. The US has launched missile attacks on Iranian oil tankers, while Tehran has responded by hitting US military positions in Jordan. The latest escalation comes amid a surge in Chinese oil purchases, fueling renewed concerns over supply-demand imbalances. While the heightened tensions could weigh on risk sentiment in the near term, little evidence remains to suggest that they pose a lasting threat to equity markets.

• The recent spat comes as the two sides fight for control over the strait. This renewed conflict has reversed much of the progress made in securing safe passage through the waterway, though many vessels still manage to transit by turning off their transponders. However, both countries have now begun targeting each other’s oil tankers, complicating their ability to profit from sales and rendering the strait increasingly dangerous for maritime trade.
• China’s pickup in purchases has heightened concerns over global oil supply. Until recently, China had slowed its buying and drawn down existing inventories, which helped ease upward pressure on prices. However, that trend reversed this month as oil shipments rose to 10 million barrels per day, up from the lows of 6 million barrels per day earlier this summer. This resurgence in buying appears to be driven less by broad end-user demand and more by Chinese refiners moving to capitalize on attractive refining margins.
• Nevertheless, while oil prices are likely to remain elevated, there are still encouraging signs that consumer spending remains resilient. Much of this sustainability stems from households’ access to available credit. In July, the increase in nonrevolving credit was the largest in three years; meanwhile, revolving credit growth slowed from the previous month but still posted a gain. This reliance on credit has helped sustain consumer purchasing power even as inflation has outpaced wage growth.
• The rise in oil prices, driven by conflict involving Iran and China’s resumption of purchases, remains a key economic concern. However, higher energy costs alone are unlikely to derail household spending. As long as geopolitical tensions stay relatively contained, markets should recover from temporary drops in sentiment. For risk-averse investors, value stocks offer attractive potential due to their stronger fundamentals and lower volatility profile.

Bessent Steps In: US Treasury Secretary Scott Bessent made clear his readiness to intervene in order to prevent markets from spiraling out of control. On Tuesday, he stated that he is prepared to step into both bond and currency markets to deter speculators from triggering a sell-off. His actions come amid growing investor anxiety over rising fiscal spending in both the US and Japan. Collectively, these moves reinforce the perception that the government is becoming increasingly interventionist in the economy.

EU-Canada Alliance: The European Union and Canada are working to deepen security and trade ties as both look to reduce their economic dependence on China and the United States. European Commission President Ursula von der Leyen is expected to outline these plans during her State of the Union address on September 16, with Canadian Prime Minister Mark Carney in attendance. While there has been ongoing speculation about Canada establishing an EU-style partnership with the bloc, the practical mechanics of such a framework remain unclear.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some disturbing remarks from a former White House official that serve as a reminder that the US-China competition in artificial intelligence could eventually lead to geopolitical conflict, although not necessarily in the near term. We next review several other international and US developments that could affect the financial markets today, including new attacks in the Iran war that have driven up energy prices today and the latest skirmishes in the US-Canada trade war.

United States-China: Jacob Stokes, a former White House official who is now a leader at the Center for a New American Security, said at an event on Thursday that the federal government should start preparing for offensive action against China to keep it from surpassing US capabilities in artificial general intelligence (AGI). According to Stokes, the US needs to start developing the espionage, covert operations, and military programs that would be needed to slow or destroy China’s ability to exploit AGI.

• The call from Stokes is an extreme proposal. We’ve seen no other current or former US official calling for military strikes aimed at China’s artificial intelligence capabilities. Since China is probably no more than a few months behind the US in this technology, and since the war in Iran has probably weakened the US armed forces severely for years into the future, it isn’t even clear that US intelligence or military action could meaningfully slow China’s progress.
• All the same, the dramatic proposal raises a point: If artificial intelligence and AGI really are game changers for national economic development or geopolitical power, losing out to the Chinese could eventually be seen as an existential issue for the US. At some point down the road, investors may indeed see a growing debate about potential offensive kinetic action against China — a development that would be profoundly impactful on the financial markets.

European Union-China: In an interview with the Financial Times, the chair and chief executive of Spanish auto parts giant Gestamp today warned that Europe’s “wealth won’t last” unless it can salvage its auto industry amid surging imports from China and rising trade barriers in the US. The statement comes as EU automakers and other industrial firms continue to hemorrhage jobs, prompting EU officials and national leaders to consider tougher trade policies against China. However, those officials and leaders continue to worry about Beijing’s likely retaliation.

United States-Canada: In a social media post yesterday, President Trump appeared to threaten a new US ban on selling business jets from Canadian aerospace firm Bombardier, even though the firm employs more than 3,000 workers at nine different facilities in the US and buys supplies from thousands of US firms. The president’s threat came just hours before Canada imposed its big retaliatory import tariffs on a range of products from the US. The statement suggests the US and Canada will remain locked in a disruptive trade war for the near future.

United States-Israel-Iran: The US military over the weekend struck three Iranian oil tankers in retaliation for Iranian missile attacks on two US Navy vessels. Then, yesterday and today, Iran-backed Houthi rebels in Yemen attacked several oil facilities in southern Saudi Arabia, shutting down several of them. The renewed strikes have pushed global oil prices higher yesterday and today, with near Brent futures currently up 1.6% to $98.54 per barrel.

• Now that the US Navy has had some success in escorting allied oil tankers through the Strait of Hormuz, the renewed Houthi strikes may reflect a tactical shift by Tehran to focus on Saudi Arabia.
• As shown by the behavior of oil prices today, such attacks can push up global energy costs and potentially cause political problems for President Trump.

Germany: In a weekend election for the Saxony-Anhalt state parliament, the far-right Alternative for Germany (AfD) won handily with 43.8% of the vote, thrashing the Christian Democratic Union, which rules nationally. The CDU came in second with just 17.2% of the ballots. The results put the AfD just three seats short of a majority in the state legislature, but that isn’t likely to prevent it from taking control of the state to push the national AfD party’s agenda.

• The AfD’s populist, nationalist agenda focuses on aggressive anti-immigration policies, financial incentives to boost the birth rate, reduced teaching about Nazi Germany in the schools, and increased teaching of Russian. The agenda also strongly focuses on wresting back power from the European Union and drawing closer to Russia.
• The AfD’s win in Saxony-Anhalt gives it further momentum that could help it eventually seize power at the national level. The risk of policy upheaval could well weigh on German stock values going forward.

France: Private model-maker Mistral AI today raised 3 billion EUR ($3.5 billion) in new equity as it fights for relevance in the global artificial intelligence race dominated by US and Chinese firms. The new private-equity financing, which was led by an investment from Samsung, lifts Mistral’s valuation to 21 billion EUR ($24.4 billion) and will be used mostly to secure compute capacity for the company’s modeling effort. However, Mistral’s valuation is still only a small fraction of the valuations expected for US companies such as Anthropic and OpenAI in their upcoming initial public offerings (IPOs).

United Kingdom: As a reminder that government bond yields are rising across the globe, the British government today sold 4.25 billion GBP ($5.74 billion) of 30-year debt at a yield of roughly 5.83%. That marks the highest interest rate on any gilt since at least 1998. The surge in yields reflects many factors, including concerns about elevated consumer price inflation, high global credit demand from the AI investment boom, and worries about national governments’ big budget deficits and rising debt loads. The rise in yields could eventually weigh heavily on national stock markets.

Japan: In London trading yesterday, the yen not only continued its recent appreciation but also reached its highest value against the greenback since February, at 154.06 yen per dollar. In US trading early today, the currency remains at about that level. The joint US-Japanese market intervention in late July has been seen as only temporarily effective, but now it appears that the yen is getting an added boost from expectations of more aggressive interest-rate hikes by the Bank of Japan and the reversal of short positions as the yen broke through 155.

Global Education: The latest PISA survey of comparative educational attainment across the countries of the Organization for Economic Cooperation and Development shows that reading scores have plunged across the developed world, as widespread access to AI and social media has harmed teenagers’ ability to concentrate. The performance of the average 15-year-old across the OECD in 2025 was more than a year behind where it was in 2018, according to the report. The report will likely raise concerns about skill shortages in the future workforce.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with our view on the dollar and the drivers we expect to influence it going forward. We then briefly cover the German elections, AI advances, private credit, and other market-moving narratives. We close, as usual, with a roundup of recent economic data from both the US and abroad.

The Sideways Greenback: The US dollar has remained largely flat throughout the year, even amid persistent market volatility. This stability masks a tug-of-war between several competing forces, including uncertainty over Federal Reserve policy, Japan’s suspected currency interventions, and the threat of a liquidity crunch stemming from escalating geopolitical tensions in the Middle East. While these crosscurrents have kept the greenback rangebound so far, a shift in any of these narratives could trigger meaningful moves in the dollar going forward.

• The dollar weakened against a broad basket of currencies this week, driven by diverging monetary policy signals from the Bank of Japan and the Federal Reserve. On Thursday, Fed Governor Christopher Waller pushed back against the market’s recent hawkish repricing, signaling his preference to keep rates unchanged at the upcoming meeting. At the same time, speculation that the Bank of Japan may deliver an oversized rate hike fueled a rally in the yen.
• While recent developments have weighed on the dollar, several ongoing risks could still provide support. The wars involving Iran and Ukraine remain key upside risks, particularly if either conflict escalates and drives energy and other commodity prices higher. Such a shock would likely be bullish for the dollar as it could delay Federal Reserve easing, while also increasing global demand for dollar liquidity as governments, firms, and commodity importers secure funding for essential goods.

• Among the five major freely floating currencies in our basket, only the euro and Canadian dollar have weakened against the US dollar on a net basis this year. The Japanese yen has been the most volatile. It had led the declines through July before rebounding sharply, fully reversing those losses and moving into positive territory for the year. The Mexican peso has been the basket’s strongest performer, consistently holding onto the gains it made at the start of 2026.
• Monetary policy remains a key focus for currency markets, as exchange rates are highly sensitive to changes in expected interest-rate differentials. The dollar’s central role in global trade should continue to make it attractive during periods of heightened uncertainty, although we expect these episodes to provide only temporary support. Going forward, the dollar’s direction will depend largely on the relative tightness of US policy versus major peers, as well as each central bank’s credibility in maintaining price stability.

German Elections: Ahead of upcoming elections, German Chancellor Friedrich Merz has been maintaining a low profile. This decision to remain largely invisible comes as he seeks to protect his party from political backlash linked to his declining popularity during recent months. The CDU is attempting to curb the momentum of the far-right AfD in next week’s regional elections while simultaneously preparing for the general election in January. Germany — along with other European nations such as France, Italy, Poland, and Spain — is facing growing challenges from the far right.

OpenAI Breakthrough: OpenAI, the maker of ChatGPT, announced that it has developed a model it says surpasses Anthropic’s. CEO Sam Altman described the system as approaching artificial general intelligence, or AGI, a term generally used to describe AI with broad, human-level cognitive capabilities across a wide range of tasks. If borne out, such a breakthrough could strengthen OpenAI’s competitive position as it prepares for a potential initial public offering (IPO) and could provide a further catalyst for enthusiasm across the AI sector.

National AI Regulator: Meta CEO Mark Zuckerberg held a phone call with President Trump to voice concerns over the proposed oversight of AI. The discussion follows the White House’s push to establish an industry-led regulator modeled after FINRA. While the proposal has garnered backing from many tech professionals, Zuckerberg has expressed reservations and urged the president to pursue a lighter-touch approach to AI policy.

Private Credit: Cliffwater has capped redemptions in its funds to shield its portfolio from forced asset sales. Despite investor requests to redeem 16% of shares in the third quarter, the fund successfully capped redemptions at its 5% limit. While withdrawal gates often attract criticism, such measures are essential for preventing liquidity runs in otherwise high-quality assets. Notably, Cliffwater has still satisfied 78% of total redemption requests this year as outflow pressures steadily ease, a strong testament to its capacity to satisfy liquidity needs.

Norway Sovereign Wealth Fund: The sovereign wealth fund’s manager has proposed trimming its government bond holdings. The move reflects rising anxiety over meager returns amid widening deficits, inflation concerns, and geopolitical tensions. US Treasurys could bear the brunt, with potential reductions of up to $80 billion, though agency bonds appear safe given their robust performance. The broader pivot away from global debt may complicate efforts by governments to manage their swelling liabilities.

Note: Due to the holiday, there will not be a Daily Comment or Bi-Weekly Geopolitical Report published on Monday.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will begin with a discussion of a potential set of economic indicators the Federal Reserve may be monitoring and the implications for its forward guidance. We will then turn to the second day of the G20 summit, where attention was centered on artificial intelligence. The report will also briefly examine the recent appreciation of the yen and President Trump’s push to lower gasoline prices. As always, it will conclude with a summary of the latest domestic and international economic data releases.

Forward Guidance Lite? With the Fed’s blackout period just days away, markets are already scrambling to decode the central bank’s reaction function. On Wednesday, a Bloomberg report used data points from Kevin Warsh’s Jackson Hole speech as a dashboard to gauge how the new Fed chair views the economy. The indicators will be used as signals that market participants are likely to lean on heading into the upcoming FOMC meeting, which begins on September 15.

• Bloomberg’s analysis focused on several key indicators. Financial conditions included four-quarter growth in equipment and intangible investment, profit margins, credit spreads, and a Fed survey on lending. Real-economy measures spanned final sales to private domestic purchasers, the unemployment rate, and continuing jobless claims. Inflation gauges combined the share of PCE components running above 3%, along with market-based breakeven inflation rates and consumer-survey inflation expectations.
• Using these data points as a guideline suggests that the Fed chair may be worried about the economy overheating. In discussing them, Warsh emphasized signs of continued underlying strength rather than an economy constrained by restrictive policy. He pointed to more than 20% year-over-year growth in S&P 500 profits, four-quarter growth of roughly 9% in investment in equipment and intangible assets, and a 4.2% annualized increase in final sales to private domestic purchasers.

• One could therefore interpret Warsh’s emphasis on these indicators as evidence of a more hawkish shift. That conclusion, however, may be premature. His use of the data may instead have been intended to counter concerns that higher interest rates were pushing the economy toward a more serious downturn. In that reading, the indicators were meant to demonstrate the economy’s resilience rather than to signal a preference for tighter policy.
• Warsh’s willingness to outline a set of indicators for markets to monitor ahead of the next meeting may help reduce uncertainty around the Fed’s reaction function. Even so, the prospect of a rate hike remains unclear until policymakers receive the latest employment and inflation reports, due this and next Friday. Until then, these indicators should be viewed more as important inputs into the policy debate, and not as a definitive signal.

US AI Embrace: The White House continues to make AI a cornerstone of its economic agenda as it seeks to establish a global regulatory framework. On the second day of the G20 gathering — attended by government officials and tech leaders — discussions centered on AI and the data required to train its models, with a particular emphasis on shielding tech companies from future copyright infringement lawsuits. The push comes as the administration continues advocating for a broad interpretation of fair-use doctrine to protect AI development.

• At the summit, tech leaders cautioned against the over-regulation of artificial intelligence, arguing that strict controls could stifle economic growth. They expressed particular concern over data sovereignty laws — most notably in Europe — which restrict how foreign companies collect and process citizen data. The US has repeatedly opposed these European regulations, arguing they unfairly target American technology firms, which currently lead the AI sector.
• The tech industry’s push for broader data access to train its models comes amid growing backlash from content creators. OpenAI, for example, is facing a copyright lawsuit from The New York Times over its use of the newspaper’s articles. However, the Department of Justice filed a brief on Wednesday supporting OpenAI, arguing that using Times articles to train models constitutes fair use. The DOJ further noted that access to such data is essential not only for scientific progress but also for national security.
• Despite strong revenue growth, AI developers face mounting pressure to control soaring operational costs. The push for broader data access comes as firms struggle with the massive computing expenses required for model training. At the same time, top US companies are facing intense competition from lower-cost Chinese rivals, whose models continue to rapidly close the capability gap.
• The White House’s persistent advocacy for AI underscores the government’s expanding role in strategic economic sectors — especially where national security is concerned. Bolstered by government support, we believe US tech companies are well positioned to penetrate foreign markets and may boost their profitability in the process. While we acknowledge that other sectors may offer more attractive long-term value at current valuations, we still see momentum driving the AI rally ahead.

Yen Intervention: The Japanese yen rallied against the dollar amid concerns over possible official intervention. While some speculation initially pointed to the Bank of Japan, recent account data suggests that the central bank may not have been the culprit. This shift comes as growing talk of a potential outsized rate hike at the BOJ’s next meeting prompts a reset in currency expectations. Although it is too early to determine whether this trend will hold, continued speculation about support for the currency should keep it elevated against the dollar.

Fuel Prices: The White House is exploring ways to lower gasoline prices as the midterm elections approach. Earlier this week, the president met with refinery executives to discuss options for easing pressure at the pump, including measures that could encourage additional refining capacity. The administration appears to be focusing on regulatory relief as a potential incentive for firms to expand or build refinery capacity. The effort is another example of the broader push to ease domestic energy costs and limit fuel-price pressures on consumers.

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