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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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with our key takeaways from the G20, as the world’s finance ministers and central bank governors confront rising inflation and interest rates. We then turn to the Iran war, examining the factors behind the recent skirmish and providing an update on shipping through the Strait of Hormuz. Next, we briefly discuss the push by banks for a reduction in legal service fees and China’s decision not to sign the G20 joint statement. As always, we conclude with a review of recent US and international economic data.

G20 Finance Summit: On Tuesday, world finance leaders convened in Asheville, North Carolina to address key issues weighing on global growth and policy. The primary focus was elevated interest rates and persistent inflation, while concerns over widening fiscal deficits and geopolitical tensions kept investors cautious. Against this backdrop, fears are mounting that sustained high borrowing costs could restrain consumer spending and business investment, particularly in AI, potentially slowing growth later this year. Even so, we remain broadly constructive on the outlook.

• At the summit, Treasury Secretary Scott Bessent sought to reassure attendees that rising yields did not necessarily signal turmoil in the bond market, noting that US Treasurys had outperformed global peers. He attributed the increase to confidence in stronger economic growth, alongside energy-related inflation pressures that he expects to fade over time. Bessent further indicated that while fiscal consolidation efforts are underway, he views faster economic growth as the principal pathway to addressing the national debt.
• Bessent’s remarks come amid intensifying global scrutiny of both monetary and fiscal policy. Rising geopolitical tensions have lifted energy prices and, in turn, added to inflation expectations. These pressures have been compounded by shifts in bond markets where increased government borrowing has coincided with a surge in corporate debt issuance by technology companies seeking to finance AI-related investment, giving investors alternatives to invest in.

• Rising costs are putting significant pressure on governments to act. In several countries, longer-duration bond yields have surged to multi-decade highs. Most notably, the 30-year Japanese government bond yield has overtaken that of Germany, while the spread between Italian and French bonds has narrowed considerably. Meanwhile, UK interest rates are approaching 6%, exacerbating the country’s already fragile fiscal position.
• Higher borrowing costs present economic headwinds, but resilient household spending should help cushion the impact. Provided credit remains available and corporate investment in AI infrastructure stays strong, growth should stay solid. Nevertheless, growing uncertainty and elevated interest rates increase the likelihood of market volatility, reinforcing the need for portfolio diversification.

Iran Back On: The US and Iran continued to exchange strikes on Tuesday. The escalation reflects each side’s effort to gain leverage over reopening the Strait of Hormuz and resolving the broader dispute over Iran’s nuclear program. Although the initial US strikes were limited, Washington has signaled a willingness to escalate if Iran retaliates, with President Trump warning of strikes at a “much harder and higher level.” As the war enters its sixth month and diplomacy remains stalled, uncertainty over the conflict’s duration and trajectory is mounting.

• The latest round of strikes followed Iranian attacks on vessels transiting the Strait of Hormuz and on US personnel. Iran then retaliated with its own strikes targeting US bases in Jordan. Although Iran has signaled openness to reviving the June agreement, which expired last month, President Trump has indicated that he is no longer willing to return to the negotiating table.
• While the conflict has escalated, the US appears to be taking concrete steps to loosen Iran’s control over the Strait of Hormuz. Last week, a US naval convoy safely escorted 30 ships per night through the waterway near Oman. Furthermore, Treasury Secretary Scott Bessent announced plans to build an alternative pipeline, which would diminish the strait’s strategic importance in global trade. While these moves have not freed up the strait entirely, it has likely given the US more leverage in talks.

• Even so, the conflict continues to stoke market anxiety and drive oil prices upward. The broader concern is not merely physical access through the strait, but the potential for a prolonged and widening war. On Tuesday, reports revealed that there has been Russian assistance in developing Iranian supersonic missiles, intensifying worries surrounding Tehran’s weapons development. Though the exact depth of Moscow’s support is uncertain, the partnership appears calculated to further entangle the US in the Middle East.
• Although recent escalation between the US and Iran introduces renewed uncertainty over a prolonged conflict, it is unlikely to severely impact global markets — provided the confrontation remains contained. This outlook could shift if the US deploys ground troops to Iran, a move that might stabilize immediate geopolitical risk but would simultaneously reignite concerns over the fiscal burden of prolonged military engagement. As a result, we maintain a relatively optimistic outlook on risk assets.

AI Discount: Companies are increasingly pushing back against suppliers leveraging AI. Notably, investment banks have begun demanding lower fees from law firms for work automated by artificial intelligence. This shift suggests that service providers deploying AI may be forced to compress their margins as clients demand price cuts. If this trend spreads beyond the legal sector, it could dampen incentives for widespread AI deployment while simultaneously cooling inflationary pressures.

Beijing Faces Pressure: During the G20 summit, several countries sought to pressure China to alter its export-led growth model. At the summit’s conclusion, China reportedly declined to endorse language warning about trade imbalances, viewing the statement as a direct criticism of its own policies. The decision comes as the United States and European Union prepare to hold talks with China in the coming weeks concerning its trade practices.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with today’s continuing global bond sell-off, which is creating headwinds for risk assets as well. We next review several other international and US developments that could affect the financial markets today, including the latest on the war in Iran and signs that artificial intelligence firms could rapidly scale up their advertising businesses despite plenty of other challenges in terms of Chinese competition, citizen pushback against data centers, and other issues.

Global Bond Market: Investors continued to cool their bond buying in foreign markets overnight, pushing the yield on Japanese 10-year government bonds to 2.996% for the first time since 1996. Yields also rose to multi-year highs in Germany, France, and other markets. At this writing, the yield on 10-year US Treasury obligations has risen to 4.789%. The bond sell-off reflects concerns about economic overheating, high price inflation, rising debt levels, and other factors. The renewed upward move in yields is also weighing on US stock prices so far today.

United States-Israel-Iran: President Trump yesterday warned that his administration will respond to Iran’s retaliation for a US strike against two Iranian missile launchers. According to Trump, “We’re going to hit them hard.” The statement suggests a new spiral of US-Iran attacks could be about to begin, which would again raise the risk of further shipping restrictions in the Strait of Hormuz, higher energy and commodity prices, and increased volatility in global financial markets.

• Indeed, two oil tankers trying to exit the Persian Gulf were hit by “unknown projectiles” last night. If the attack came from Iran, as seems likely, it would underscore how the country retains enough firepower to keep disrupting shipping in the waterway.
• As a result, global oil prices are up approximately 2.0% so far today, with near Brent futures trading at $92.42 per barrel as of this writing.

United States-Venezuela: North American Blue Energy Partners, the private company through which the Trump administration will hold its recently announced equity stake in Venezuelan oil fields, reportedly plans to rapidly increase the number of drilling rigs it deploys in the country to more than 50 in the coming years. The aim is to quickly boost Venezuela’s oil output after its long slide under the governments of Hugo Chavez and Nicolas Maduro. The boost could have a meaningful impact on global energy supplies and help hold down prices over time.

Eurozone: In an initial estimate, the August consumer price index was up 3.3% from the same month one year earlier, matching estimates and accelerating from a gain of 2.9% in the year to July. Excluding volatile categories such as food and energy, the August “core” CPI was up 2.4% on the year, decelerating a bit from the annual rise of 2.5% in July but still coming in well above the European Central Bank’s target of 2.0%. The figures suggest the ECB will indeed hike its benchmark short-term interest rate again this month, as is widely expected.

South Korea: President Lee Jae Myung’s government today proposed hiking its budget by 12.8% in 2027 to the equivalent of $598 billion. The figure includes about $118.2 billion for an endowment-style “Future Response Fund” financed largely by soaring tax receipts from chipmakers such as Samsung Electronics and SK Hynix. The fund would support firms working on artificial intelligence and other cutting-edge industries in order to ensure South Korea remains prosperous into the future.

India: After stripping out price changes, the country’s second-quarter gross domestic product was up a strong 7.8% from the same period one year earlier, beating expectations but still decelerating a bit from the 8.6% increase in the year ended in the first quarter. The main sources of growth in the year to the first quarter were consumer spending, government spending, fixed investment, and exports. The data should be bullish for Indian stocks.

US Labor Market: Transportation Secretary Sean Duffy has announced that his agency forced the emergency shutdown of nearly 300 truck driving schools that he said were failing to train commercial drivers properly. He also said the Transportation Department has stepped up its apprehensions of commercial drivers who have a valid license but may be in the US illegally. The announcement highlights how the administration’s immigration crackdown continues to affect the US labor supply, crimping job growth but holding down the unemployment rate.

US Artificial Intelligence Industry: OpenAI yesterday said its advertising business has reached a $1 billion annualized revenue run rate less than 200 days after launch. According to the firm, the self-service ad platform is already being used by tens of thousands of businesses, including many small and medium-sized companies. Separately, analysis by WPP Media says generative AI search ad revenue is now the fastest-growing ad format in history. While other issues have made investors more wary of AI, the new data could help prolong positive sentiment about it.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with worrying new details about the recent incident in which experimental artificial intelligence agents escaped an OpenAI sandbox and hacked the company Hugging Face. We next review several other international and US developments that could affect the financial markets today, including new fighting between the US and Iran and a few words on the speech by Federal Reserve Chair Warsh at Jackson Hole on Friday.

Global Artificial Intelligence Industry: Two new probes into OpenAI’s Hugging Face breach show that when the firm tasked tens of thousands of AI agents to work independently on a difficult cyber test, roughly 1,200 found one another on a secret message board, exchanged more than 70,000 messages and files, and organized into a hierarchical swarm that then attacked outside companies as it hunted for ways to beat the test.

• As the swarm hunted on the open internet, agents began risking their own chance of success and sacrificing fellow agents to help the group.
• The agents often recognized that hacking real companies had nothing to do with their assignment, but most kept going anyway. In fact, the agents devoted substantial effort to making their cheating look legitimate or erasing evidence of how they had gotten the test answers. Some of the agents considered alerting OpenAI about the rogue coordination, but none actually did so.
• In sum, the investigations show the AI agents independently forming social, hierarchical organizations and working to achieve their goals not only aggressively, but also with human-like deception, dishonesty, and amorality.
• As political leaders, national security officials, and companies begin to understand that the agents acted like an organized, coordinated army of super-intelligent but amoral beings, we think they’ll become increasingly concerned about the dangers posed by rogue AI agents. Coupled with the increasingly questionable economics of the AI investment frenzy, that further raises the risk of a regulatory crackdown or social pushback against the industry that could take more wind out of high-flying AI stocks.

United States-Israel-Iran: The US military said it struck two Iranian missile launchers on an island in the Strait of Hormuz as they prepared to fire mine-laying missiles yesterday. Iran’s military responded immediately by launching missiles at US bases in Jordan, but US air-defense assets shot them down. The incident is a reminder that despite the US administration’s desire to now shift to economic warfare, outright military exchanges can happen at any time and threaten to intensify or expand the war again, imposing negative risks on global financial markets.

• Meanwhile, an oil tanker trying to enter the Strait of Hormuz near Oman was reportedly struck by a projectile, possibly from Iran.
• As we have noted in the past, Iran has been able to discourage most shippers from trying to transit the strait with just occasional missile or drone strikes. Shipping through the waterway therefore remains far below what it was before the war, buoying prices for commodities ranging from crude oil to fertilizers.
• In response to the latest fighting, global oil prices are up about 3.5% so far this morning, with near Brent futures trading at $91.15 per barrel.

 US Monetary Policy: At his first speech as Fed chair at the Kansas City FRB’s symposium in Jackson Hole on Friday, Kevin Warsh warned that underlying trends in consumer price inflation haven’t improved meaningfully and buoyant economic activity suggests US monetary policy isn’t restrictive enough to bring price pressures down. The analysis, which was more fulsome than Warsh has heretofore offered, suggests he is leaning toward hiking interest rates at upcoming policy meetings.

• If the Fed under Warsh does start to raise rates, the institution and Warsh in particular would likely come under strong pressure from the White House to reverse course.
• Because of that, even if the Fed does start to raise rates, we currently would not expect a fast increase or multiple rate hikes. Nevertheless, the prospect of higher rates could well have a dampening effect on key asset prices ranging from high-flying tech stocks to gold.

United States-Venezuela: President Trump on Friday said Washington and Caracas have struck a deal in which the US will take control of Venezuelan oil fields with 65 billion barrels of oil reserves, vastly increasing the amount of oil controlled by the US and its companies. Details of the deal haven’t been released, but it appears that the US government would take equity stakes in Venezuelan operations to exploit the reserves. The deal would probably be a boon to US energy firms, although much will depend on the specifics of the deal.

United States-Afghanistan: The Taliban government has signaled that it would welcome US investment in sectors such as mining, infrastructure, agriculture, and trade in return for sanctions relief and access to its frozen assets. We believe the offer could be enticing to the US administration because Afghanistan is believed to hold rich deposits of minerals including copper, iron ore, niobium, cobalt, gold, and lithium, but those deposits remain largely untapped due to decades of conflict.

China: The government on Friday said it has removed two high-ranking generals from the Central Military Commission, the main governing body for the Chinese military. The move came seven months after it was announced that Zhang Youxia and Liu Zhenli were being investigated for “serious violations of the law.” The development shows that General Secretary Xi’s massive anti-corruption purge in the country’s national security agencies continues apace.

• The continuing purge almost certainly is attacking real problems with graft and other forms of corruption, but it is also having the ancillary effect of concentrating power in Xi’s hands.
• For example, with the removal of Zhang and Liu, the CMC is down to just two known members: Xi and anti-corruption chief Zhang Shengmin. At full strength, the CMC is supposed to have seven members.

South Korea: In a new Gallup poll released Friday, 65% of those surveyed said South Korea should have its own nuclear weapons, while 30% were opposed to the idea. That’s consistent with similar polls in recent years that show the impact of China’s new geopolitical aggressiveness and the US’s faltering willingness and ability to stand by its allies. As we’ve warned previously, increased geopolitical instability could well spark a new, global nuclear arms race, which is one reason we continue to expect good returns from assets such as defense stocks and uranium.

United Kingdom: The Labour Party has confirmed that it has downgraded its 2024 campaign promise to restrict foreign buyers from purchasing new homes before they are built. The party now says it considers the policy to be just one option as Prime Minister Burnham looks for ways to make housing more accessible for British citizens. According to developers, any policy to ban foreigners would make many new-build projects untenable and further restrict housing supply.

Iceland-European Union: In a referendum on Saturday, 52.8% of the country’s electorate voted against resuming negotiations to enter the European Union. According to electoral authorities, 82.5% of eligible voters cast ballots in the divisive election, the highest participation rate in an Icelandic election since 2009. Voter interviews before the balloting suggested many of those opposed to joining the EU feared for the country’s important fishing industry and other aspects of sovereignty.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with Nvidia’s strong earnings report and the potential implications for the AI trade. We then turn to the Iran‑US conflict, which has entered a new phase. Following that, we briefly cover a few other topics, including Bill Gates’s warning on AI, Lisa Cook’s response to the White House, and recent escalation in the Russia‑Ukraine conflict. As usual, the report concludes with a summary of today’s domestic and economic releases.

AI Gains Life? The AI trade received a boost on Wednesday after Nvidia once again delivered strong earnings and an upbeat outlook. In the second quarter, the chipmaker beat consensus expectations for the 15^th consecutive quarter. While the initial report triggered a brief sell-off over concerns about rising capital expenditures, investor anxieties were eased by Nvidia’s projections of robust sales through 2028 and an expanded partnership with Amazon. The strong report may reignite optimism across a sector that has recently faced growing skepticism.

• According to the chipmaker’s earnings report, second quarter revenue rose to $96.22 billion, surpassing the $92.17 billion consensus estimate. The stronger-than-expected result was driven primarily by data-center sales, which accounted for 92% of total revenue. Although the company remains heavily reliant on hyperscalers, it is seeing its customer base broaden to include AI cloud providers, industrial firms, and enterprise customers, a trend that supports its expectation for 70% revenue growth by 2028.
• However, despite the report’s strong positives, it also highlighted several areas of concern. The company identified its rising debt burden as a key risk factor, warning that its obligations could eventually weigh on financial health and cash flow. In addition, higher memory-chip costs have compressed margins, which management expects to bottom out in the fourth quarter. Earlier this month, reports indicated that the company had begun raising chip prices for customers.

• Better-than-expected earnings at Nvidia are likely to bolster sentiment toward AI-related equities, particularly the “Magnificent” tech giants that have anchored the broader market rally. The results arrive as this group begins to recover from a recent period of weakness. Although these companies continue to demonstrate strong earnings power, investor concerns over the scale of their capital expenditure plans — and uncertainty around the eventual return on that spending — have continued to weigh on valuations.
• That said, the AI trade continues to show sustained momentum and is likely to remain elevated over the short to medium term as infrastructure buildout remains a central market theme and an increasingly important driver of economic activity. At the same time, we see potentially greater long-term value in select companies beyond the small group of names that have attracted the market’s attention. That does not, however, imply that the AI rally is over.

Sanctions over Strikes? The United States is increasingly signaling a shift toward economic leverage over military action in its approach to Iran. On Wednesday, reports indicated that Secretary of State Marco Rubio informed allies that Washington does not plan to initiate strikes in the near term as a punitive measure but will instead intensify sanctions. The announcement comes as the Treasury Department deepens its involvement in the conflict, coinciding with intensified US pressure on Tehran to return to the negotiating table.

• Rubio’s reported admission that the US favors sanctions comes as Treasury Secretary Scott Bessent steps up his involvement in the conflict. Over the last few days, Bessent has announced plans to leverage the dollar-based system and rolled out new sanctions targeting 60 individuals, entities, and vessels that are enabling trade with Iran. The move appears to be having an immediate effect, with the Iranian rial tumbling to an all-time low against the dollar.
• The decision to pursue a more diplomatic approach comes as signs emerge that the fighting has reached a stalemate. Although the United States has achieved military successes by striking several of Iran’s key military assets, it has not prevented Iran from disrupting shipping traffic through the Strait of Hormuz or from retaining the ability to launch attacks against other Middle Eastern countries in the region.
• The shift from military strikes to economic sanctions threatens to draw additional countries into the dispute. In particular, the prospect of expanded US secondary sanctions on countries and companies doing business with Iran — including potentially China, one of Iran’s key economic partners — raises the risk of retaliation from Beijing. Europe also remains on alert after Iran warned Bulgaria against allowing its territory or military facilities to support US operations.
• While the scaling back of military operations may ease near-term market fears of a wider conflict, economic sanctions remain an imperfect tool. Historically, sanctions have delivered mixed results in compelling adversaries to comply with US demands, as illustrated by their failure to deter Russia’s invasion of Ukraine or halt North Korea’s weapons program. As a result, a pivot toward sanctions may create space for further negotiations, but it is unlikely to produce a swift resolution to US-Iran tensions.

Bill Gates Warning: In a recent essay, Gates cautioned that AI poses significant threats to both the labor force and cybersecurity, and he called for a slowdown in its development. His remarks come at a time when several AI models have demonstrated autonomous hacking capabilities and as adoption of the technology continues to rise steadily across the United States. While his views may not have an impact on financial markets right away, they are likely to fuel the ongoing political debate over AI’s evolving role in society.

Fed Governor Under Pressure: On Thursday, Fed Governor Lisa Cook denied any wrongdoing in response to claims made last year by FHFA Director William Pulte, who accused her of misrepresenting her primary residence to obtain more favorable loan terms. Her denial comes three weeks after President Trump suggested he was considering the matter as grounds for her dismissal. Although she has not been formally charged with a crime, the White House has used the allegation to justify firing her. The move is likely to heighten concerns over Fed independence.

Russia-Ukraine: The Russia-Ukraine conflict continues to show signs of escalation. On Wednesday, missiles struck several facilities including a Children’s Hospital. The attack came after Ukraine launched a strike on a facility belonging to a major retailer. The deepening cycle of attacks between the two countries raises the risk of more extreme weaponry being deployed, particularly by Russia. The escalation could potentially push the West to consider increasing their assistance in the conflict.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with the escalating trade tensions between the US and Canada and why China may be behind the rift. We next examine the fiscal front, analyzing Richmond Fed President Thomas Barkin’s concerns about the growing deficit and the potential risks to the bond market. The next sections provide updates on three distinct fronts: diplomatic efforts between Iran and Oman to ease transit in the strait, primary wins bolstering Trump’s pre-midterm standing, and Huawei’s offensive to distribute its chips worldwide.

Canada-US Trade: Trade tensions between the United States and Canada flared on Tuesday as both countries sought leverage in ongoing negotiations. Ottawa imposed retaliatory duties on $20 billion of US imports, directly mirroring Washington’s initial measures. The back-and-forth comes as each side accuses the other of negotiating in bad faith. The rift also occurs as the United States prepares for high-stakes trade talks with China next month. Washington’s pressure campaign against Canada may offer insight into what it hopes to achieve in talks with Beijing.

• The latest round of duties peaking at 50% on certain goods is scheduled to take effect on September 8. Canada has tailored its retaliation to target specific sectors of bilateral trade, including dairy, steel, and agricultural equipment. However, the delayed implementation suggests Ottawa is deliberately leaving the door open for continued dialogue before the economic blow lands. Washington has already countered with a threat of its own by vowing to impose additional tariffs on Canadian imports starting on New Year’s Day.
• Rising trade tensions between the US and Canada may have less to do with personal friction than with the broader strategic shadow of China. Washington and Ottawa had previously been in discussions over forging a unified trade and investment front designed to make North American supply chains “China-proof.” However, given Canada’s recent overtures toward closer economic ties with Beijing, it appears Ottawa was unwilling to abandon that potential leverage without securing significant concessions in return.
• Despite the escalating rhetoric, markets appear to be shrugging off the ongoing row and its potential fallout. The S&P 500 closed up 0.3% on the day, while Canada’s benchmark S&P/TSX finished nearly 0.7% higher. This muted reaction suggests that, for now, the tariff measures remain insufficient to trigger major market disruptions. Key sectors, particularly US tech and Canadian energy, seem largely insulated from the tit-for-tat, with investors betting on a contained outcome rather than a full-blown trade war.
• Still, the real focus centers on next month’s US-China trade talks. If Washington uses its leverage with Canada to extract a stronger position against Beijing, markets and the broader economy stand to benefit. However, a more aggressive stance with Beijing that triggers another cycle of retaliatory tariffs will likely drive up market volatility. For now, the former scenario appears more likely than the latter.

Growing Deficit Concerns: The US Treasury’s recent actions have sharpened investor focus on the swelling federal deficit. On Tuesday, Richmond Fed President Thomas Barkin warned that America’s mounting debt burden could eventually provoke investor pushback if borrowing continues to rise unchecked. His remarks come as the Treasury has taken more aggressive steps to smooth the impact of heavier issuance on interest rates.

• Although Barkin later conceded that the exact point at which investor resistance might materialize remains inherently difficult to project, he characterized the outcome as virtually assured. He attributed this forecasting challenge to two structural advantages that continue to insulate the US: the country’s robust legal framework and its preeminent position as the issuer of the global reserve currency. These factors, in his view, have thus far deferred, but not eliminated, the risk.
• Despite his deficit concerns, Barkin has stated that he does not believe interest rates have yet had a meaningful impact on the broader economy. His relative optimism may partly reflect the Treasury’s more hands-on approach to easing pressure on long-term bonds. And while the recent bond buyback program has drawn considerable attention, it is worth noting that the Treasury’s sustained shift toward shorter-dated issuance over the past three to four years has likely played an even greater role in anchoring rates.

• According to the latest data from SIFMA Research, US Treasury bill issuance has surged since 2023 to levels not seen since the height of the pandemic. This reallocation — later termed “Activist Treasury Issuance” in a paper authored by former Fed Governor Stephen Miran and Nouriel Roubini — helped ease pressure on long-term bond yields. As a result, the 10-year Treasury yield fell from a peak of 4.99% in October 2023 to as low as 3.62% roughly a year later.
• While monetary policy, inflation expectations, economic growth, and investor preferences will continue to be key drivers of the yield curve, we believe Treasury debt-management decisions will become an increasingly relevant factor as federal borrowing needs rise. Greater bond issuance could exert upward pressure on yields and term premia, especially if investor demand fails to keep pace. This dynamic is particularly pronounced for longer-dated securities, where demand has notably softened.

A Possible Strait Deal? Iran and Oman appear close to an agreement that could potentially reopen the Strait of Hormuz. The two sides have announced terms to establish a maritime corridor for commercial shipping, but the arrangement does not necessarily guarantee that the strait will reopen. Iran has said it will do so only if the United States meets its conditions, including lifting the naval blockade and reinstating a waiver permitting Iranian oil sales. Still, the agreement will likely create an opening for further negotiations.

Trump Bump: Two Republican candidates endorsed by President Trump won their primary runoffs on Tuesday. The higher-profile contest was South Carolina’s Senate race, where Darline Graham defeated Ralph Norman. Meanwhile, former state Senator Mike Mazzei won Oklahoma’s Republican gubernatorial primary runoff. Both contests are likely to be decisive in determining who ultimately holds the seats, underscoring Trump’s continued influence within the Republican Party heading into the midterm elections.

Chinese Competition: Huawei is bidding to build a data center in Egypt using its own chips, a move that could expand the company’s international footprint as it seeks to compete with Nvidia in AI infrastructure. The effort also appears to fit within China’s broader strategy to challenge US chip diplomacy by strengthening technology and investment ties with emerging-market economies.

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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 US has provided new details on its economic war against the country and its new secondary sanctions against countries and other entities that engage economically with Iran. We next review several other international and US developments that could affect the financial markets today, including the latest on the evolving US-Canada trade war and important new pushback against the Treasury Department’s plan to artificially depress longer-term bond yields.

United States-Israel-Iran: Treasury Secretary Bessent yesterday announced details of the US “economic D-Day” program of new sanctions on Iran that are designed to force it to stop disrupting Middle East shipping. Dubbed “Operation Economic Outcast,” the program has reportedly already sanctioned more than 60 entities, individuals, and vessels that enable Iran to procure nuclear and missile technology, earn revenue from oil, or carry out cyber operations.

• Most important, Bessent warned that the US would sanction any country or entity that engages economically with Iran.
• Of course, Iran’s supporters, such as China, might have so much leverage over the US that Washington can’t actually sanction them. It therefore remains to be seen whether the new program meaningfully increases the pressure on Iran to meet US demands.

United States-China: In response to the new US secondary sanctions, Beijing today warned that “China will take all necessary measures to firmly safeguard its rights and interests” if the sanctions impose a significant burden on China or its major firms. The sanctions announced by Treasury Secretary Bessent yesterday included some small Chinese and Hong Kong companies, so it’s clear the administration is trying to make sure China isn’t entirely off the hook. However, we think the US may pull its punches to avoid upending its current effort at détente with China.

• If the US goes too far and imposes what China believes are unacceptable sanctions on its companies, the most obvious way that it would retaliate is to again throttle its exports of rare earth materials to the US or its allies. Such a move would threaten a range of US and allied manufacturers.
• Although the US and its allies are trying to rapidly develop their own sources of supply for rare earths, the effort hasn’t borne fruit yet. A new Chinese embargo of the materials or other critical goods could force the US to soften its new sanctions.

United States-Canada: In a social media post yesterday, President Trump said the US will impose a 50% tariff on Canadian autos, auto parts, and steel starting in January. The decision comes after Canada said it would impose big tariff increases against a range of US products to retaliate for new US import tariffs announced last week. The move adds to the risk of a bilateral trade war between the US and Canada. It also calls into question whether the US-Mexico-Canada trade agreement will be renewed.

• On a related note, President Trump this morning said his administration is seriously considering changing the name of Lake Ontario to Lake America because it doesn’t expect to be “doing much business with Ontario any longer.” The move echoes the president’s executive order last year that changed the name of the Gulf of Mexico to the Gulf of America.
• Like the unilateral renaming of the Gulf, any US effort to unilaterally change the name of Lake Ontario would almost certainly not be recognized by Canada or many other countries. Coupled with the US’s inability to defeat Iran and force it to reopen shipping in the Middle East, making such a move and not achieving international buy-in would likely add to growing perceptions that the US’s power as the global hegemon is waning.

Germany: Authorities have discovered another explosives-laden drone near the Leipzig airport, where a similar drone was discovered next to a Ukrainian cargo plane earlier this month. Both drones had traces of military-grade explosives but were defective and did not explode. The drones are widely suspected of being a warning from Russia or its proxies that the German government should stop supporting Ukraine in its effort to defend itself from Russia’s invasion. The incidents highlight the growing risk of Russian hybrid attacks in Europe.

United Kingdom-Ukraine: Under a deal that British Prime Minister Burnham struck with Ukrainian President Zelensky yesterday, the UK will gain access to a vast trove of Ukrainian battlefield data used to train AI models to identify and strike Russian targets, while the Ukrainians will get access to British defense technology. The vast Ukrainian dataset based on actual combat conditions could give British defense firms a leg up when developing autonomous weapons systems.

US Monetary Policy: In a Wall Street Journal op-ed today, hedge-fund veteran Stanley Druckenmiller strongly criticizes his longtime protégé, Treasury Secretary Scott Bessent, over his plans to intervene in the Treasury bond market to reduce interest rates. Druckenmiller complains that Bessent’s strategy of financial repression, including buybacks of longer-term Treasurys, is merely a distraction from the real need, which he says is to rein in the federal budget deficit and bring down government debt.

US Labor Market: The Department of Homeland Security yesterday said it plans to charge a $103,265 fee to foreign nationals applying for an H-1B high-skilled work visa. The fee would have to be paid upfront, before the government decides whether to approve the application. The new fee, which is designed to meet court objections that scuttled a similar fee proposal last year, would mostly affect technologically skilled workers from India. If it is successful in driving those workers out of the US, it would mostly affect the technology and finance sectors.

US Agriculture Industry: New research by the American Farm Bureau Federation shows that without government assistance, US farmers growing nine key crops will lose over $30 billion in 2026 and 2027. For example, the AFBF estimates corn producers will lose $131 per acre this year, rising to $167 next year. The negative economics reflect both constricted export markets and skyrocketing costs for fuel and fertilizer due to the wars in Iran and Ukraine.

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