by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Investors are eagerly awaiting more earnings reports to assess the underlying strength of the financial markets. In sports news, Argentine midfielder Lionel Messi scored a hat trick against Bolivia as he prepares for retirement. Today’s Comment will delve into our takeaways from the latest Trump interview with Bloomberg, our thoughts on how government restrictions can impact earnings for chip-related companies, and an explanation of why the Bank of England’s rate decision will affect the UK pound sterling. As usual, the report includes both domestic and international data releases.

Trump’s Agenda: Republican candidate and former President Donald Trump has conducted another interview outlining his plans if elected.

• In a one-hour interview, Trump championed his economic policies, touting their benefits for small businesses and workers. He stood firm in his belief that he should have a say in monetary policy and asserted that new tariffs would incentivize companies to reshore jobs lost to globalization. Additionally, he argued that his crackdown on illegal immigration would be counterbalanced by an influx of legal, documented workers. While the audience seemed to largely support his views, the interviewer raised concerns about potential negative economic consequences, as highlighted by economists.
• While theoretical criticisms hold weight, their real-world impact is contingent on various factors. For instance, a stronger dollar could mitigate many of the inflationary pressures from tariffs. Moreover, price elasticity, which measures consumer sensitivity to price changes, may compel foreign firms to absorb a portion of the increased costs. Also, although the Fed is independent, policy coordination with the executive branch is not unusual. Finally, while the crackdown on immigration could reduce the labor supply, it should also alleviate pressure on public resources.

• Betting markets currently favor President Trump to win in November, but polls indicate that the race remains close. Investors should instead focus on broader trends rather than individual candidates. Both Trump and Vice President Harris agree on reshoring manufacturing jobs. But while Trump supports tariffs to limit imports, Harris favors stimulus packages to boost domestic competitiveness. Still, assuming these efforts achieve their long-term objective of raising wages for US workers, we would expect higher inflation and higher interest rates on long-term bonds no matter the victor.

Chip Wars! Chipmakers have been impacted by increasing concerns about weak demand in China.

• ASML Holding, a leading chip equipment maker, had its worst day in 26 years after the company reported a significant decline in orders and lowered its 2025 guidance. While the specific reasons for this miss weren’t explicitly stated, increasing concerns are mounting that global chip restrictions on sales to China are negatively impacting the company’s earnings. Last month, the Netherlands mandated that ASML obtain export licenses to sell older machines and provide repair and maintenance services to China. This further highlights the challenges posed by these restrictions.
• The uncertainty surrounding ASML has sent shockwaves through the broader semiconductor industry, as other companies grapple with similar headwinds. The Philadelphia Semiconductor Index plummeted by 5.3% on the day, far outpacing the S&P 500’s modest decline of 0.8%. Investors are reevaluating the earnings potential of these firms, driven by growing concerns over their ability to sell to China, a critical market for chips and related products. ASML is particularly exposed to these restrictions, with 47% of its quarterly sales tied to the country.

• Chipmakers and related equipment manufacturers are likely to face headwinds as these regulations will complicate their efforts to expand into foreign markets. While China will be a strong focus, other countries may also be included. The Biden administration is currently considering implementing export controls for Nvidia and AMD chips on a case-by-case basis, targeting specific countries. While many of these firms are expected to adapt to the regulatory environment, their high valuations suggest that there may be better investment opportunities in other sectors.

Dovish BOE: The British currency has hit a near two-month low amid market expectations that the central bank will implement more aggressive monetary easing than previously anticipated.

• UK inflation fell below 2% for the first time in 3.5 years. In September, the Consumer Price Index (CPI) rose 1.7% from the previous month, much lower than the prior month’s increase of 2.2% and the consensus forecast of 1.9%. Meanwhile, core inflation moderated from an increase of 3.6% to 3.2%, and services inflation, a particular concern for policymakers, fell from 5.6% to 4.9%. However, not all the news was positive, as the core measure of services inflation (excluding volatile elements like airfares, packaged holidays, and education) indicated that underlying pressures persist.
• A lower-than-expected inflation report has paved the way for the Bank of England to potentially implement its second, and possibly third, interest rate cuts this year. While the central bank previously signaled a cautious approach to rate cuts following its initial cut in August, BOE Governor Andrew Bailey suggested earlier this month that the central bank could become more aggressive if inflation cooled more than anticipated. Nevertheless, the latest inflation reading has likely secured another 25-basis-point cut for November and increased the likelihood of another cut the following month.

• While the inflation report is encouraging, investors should closely monitor exchange rates, as rising import prices could offset some of the progress. The narrowing interest rate differential between the US and UK is likely to put downward pressure on the pound sterling (GBP), as the two central banks pursue divergent monetary policies. The Federal Reserve’s focus on the labor market means that a strong US jobs report in October could further weaken the case for another Fed rate cut. If this were to happen, the GBP could sink further relative to the dollar and push up the price of energy imports.

In Other News: The UK is considering imposing sanctions on Israel over its conduct in Gaza, indicating that other countries are seeking an end to the conflict. Ukrainian President Volodymyr Zelensky has shared his “Victory Plan” with EU officials as he seeks to reassure Western allies that he understands the war cannot continue indefinitely. Financial firms are starting off the earning’s season strong, with Morgan Stanley continuing the streak of Wall Street banks posting better-than-expected revenue.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that Israel has agreed to strike only military targets in its expected attack on Iran, sparing oil and nuclear facilities. Global oil prices have therefore fallen sharply so far today. We next review several other international and US developments with the potential to affect the financial markets today, including heightened political tensions between India and Canada and a few words about the evolving military drone industry in the US.

Israel-Iran: According to a report in the Washington Post late yesterday, Israeli Prime Minister Netanyahu has told the US that his forces will only launch retaliatory strikes against Iranian military targets, rather than its oil or nuclear facilities. The report also said the Israeli attack would be calibrated to avoid the perception of political interference in the US elections.

• The suggestion that Tel Aviv is willing to exercise restraint after Iran’s latest missile attack has reduced the risk of a broader regional war that could cut global oil supplies.
• As a result, global oil prices so far this morning have fallen sharply. Near Brent futures are currently down 3.9% to $74.43 per barrel, while WTI futures are trading down 4.2% to $70.75 per barrel.

China-Taiwan: Despite the welcome sign of cooling tensions in the Middle East, the Chinese military yesterday conducted large-scale exercises around Taiwan to retaliate for Taiwanese President Lai’s speech last week asserting the island’s sovereignty. Amid the drills, the Chinese military issued a statement saying, “This is a stern warning to the secession forces advocating ‘Taiwan independence.’”

• Beijing’s reaction to Lai’s speech shows the extent to which Taiwan’s moves to assert its sovereignty could provoke a Chinese military response.
• Of course, a strong Chinese military response could ultimately draw the US into a conflict in the Western Pacific Ocean.

Russia-Germany: In another reminder of today’s continuing geopolitical tensions, the head of Germany’s domestic intelligence agency yesterday told parliament that increasingly aggressive Russian agents had tried to sabotage a domestic airline flight earlier this year. The agents apparently got a parcel rigged to start a fire into the cargo hold of an airliner, but it burst into flames too early and didn’t cause a crash.

• The statement shows how Russian intelligence tactics are increasingly approaching the level of state-sponsored terrorism.
• The risk is that a successful attack could spark an international security crisis that would be highly disruptive to the global economy and financial markets.

Poland-European Union: Over the weekend, Polish Prime Minister Donald Tusk said his government will suspend immigrants’ right to asylum, making Poland the latest EU country to unilaterally curb migration. According to Tusk, the suspension is needed because Russia and Belarus are conspiring to send waves of migrants across the border to destabilize his country. The move is also in sync with widespread popular resistance to migration among EU citizens, but it will likely set up a clash with EU officials in Brussels.

Italy: The government of right-wing populist Prime Minister Meloni is reportedly in talks with the country’s banks to temporarily raise their taxes. The potential tax hikes would help cut Italy’s budget deficit down to the 3% of gross domestic product required by the EU. Of the 9 billion EUR ($9.82 billion) in tax hikes or spending cuts needed to meet the EU’s requirements in 2025, about one-third is expected to come from the nation’s banks. However, the liberal Forza Italia party, which is a member of the coalition government, is resisting further taxes on companies.

Canada-India: Ottawa yesterday declared six top Indian diplomats personae non grata and expelled them over allegations they had collected intelligence on Canadian Sikhs and targeted them for violence. In response, the Indian government expelled six Canadian diplomats. The expulsions are the latest results of India’s assassination of a Canadian Sikh separatist in British Columbia last year.

US Monetary Policy: Fed board member Christopher Waller yesterday said the monetary policymakers should exercise caution in cutting interest rates after last week’s report that September consumer price inflation was higher than expected and an earlier report that labor demand in September was more robust than anticipated. The statement confirms our view that the Fed will now cut rates much more gradually than its 50-basis-point cut last month.

US Defense Industry: Since the Russia-Ukraine war has shown that small, inexpensive drones are now key military systems for reconnaissance and attack, new reports suggest the US Army will soon need to buy thousands of drones per year just for training purposes. As it tries to figure out how to best use drones in war, the Army is now testing small drones and drone-operating units in three different brigades.

• Experience to date suggests each of the Army’s 59 active-duty and National Guard brigades would need at least 50 small drones, and perhaps more than 100, for training. That implies a total fleet of 3,000 to 6,000 drones. Army officials assume about 25% of those drones would be lost each year, implying annual replacement buys of 750 to 1,500. Those totals don’t include the Army’s purchases of bigger, heavier drones or purchases by the Navy, Marines, and Air Force.
• Of course, the Russia-Ukraine war shows that the military would need to buy multiples of those figures to prepare for a potential war. It would also need to invest in the surge capacity to produce enormous numbers of drones of various types. For comparison, Ukrainian President Zelensky recently said his country’s defense industry has now developed the capacity to produce 4 million drones per year.
• We continue to believe worsening geopolitical tensions will spur increased defense budgets around the world. However, purchases of big, heavy, expensive systems such as fighter jets and tanks may be cut to fund purchases of relatively inexpensive drones. The defense budgets of the US and its allies may therefore be restructured over time.
• We still expect US spending on big, expensive, “exquisite” military systems will rise, but the growth rate will likely pale when compared with the spending hikes related to drones and other new technologies. The prime defense contractors that build the traditional systems, therefore, may not grow as fast as small defense start-ups or small companies producing high-tech products with dual civilian and military uses. As those firms eventually have their initial public offering of stock, they may be interesting investment opportunities.

US Nuclear Energy Industry: Late yesterday, Google said it has struck a deal to back the construction of seven small, modular nuclear reactors by nuclear energy start-up Kairos Power. Under the deal, Google has committed to buy some 500 megawatts of electricity from the reactors as they come on-line between 2030 and 2035. The deal is the latest example of firms signing up for nuclear energy to power their artificial-intelligence efforts without boosting their greenhouse gas emissions.

US Property Insurance Industry: Initial estimates show last week’s Hurricane Milton will lead to about $36 billion in private-sector insurance payouts, versus new estimates that Hurricane Helene will result in about $6 billion in payouts. The total estimated payouts for the two storms are significantly lower than initially feared. Reflecting the lower-than-feared payouts, major reinsurance stocks have now generally regained their prices from before the storms hit.

US Medicare Insurance Industry: The enrollment period for 2025 Medicare insurance plans opens today and will run through December 7. Because of changes by federal authorities and insurance companies, an estimated 1.5 million seniors will have their Medicare Advantage plan eliminated next year, while 3.5 million will lose their Plan D drug coverage. Many others are expected to see benefit reductions and/or deductible increases in their plans.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with yet another disappointing press conference by a top Chinese economic official. We next review several other international and US developments with the potential to affect the financial markets today, including a cut in France’s debt rating outlook and another study looking at US economic prospects in a new term for former President Trump or under Vice President Harris.

Chinese Economic Policy: At a news conference on Saturday, Finance Minister Lan Fo’an said the central government will issue special bonds in 2025 to fund new fiscal support for local governments and banks, but he gave no figure for the new spending and provided no detail on how much of it would go to boost consumer spending. As with the National Development and Reform Commission’s disappointing news conference last week, the lack of detail miffed foreign investors. Local buyers were more positive, pushing China’s markets higher today.

• When the government announced its big monetary stimulus last month, sources said it would also soon release a plan to issue the equivalent of $284 billion in special bonds to help local governments and banks. However, no official announcement has been made. That has prompted rabid speculation about how aggressive the government will be. Some observers are looking (or hoping) for a program of up to $425 billion, with significant amounts going to boost consumption spending.
• For now, the Chinese economy continues to struggle against big structural problems, including weak consumer demand, excess capacity and high debt, poor demographics, decoupling by the West, and disincentives from the Communist Party’s intrusions into the free market. Without a strong dose of fiscal stimulus and new policies to promote consumer spending, Beijing may fail to generate lasting optimism among investors and consumers, with negative implications for global economic growth.
• In the latest piece of evidence showing China’s economic weakness, the September consumer price index was up just 0.4% from the same month one year earlier, decelerating from a 0.6% rise in the year to August. Excluding the volatile food and energy components, China’s “Core CPI” is already in deflation.

Chinese Financial Industry: The Supreme People’s Procuratorate said on Saturday that it has arrested Li Quan, former chief executive of the New China Life Insurance Company for embezzlement and bribery. Along with other recent arrests, the action against Li shows how Beijing has focused on cleaning up the country’s financial industry as part of its program to make China a “financial superpower.” Cleaning up the industry would probably be positive in the long run, but it also presents regulatory risk for Chinese financial firms in the near term.

Russia-Ukraine Conflict: The Russian military has increased its attacks in recent days on Ukraine’s Black Sea granaries, ports, and civilian ships serving them. The attacks appear to be an effort to undermine Ukraine’s ability to export grain and hurt its economy. If Russian forces can cut Ukrainian exports in a meaningful way, the shock to supply could lead to higher grain prices worldwide. So far this morning, however, US corn and wheat futures are trading slightly lower.

Broader Emerging Markets: Although major central banks have finally started cutting interest rates, S&P Global Ratings today issued a report warning that sovereign bond defaults will likely accelerate in the coming decade. The report argues that when today’s cutting cycle ends, interest rates will remain relatively high. Many emerging markets will also be left with higher debt and lower financial reserves, making them more susceptible to default.

France: On Friday, just a day after Prime Minister Barnier proposed an austere 2025 budget aimed at reining in the burgeoning fiscal deficit, Fitch cut France’s bond rating outlook to negative. Although the firm kept France’s overall sovereign rating unchanged at AA-, it warned that the rating could be reduced if the budget plan fails in the severely divided parliament. The move by Fitch follows an outright rating cut by S&P and an outlook cut by Moody’s earlier in the year.

• France’s public debt has now risen to more than 110% of gross domestic product, making it the third-most indebted country in the European Union after Greece and Italy. Clearly, emerging markets aren’t the only ones that can face debt problems!
• The country’s rapidly expanding debt reflects a range of factors, such as increased fuel subsidies, economic stimulus spending, rising interest rates, and tax cuts aimed at making the country more attractive for investment.

United Kingdom: At an investment conference in London today, Prime Minister Starmer promised to develop an industrial strategy, slash regulation, and get control of the country’s fiscal situation to spur economic growth. As Starmer put it to the assembled executives, “You have to grow your business, I have to grow my country . . . We are determined to improve it and repair Britain’s brand as an open, outward looking, confident, trading nation.” Still, corporate confidence may not improve much if Starmer’s government hikes taxes as expected.

Japan: With campaigning for the snap October 31 parliamentary elections due to start Tuesday, Prime Minister Ishiba said he is not contemplating raising or lowering the country’s 10% sales tax “for the time being.” The new prime minister and his cabinet have been criticized for making contradictory statements on economic policy, but Ishiba’s statement appears to be a clear sign that he is looking for stability in tax policy. That will likely be celebrated by investors, although it also suggests Japan will face continued budget deficits and growing debt.

United States-Israel-Iran: As the Israeli government continues planning for a strike against Iran to retaliate for its recent missile attack, the US Defense Department yesterday said it will deploy an advanced missile defense system to Israel, including about 100 troops to operate it. Deploying the Terminal High Altitude Area Defense system, or THAAD, along with its crew, will raise the risk of the US getting directly involved in the conflict, especially if Iranian missiles or drones injure any US troops.

US Politics: Scott Bessent, the former hedge fund manager for liberal philanthropist George Soros, who has become a top economic advisor to former President Trump, said in an interview with the Financial Times that Trump’s threats to weaken the dollar and impose big import tariffs on US allies are just bargaining positions. Bessent insisted that Trump would stand by the traditional US policy of keeping the dollar strong and maintaining its position as the world’s key reserve currency.

• While Bessent cautioned that he does not speak for Trump, he asserted that the former president, at the end of the day, is a “free trader.”
• Despite Bessent’s assertions, Trump has shown that he is highly populist, with a focus on protecting blue-collar workers even if it imposes costs on capital owners and business managers. Bessent’s comments may be aimed at shoring up support for Trump among business executives. Nevertheless, we suspect that if Trump is elected to a new term, he would indeed pursue populist policies, including high, protectionist import tariffs, a weaker dollar, and expansive fiscal spending for the working class.
• On that note, the latest study comparing economic prospects under Trump or Harris is out. In a Wall Street Journal survey of 50 economists, 68% predicted consumer price inflation would be higher under Trump than under Harris, while 12% thought inflation would be higher under Harris. Most of the respondents also expected higher interest rates and budget deficits under Trump, which is consistent with other recent studies.
• Of course, much will depend on what actually gets passed by Congress. In any case, the clear pattern in all these studies is that inflation, interest rates, and budget deficits are expected to be higher no matter who wins the presidency.

Nobel Prize: Finally, this year’s Nobel Prize in economics was awarded today to Turkey’s Daron Acemoglu, the UK’s Simon Johnson, and the US’s James Robinson for their analyses of why some countries are more prosperous than others. In their 2012 book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” the authors stress that prosperity relies largely on having good institutions that protect private property, allow free markets to work efficiently, mediate disputes, and promote innovation. Nations fail if they lack such institutions.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently analyzing the latest PPI data. In sports news, the Minnesota Lynx managed to win game one against the New York Liberty in the WNBA Final. Today’s Comment will cover our thoughts on the latest inflation report, explore reasons behind the upward movement of the 10-year Treasury, and provide a review of France’s government budget proposal. Additionally, the report will include a roundup of international and domestic data releases.

Mixed Bag Inflation: While the BLS inflation report offered some relief about the path of inflation, it also raised some concerns.

• The September CPI report surpassed consensus expectations, with core goods and services inflation accelerating from the prior month. Overall inflation rose 0.2% month-over-month and 2.4% year-over-year, exceeding the projection of 2.3%. Excluding energy and food, inflation increased by 0.3% month-over-month and by 3.3% year-over-year, surpassing the anticipated 3.2%. The broad-based jump in the inflation report was driven by spikes in apparel, new cars, and medical services. However, shelter inflation decelerated to its slowest pace since August 2021.
• Although a significant decrease in shelter inflation might be seen as a positive development, other offsetting factors suggest persistent underlying inflationary pressures. Throughout the year, Fed officials have emphasized that shelter inflation is a key factor in their efforts to bring overall inflation down to the 2% target. However, the latest report highlights the risk posed by other components to the Fed’s inflation target. This marks the second consecutive month where inflation has risen at a pace exceeding that of the previous year.

• While the report is concerning, we think it is too soon to become overly worried. As the chart above shows, it is normal for inflation to accelerate in the fall, and this should moderate over the next few months. Additionally, many of the factors that drove the spike may have been related to Hurricane Helene, particularly for medical services. Nevertheless, we believe the Fed will closely monitor inflation to ensure its convergence toward the target. If inflation begins to accelerate, we anticipate the Fed will slow the pace of its easing cycle.

Treasurys Not Convinced: Investors have become less willing to take on longer-duration debt as supply continues to be a problem.

• The 10-year Treasury yield has increased by 40 basis points since the latest FOMC rate decision, as investors have become increasingly concerned about the policy path. The sharp rise was primarily driven by concerns that the Fed may have shifted away from prioritizing maximum employment too quickly. Furthermore, there is a growing concern that the market may not be able to absorb the large issuance of government debt as the US continues to run large deficits. Earlier this week, the Treasury auction for 10-year bonds experienced somewhat weaker demand due to the uncertainty.
• The main source of concern in the Treasury bonds market may be attributed to uncertainty regarding the Fed’s neutral rate, which is the policy rate at which it neither stimulates nor restricts the economy. The latest FOMC dot plots highlight the substantial disagreement among Fed officials on this issue, with the highest long-run fed funds rate at 3.75% and the lowest at 2.25%. Assuming one more rate cut this year, the central bank could potentially cut rates another 4-10 times over the next few years.

• The wide dispersion in the FOMC dot plots is likely to be a key focus for the market in the coming months as it assesses the Fed’s terminal rate. Consequently, we believe that speculation about rate cuts will have less influence on bond markets than the broader trajectory of monetary policy. While favorable inflation data has historically impacted bonds, we expect weak labor and economic data to play a more significant role. Fed officials are likely to be more responsive to signals of an economic slowdown than to indications of easing inflation when deciding the size of future cuts.

French Austerity: French Prime Minister Michel Barnier has released details of the budget for the next fiscal year as he looks to solve the country’s deficit problem.

• The budget proposes over 60 billion EUR ($65 billion) in spending cuts and tax increases on large corporations. A new exceptional tax would be imposed on corporations with annual revenue exceeding 1 billion EUR ($1.1 billion), aiming to generate over 12 billion EUR ($13.1 billion) in revenue over two years. Additionally, the state-owned utility company, EDF, would be required to pay a special dividend of 13.6 billion EUR ($14.8 billion) to the government. Furthermore, the government plans to raise two-thirds of the funding through cuts to medical costs, unemployment benefits, and staff reductions.
• If enacted, the budget plan could dampen investor sentiment toward French financial markets. France already faces relatively high 10-year bond yields compared to its peers, and concerns over corporate profitability under the new proposal may further deter investment. The country’s benchmark index, the CAC 40, is currently down nearly 10% from its May peak. In contrast, Germany’s benchmark stock index, the DAX 50, is hovering near an all-time high, despite the country’s recession.

• Nevertheless, the budget remains subject to several hurdles before its finalization. The proposal has faced opposition from lawmakers concerned that the tax increases could hinder efforts to improve the country’s competitiveness. Additionally, today’s Fitch rating outlook will offer insights into investor views on the budget’s credibility. If it is able to pass through parliament and avoid a downgrade in its outlook, French yields should fall. However, a major concern moving forward will be avoiding a budget that is so onerous as to negatively affect tax receipts in the upcoming year.

In Other News: Iran has warned that a strike on its nuclear sites would potentially cause the country to change its nuclear doctrine. Atlanta Fed President Raphael Bostic was the first Fed official to signal a willingness for a pause in rate cuts following the hotter-than-expected CPI report. China is expected to release $283 billion in new stimulus over the weekend, in a sign that it is ready to follow through on its promise to boost its economy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is still processing the latest inflation data. In sports news, the New York Mets defeated the Philadelphia Phillies to move on to the NLCS. Today’s Comment will discuss the latest FOMC meeting minutes, explain why the dollar is strengthening, and give our thoughts about Japanese elections later this month. As usual, our report will conclude with a round up international and domestic data releases.

Employment Not Inflation: The Federal Reserve cut interest rates by 50 basis points due to concerns about a weakening labor market and confidence in ongoing inflation progress.

• As detailed in the September 17-18 meeting minutes, Fed officials expressed concern about the labor market following two consecutive jobs reports that indicated a slowdown in hiring and job openings, with a rise in the unemployment rate. Additionally, the recent summer PCE price index reports, which showed that inflation rates were aligning with the 2% target, reinforced the Fed’s belief that inflation was making steady strides towards its goal. As a result, the FOMC determined that the risk to its maximum employment mandate had risen to the same level as its price stability mandate.
• Although Michelle Bowman was the lone dissenter who advocated instead for a smaller rate cut, several other Fed members also expressed support for a more measured approach. Their reluctance stemmed from concerns about the reliability of the labor market data, given the influx of immigration and the frequent revisions to the payroll data. Additionally, uncertainty surrounding the determination of the neutral interest rate — the level at which the economy neither expands nor contracts — contributed to their cautious stance, as many believed it could send the wrong signal about the pace of the Fed’s easing cycle.

• Based on the meeting minutes, we anticipate that the Fed will gradually loosen monetary policy in the coming months, contingent upon the ongoing deceleration of inflation toward the 2% target. However, a more aggressive rate cut would likely be triggered by a deterioration in the labor market rather than by more progress toward the inflation target. As a result, we project that the Fed could decrease rates by an additional 25-50 basis points this year. This is likely not going to have a major impact on equities but could affect short to intermediate bonds.

Attitudes Are Changing: While the Fed has tapered expectations of policy easing, other central banks have gone in the opposite direction.

• The European Central Bank (ECB) is expected to cut interest rates for a third time this year at its October 17 meeting. The drop in interest rates comes as the region suffers through an economic slowdown, but inflation is still making progress toward its 2% target. Germany, the largest economy in the region, has lowered its GDP growth forecast as it braces for a deeper economic downturn in the coming months. Meanwhile, the EU’s headline inflation has dropped below 2% for the first time since July 2021.
• Central banks worldwide are increasingly adopting a more accommodative monetary stance. It is anticipated that the Bank of Canada will reduce interest rates by 50 basis points in both October and December, reflecting concerns over slowing economic growth. In Japan, despite rising inflation, concerns about consumer spending have prompted the central bank to consider postponing further rate hikes until January 2025. This change in sentiment has boosted the US dollar as investors have become less confident in the narrowing of interest rate differentials with the United States.

• With the initial phase of interest rate cuts behind us, central bankers are likely to prioritize the future trajectory of monetary policy. Given the current inflation rate and poor economic outlook, the ECB and the Bank of Canada are expected to implement most of their rate cuts early in this cycle. In contrast, the Bank of Japan may resume rate hikes at the beginning of the year. Assuming the Federal Reserve does not reverse course due to an unexpected rise in inflation, the US dollar is likely to weaken slightly during this monetary cycle.

Elections in Japan: A week after taking over, Prime Minister Shigeru Ishiba is already looking to consolidate his party’s hold on the lower house.

• Ishiba dissolved the lower house of parliament on Wednesday, paving the way for snap elections on October 27. The swift decision aims to capitalize on a recent surge of optimism following his rise to leadership. Seen as having a cleaner image than his predecessor Fumio Kishida (who resigned after a series of political scandals), Ishiba enjoys an approval rating of around 50%, significantly higher than Kishida’s, which fell below 20% in some polls. Despite the uptick in sentiment, his approval rating remains low when compared to previous leaders in Japan after taking office.
• Japan is experiencing an economic slowdown, with over a third of companies expecting to miss their first-half earnings projections, according to a Reuters survey. This downturn aligns with the highest number of bankruptcies since 2013, which was recorded this month. Small businesses have been hit particularly hard and are facing sluggish sales and rising costs that squeeze profit margins. In response to the economic weakness, Ishiba, known for his hawkish stance, has advised the Bank of Japan to pause any further rate hikes as households are still reluctant to spend after years of deflation.

• The upcoming election this month is not expected to significantly change the composition of the lower house, but it could provide momentum for the upper house elections next year. The ruling LDP currently holds 258 seats and has a coalition with an additional 28 seats, surpassing the 233 seats needed to maintain majority in the lower house. If the party can retain its majority, it will be well-positioned to maintain power in the upcoming contests next year. Given that Ishiba is expected to carry out the mission of his predecessor, this should be favorable to markets.

In Other News: FTC Chair Lina Khan’s position will be uncertain under the next administration, as some donors push for her removal while lawmakers advocate for her to stay. In Florida, widespread blackouts followed Hurricane Milton, and the damage is expected to affect this month’s payroll data. Meanwhile, former President Donald Trump has pledged to eliminate double taxation on foreign expats, signaling plans to expand his tax cut agenda if he wins the November election.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently processing the latest comments from Fed officials as it looks for further evidence of a soft landing. In sports news, the Minnesota Lynx were able to knock out the Connecticut Sun to make it to the WNBA finals. Today’s Comment will discuss the growing crackdown on US tech firms, why lower rates may not be enough to boost economic optimism, and signs of easing in the Middle Eastern and European conflicts. As usual, our report will conclude with a roundup of domestic and international data releases.

Breakup of Big Tech: US officials are considering Google as a potential target for antitrust action as they seek to take a stronger stance against monopolies.

• The US Department of Justice is contemplating asking for court approval to compel Google to divest portions of its business. This potential breakup aims to curb the company’s dominance in web search and could require Google to share the underlying data used for its search engines and other AI products. The DOJ’s action follows an August court ruling that found Google guilty of monopolizing online search markets. While Google is expected to appeal the decision, the judge has allowed the DOJ to proceed with potential remedies for the violation.
• The crackdown on Google is part of a broader effort by US regulatory agencies to increase competition among Big Tech companies. The Department of Justice is also suing Apple for allegedly imposing restrictions on software and hardware to hinder rival competition and discourage consumers from switching phones. Additionally, the Federal Trade Commission has been granted permission to proceed with its case against Amazon, accusing the company of using its monopoly power to charge consumers higher prices both on and off its platforms.

• Regulatory scrutiny of Big Tech companies is likely to persist in the coming years, as these firms increasingly resemble the Wall Street banks of the previous decade. Although we don’t anticipate a major upheaval among the top tech names, regulatory compliance may necessitate changes in business practices. These changes could hinder efforts to maintain a competitive edge and weigh on earnings growth. While it’s premature to completely abandon Big Tech stocks since these court cases are far from resolved, investors may find it useful to explore other opportunities.

Rainy Day Savings: The decision to ease policy has helped protect household balance sheets, but time will tell if it will lead to further economic stimulus.

• The decrease in mortgage rates led to a significant increase in refinancing activity last month, according to the mortgage automation company Optimal Blue. Homeowners drove the surge, with rate-and-term refinance loans increasing by a remarkable 700% from the previous year, while cash-out refinancing rose by 50% in the same period. Borrowers used the drop in interest rates to lower their mortgage payments and consolidate some of their debt. In the same month that refinancing jumped, revolving credit experienced the most significant monthly drop since March 2021.
• The improvement in household debt levels is encouraging, but it may also indicate economic concerns. According to the latest Conference Board Consumer Confidence report, consumers have become more pessimistic about the labor market. A large number of survey participants mentioned that they were having a harder time finding jobs, and fewer people said that there were plenty of job opportunities available. These worries about the job market caused consumers’ confidence in their current situations to decrease to the lowest level since the beginning of the pandemic.

• The impact of the Fed rate cuts will depend on consumer confidence in the economy. If households believe that the economy is strong, then they will likely increase consumption using their improved financial position. However, if they think the economy is starting to stall or weaken, then they may be more inclined to wait until everything improves before increasing their spending. As a result, it may take some time before the easing starts to have an effect on the economy. Nevertheless, the robust September jobs report suggests that the Fed rate cut may have come in time to prevent an outright recession.

Tensions are Easing: There are indications that the warring countries in Europe and the Middle East may be open to reaching a settlement.

• On Tuesday, it was reported that Ukrainian President Volodymyr Zelensky may be open to coming to the negotiating table to discuss an end to the war with Russia. The report comes as Ukraine tries to keep Russian troops at bay in the east, while also trying to hold onto Russian territory in its border region. In the Middle East, Hezbollah has dropped its demand for a truce in Gaza as a condition of any ceasefire. This decision comes after it was reported that Israel had killed the group’s leader Hassan Nasrallah as well as his successor.
• A resolution to the ongoing conflicts could potentially lead to a decline in commodity prices, especially crude oil. A ceasefire between Israel and Hezbollah could reduce the likelihood of an Iranian attack on oil facilities, which has been a major concern following Iran’s recent missile barrage. Additionally, ending the conflict in Ukraine could enable Russia to resume selling its crude oil on the global market without sanctions. As a result, optimism about a reduction in tensions has already led to a pullback in crude prices, which fell by 5.3% on the day.

• While both outcomes are desirable, the resolution of the Ukrainian conflict appears to be more likely. Unlike Israel, Ukraine is not negotiating from a position of strength. It has likely maximized its gains from the conflict with Russia and should therefore engage in talks while it still has leverage. In contrast, Israel may be more inclined to demand further concessions from its adversaries as it continues to pressure them. However, the United States is likely to urge both parties to negotiate at some point, suggesting that the conflict may not extend significantly into 2025.

In Other News: Federal Reserve Vice Chair Philip Jefferson mentioned that the risk to the labor market and inflation remains balanced. This indicates that the central bank may be shifting its focus away from inflation and toward preventing an undesirable increase in the unemployment rate. US Secretary of State Antony Blinken is heading to Laos for the ASEAN summit. The White House aims to reassure its Asian allies of its commitment to their security, even as China continues to escalate tensions in the South China Sea.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with disappointment over the Chinese government’s failure to announce more economic stimulus, which has created extreme volatility in Chinese markets. We next review several other international and US developments with the potential to affect the financial markets today, including new Chinese tariffs on European brandy and a statement by the New York FRB leader that suggests US interest rates may continue to fall at a slower pace than some investors expect.

China: At a highly anticipated news conference earlier today, the chief of the National Development and Reform Commission failed to announce the kind of big, new economic stimulus measures investors expected. Instead, he merely summarized the thrust of existing plans, such as issuing more special government bonds to finance targeted sectors and repeated assurances that Chinese economic growth this year will achieve the government’s target of about 5.0%.

• After weeks of new stimulus measures being announced on an almost daily basis, the NDRC announcement was a splash of cold water for investors.
• Chinese equity prices whipsawed throughout the day. At first, prices surged as investors got their first chance to buy following a week-long holiday. Then, however, prices pulled back sharply as investors understood that the package of stimulus measures may not go beyond what has already been announced.
• By day’s end, Chinese stock indexes still posted strong gains, but the increases were only about half as big as their intraday jump. Hong Kong stock indexes plunged more than 9% since that market wasn’t closed for the long holiday and therefore already reflected optimism over the previously announced stimulus measures.
• The lack of new stimulus measures also has implications for the global economy, especially in terms of commodity demand. For example, copper prices, so far today, have fallen 1.9% to $9,758 per ton and aluminum prices are down 2.5% to $2,586.50 per ton. Oil prices are also lower, with WTI down 2.1% to $75.38 per barrel and Brent down 2.2% to $79.20 per barrel.

China-European Union: In retaliation for the EU’s vote on Friday to impose big antidumping tariffs against Chinese electric vehicles, Beijing today said it will impose tariffs against EU brandy. The announcement has already pushed the stock prices of major European distillers and luxury goods producers sharply lower today. More broadly, the Chinese action is being seen as perhaps just the first shot in an EU-China trade war.

• With Chinese economic growth in the doldrums and the government reluctant to offer further stimulus measures, Beijing is leaning heavily on new factory investment and export promotion to goose growth.
• In turn, surging Chinese exports have generated pushback from the US, the EU, and even many emerging countries that fear their domestic industries will be hurt by an onslaught of cheap Chinese goods.

United Kingdom: New data shows that the UK’s population grew to 68.3 million as of mid-2023. The figure was up 1% from mid-2022, marking the country’s fastest population growth since 1971. Notably, however, the number of births was slightly lower than the number of deaths, meaning the entire population increase came from immigration, despite the public’s desire to clamp down on new arrivals and government efforts to restrict them.

• Going forward, the UK’s plunging birth rates mean that population growth will probably continue to depend on migration.
• That will likely create tricky political problems for the government as it tries to maintain economic growth while also responding to popular demands for less immigration.

Mexico: The administration of newly inaugurated President Sheinbaum has reportedly asked major manufacturers to identify foreign-made parts and subcomponents that could be made in Mexico. The government is reportedly focusing on inputs from China that could be made at home to make Mexico’s supply chain more resilient. The government probably also fears that US animosity toward Chinese content could put Mexican sales north of the border at risk.

• The Mexican initiative illustrates how the fracturing of the world into different geopolitical and economic blocs is shortening supply chains.
• The initiative could also address a broader, long-standing problem with Mexico’s economic development. Since the maquiladora system of doing final assembly of US-bound goods at factories close to the border has traditionally relied heavily on parts and subcomponents from abroad, Mexico has a relatively underdeveloped base of parts manufacturers. The Sheinbaum initiative could conceivably lead the government to take steps to build out the country’s supplier base and create more factory jobs.

US Weather: As noted in our Weather section later in this report, Hurricane Milton is traveling northeasterly across the Gulf of Mexico today and is expected to slam into the Florida coast on Thursday. The strong storm is expected to cause extensive damage from wind and flooding and potentially noticeable economic disruptions in the near term. Insured losses are likely to be high.

US Politics: Intelligence officials yesterday warned that China, Russia, and other authoritarian countries intend to unleash covert disinformation campaigns after the November election to undermine US citizens’ faith in the outcome. According to the officials, the covert influence campaigns will be designed to amplify citizens’ own concerns about election integrity and manufacture entirely false narratives about the electoral results. The announcement is a reminder that electoral uncertainty and anger could continue even after the balloting finishes.

US Monetary Policy: In an interview with the Financial Times, New York FRB President Williams said the “very good” jobs report for September confirms that the US economy remains healthy even as inflation eases. According to Williams, that has left the Fed “well positioned” to achieve a soft landing if it pursues something like the two 25-basis point interest-rate cuts before the end of the year implied in the Fed’s latest dot-plot economic projections. The statement suggests Williams is looking for only moderate rate cuts going forward.

US Inflation: Managers of the popular lottery game Mega Millions said they will raise the price of a ticket to $5 in April, compared with $2 today. That will mark the game’s first price hike since 2017, but the managers said the increased ticket price will allow bigger jackpots and improved odds.

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