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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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today, the one-year anniversary of the Hamas attacks on Israel, opens with rumors that Iran may have tested a nuclear weapon as it tries to deter more Israeli attacks on its interests. We next review several other international and US developments with the potential to affect the financial markets today, including a statement by Japan’s new finance minister that suggests financial conditions in that country will remain accommodative and new analysis showing the US federal budget deficit is likely to expand no matter which presidential candidate wins the November election.

Iran: On Saturday night, seismic monitoring stations near the Middle East detected a moderate earthquake in Iran’s Kavir Desert, raising concerns that Iran may have conducted a nuclear test to retaliate for Israel’s recent attacks on Iranian proxy forces in the region. Those concerns were heightened by reports that the seismic signature of the event was more consistent with a nuclear explosion than a natural earthquake. A test explosion would confirm Iran as a nuclear state.

• Although outside observers have long thought Iran could quickly produce a nuclear bomb, few thought the country had an operational one already. If Iran does have an operational bomb that could be delivered to Israel, it would greatly raise the stakes of the ongoing conflicts in the region. An Iranian nuclear test would probably aim to deter Israel from any further attacks.
• Even if the reports are erroneous and Iran hasn’t conducted a nuclear test, there is still a heightened risk that Israel will soon attack Iranian oil facilities directly. Israel then might even strike at Iran’s nuclear research and development facilities in an effort to keep Iran from making a bomb. Whichever way Iran would respond to such an attack, it would heighten the risk of a wider, more dangerous war in the region.
• In response to these concerns, global oil prices have jumped again so far this morning. Near WTI futures are currently trading up 2.6% to $76.29 per barrel, while Brent futures are up 2.2% to $79.79.

China: Provincial and local governments have reportedly begun demanding that teachers and other rank-and-file school workers hand in their passports, preventing them from traveling abroad. It isn’t clear to what extent the action has been directed by Beijing, but it appears that the reason for the crackdown is to prevent teachers from being influenced by non-Communist ideas in the West, which they might then pass on to their students.

• We have long noted that the world is fracturing into relatively separate geopolitical and economic blocs, and that key governments around the world are putting up barriers to inter-bloc trade, investment, technology, and information flows.
• To date, there have been relatively fewer new barriers to migration and human travel between the blocs. If China really is pushing to keep its people from visiting countries outside its bloc, it would suggest that global fracturing is now broadening to encompass people flows.

Japan: Newly appointed Finance Minister Katsunobu Katō today insisted he will focus on stamping out the last vestiges of price deflation in Japan. The statement suggests Japanese financial conditions will remain more accommodative than investors originally expected under the new prime minister, Shigeru Ishiba. The prime minister’s mixed messages on monetary and fiscal policies have made the yen extremely volatile over the last week, although it has been relatively stable today.

European Union: US private equity investors have reportedly provided more than 65% of the venture capital flows into European defense technology start-ups so far this year. That’s consistent with our view that US investors are increasingly attuned to the good prospects for smaller firms with dual-use or defense-related technology. Many of those firms will likely have their initial public offerings of equity in the coming years.

• On a related note, Ukrainian President Zelensky said late last week that his country can now produce up to 4 million surveillance and attack drones per year, up from virtually none when Russia invaded in February 2022. In Zelensky’s words, Ukraine has quickly developed a “virtually new defense industry.”
• In another example of how drones are becoming a bigger part of military force, the French navy has signed a deal to buy underwater drones to conduct surveillance on subsea communications cables, pipelines, and other critical infrastructure that could be attacked by an adversary.
• While we still think that global fracturing and rising geopolitical tensions will lead to higher defense budgets around the world, a key question is how those budgets will be structured. It appears that powerful, game-changing drones can be produced cheaply and in great numbers, so some defense budget funds currently spent on big, expensive assets like aircraft carriers will likely be diverted to drones and other new technologies over time. We think that will create opportunities for smaller defense and technology firms.

Germany: August factory orders fell by a seasonally adjusted 5.8%, nearly three times as much as expected and more than enough to reverse the 3.9% rise in July. Importantly, the data shows that demand for German capital equipment is turning especially weak. That underlines the weak economic momentum in Europe and other key economies around the world outside the US.

US Fiscal Policy: New analysis by the nonpartisan Committee for a Responsible Federal Budget estimates that former President Trump’s fiscal policies would expand the budget deficit by about $7.5 trillion over current projections through 2035, while Vice President Harris’s policies would increase the deficit by about $3.5 trillion. The difference stems in part from Trump’s desire to extend the 2017 income tax cuts versus Harris’s aim to increase corporate tax rates.

• The CRFB findings are similar to those of a recent study by the Wharton School.
• The studies assume each candidate can get his or her agenda passed. In reality, Congressional politics after the election will have a big impact on what parts of their agendas actually get passed into law. Neither candidate’s full agenda is likely to be passed.
• All the same, the important finding may simply be that the federal deficit is likely to widen no matter which candidate is elected. That means the federal debt is also likely to keep rising, leading to increased risk of a fiscal crisis at some point in the future.

US Energy Industry: The Wall Street Journal said over the weekend that several top oil and gas firms have been meeting with former President Trump’s campaign team to secure a commitment not to gut key elements of President Biden’s Inflation Reduction Act if Trump is elected again. The energy firms are reportedly worried that Trump would side with conservative lawmakers who want to end the law’s lucrative tax credits for their investments in renewable fuel, carbon capture, and hydrogen.

• Conservative Republicans in Congress have argued that President Biden’s policies have hamstrung the domestic energy industry, even though domestic oil output is now at or near a record high. To the extent that energy firms have become more restrained in their investment spending, it appears that it is largely because investors are demanding capital discipline and more attention on cash flow.
• Obviously, it’s still unclear who will control the White House and Congress after the November elections. Nevertheless, the oil and gas firms’ early lobbying to protect their future-fuel investments suggests the environment for the green energy industry may not change as much as popularly assumed if Trump wins.

US Robotics Industry: New reports say US manufacturers have greatly slowed their purchases of industrial robots over the last year. The slowdown apparently stems from the manufacturers’ moderating production growth, improved labor supply, higher interest rates, and a realization that robots can require a lot of maintenance and programming skill. However, the report says robot purchases by aerospace and defense firms are still rising briskly.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are currently reacting to the fresh jobs report. In sports news, Caitlin Clark of the Indiana Fever has been named the WNBA Rookie of the Year. Today’s Comment will delve into the ongoing Israel-Iran conflict, explore why a soft economic landing is beneficial for speculative bonds, and discuss the rise of European protectionism. As always, we will conclude our report with a comprehensive overview of international and domestic data releases.

Israel-Iran: The prospect of Israel bombing oil patches in Iran has led to concerns of a broadening war in the Middle East.

• President Biden suggested that a potential strike on Iran’s oil fields is under discussion between the US and Israel in response to Iran’s missile barrage. While details remain unclear, the possibility of Israeli strikes fueled a surge in global oil prices and pushed the VIX above 20. Rising tensions between Israel and Iran, along with fears of disrupted Iranian oil production and further conflict escalation, have driven the increase in market volatility. Meanwhile, Israel escalated its offensive in Lebanon, launching airstrikes near Beirut Airport and targeting Hezbollah’s potential successors.
• The ongoing conflict has challenged the traditional safe-haven paradigm. While the 10-year Treasury and gold have historically been considered reliable during times of fear, the US dollar has emerged as the dominant safe-haven asset, consistently maintaining its value. Despite the dollar’s recent rally, bond prices have declined, and gold has relinquished some gains. This shift in investor sentiment likely reflects a reassessment of relative valuations, with gold and bonds perceived as overvalued compared to the dollar amid concerns about central bank monetary policies.

• In the coming weeks, we should gain clearer insights into how US monetary policy compares to its global peers. The Bank of England and European Central Bank have indicated a readiness to implement more aggressive rate cuts if inflation aligns with projections. Conversely, the Bank of Japan faces pressure to refrain from further tightening. The US is prepared to adjust its policy if necessary, but its decisions are likely to continue to be more sensitive to evidence of weakness in the labor market rather than to cooling inflationary pressures.

Soft Landing and Credit Spreads: Recent ISM and S&P Global data confirms a strong economy, narrowing high-yield bond spreads.

• The purchasing managers indexes (PMI) for the two most well-known reporting agencies suggest that service activity remained comfortably above the contraction threshold of 50 in September. The service index from the Institute of Supply Management increased from 51.5 in August to 54.9 in the following month. Meanwhile, the S&P Global index decreased modestly from 55.7 to 55.2. These reports reinforce the notion that despite weakness in the labor market, the economy is still on solid footing, which has boosted confidence in a soft landing.
• The positive economic outlook has led to a sharp increase in the demand for speculative bonds. This trend has coincided with a decrease in credit spreads to their lowest level since 2021, as investors expect a gentle economic slowdown. The decrease in spreads is influenced by the potential interest rate cuts by the Federal Reserve and the ongoing strong demand for credit, especially from companies looking to refinance expiring debts. This is likely to continue as long as the market maintains confidence in the Fed’s ability to control inflation and prevent a recession.

• The positive readings from the two PMIs are encouraging, but only time will determine whether the Federal Reserve can successfully navigate a soft landing. Despite the thriving service sector, manufacturing continues to struggle. Furthermore, concerns about a potential resurgence of inflation persist. As a result, a hard landing or a possible Fed U-turn remains a distinct possibility. Consequently, while credit spreads are currently tight, they may widen if economic conditions deteriorate. This may mean that investors should be patient before going into speculative grade bonds.

Europe’s Protectionist Shift: EU officials have crossed a key hurdle as they try to decide whether to impose tariffs on Chinese EVs.

• Amid ongoing trade negotiations with China, the EU has announced its intention to impose tariffs of up to 45% on Chinese electric vehicles. This reflects a growing desire to protect domestic industries. Additionally, the EU has been positioning itself for the possible return of Donald Trump as president, since he has warned of a more hostile trade relationship with the bloc. This move aligns with recent warnings from French President Macron about the need for fairer trade rules to prevent the EU from falling behind the US and China.
• The EU’s increasing vulnerability has spurred a drive for greater independence. Although the bloc aspires to be a pioneer in the green energy shift, it continues to be heavily reliant on China for renewable technology and remains a major buyer of US natural gas. Eurostat data reveals that Europe imported 93% of its solar panels. Moreover, its imports of Chinese vehicles surged from 3.5% in 2020 to 27.2% by the second quarter of 2024. This dependence has impeded the growth of domestic industries and left the bloc exposed to external threats.

• While we expect the EU to retain strong ties with the US due to its historical and security interests, we believe the increasing competition between the two has become more understated. This tension is evident in the bloc’s crackdown on US big tech firms and its calls for issuing its own bonds. The EU’s growing assertiveness could compel the US to have less influence in shaping EU affairs, especially as these countries begin to contribute more to their joint defense. In the long run, this could have an impact on firms with foreign revenue exposure.

In Other News: Dockworkers and operators have agreed to put the strike on hold until January 15. The UK has struck a deal with Mauritius in which it gave back the islands but was able keep the region that holds a UK military base. Italy is looking to raise taxes on corporations earning windfall profits as it looks to tackle its growing deficit.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently awaiting the release of the jobs report data and Israel’s response to Iran. In sports news, Lionel Messi’s Inter Miami has won the 2024 Supporters’ Shield for the second year in a row. Today’s Comment will discuss the ongoing dockworkers’ strike, how hurricanes can impact inflation, and the implications of the French government’s debt plan. As usual, the report concludes with a roundup of international and domestic data releases.

Union Tension with AI: The ongoing dockworkers’ strike may be a prelude to future disputes over AI and automation.

• US dockworkers have gone on strike at both East and Gulf Coast cargo facilities, demanding higher wages and a ban on automation for certain jobs. The strike is in its early stages, but it appears that workers have the upper hand. President Joe Biden has warned that if employers fail to reach an agreement with workers, it could lead to a man-made disaster. Meanwhile, both Vice President Kamala Harris and former President Donald Trump have expressed sympathy for the workers’ demand for higher wages to offset the rising cost of living.
• One of the most overlooked issues in this strike is the role of automation and AI. While lawmakers have primarily focused on immigration as a means of protecting workers, few have specifically addressed the potential for technology to displace them. Politicians’ reluctance to discuss the impact of automation on the job market is linked to the hope that new technology will be crucial in boosting productivity, which can not only help lower inflation but also increase profit margins.

• While the overall impact of AI on jobs may be overstated, the fear is real. According to a study by MIT professor Daron Acemoglu, AI is currently capable of doing only about 5% of jobs. Although this offers some reassurance to workers, it’s unlikely to quell their anxieties as 38% of workers think AI will hurt their jobs. Consequently, resistance to AI integration is likely to intensify in the coming years. This growing opposition could hinder firms’ efforts to increase productivity through AI, potentially leading to a reevaluation of AI’s promise and contributing to future inflationary pressures.

Insurance Costs: The estimate for the damage from Hurricane Helene is increasing, but this might not have as significant of an impact on insurance premiums as many would expect.

• The storm’s total economic losses are expected to reach approximately $35 billion. However, insurance companies are not anticipated to incur significant losses. Unfortunately for most homeowners, the majority of the damage caused by the storm was due to flooding, which is typically underinsured, as most policies only cover large-scale wind damage. Insurance companies in Florida, a region prone to hurricanes, are expecting damages from Helene to result in moderate losses compared to the devastation caused by Hurricane Ian in 2022 and Hurricane Michael in 2018.
• Although overall price pressures have eased this year, insurance costs remain persistently high. This inflationary trend is largely attributable to several factors: pandemic-related restrictions, rising operational expenses, and escalating repair costs. Unlike many other businesses, insurance companies cannot immediately adjust premiums to offset losses, as policies are typically locked in for a set term. Consequently, they are forced to wait until the renewal period to implement pricing changes that reflect the growing risks in the market, which is why insurance inflation can rise even as other prices are moderating.

• Insurance serves as a poignant reminder of the capricious nature of inflation. Certain factors can dramatically influence price levels without warning, underscoring the necessity for investors to be cognizant of the potential inflation volatility in the years ahead. Economic shocks stemming from natural disasters, geopolitical events, and pandemics are particularly concerning. While Hurricane Helene is not anticipated to influence inflation for the upcoming year, the likelihood of other events affecting it remains elevated, especially as the world transitions away from globalization.

Tackling the Budget: After pressure from Brussels to rein in its budget, it looks like France is finally doing something about it.

• French President Emmanuel Macron has endorsed raising taxes on the country’s largest companies. His shift from his typical pro-business stance comes amid calls for the government to get its fiscal house in order. The government is expected to make around 60 billion EUR ($66 billion) in spending cuts and tax increases for the next budget year. Much of the increased tax revenue will be targeted toward wealthy individuals, large corporations, and activities that are harmful to the environment. Meanwhile, two-thirds of the savings are expected to come from cuts to ministries, local authorities, and the social security system.
• The shift to reduce its deficits comes as France has pushed to extend the deadline for meeting EU deficit targets. The French government is expected to lower its deficit from its current rate of 6% of GDP to 5% of GDP by 2025, with an overall goal of bringing the deficit below the 3% fiscal ceiling by 2029, two years later than it had anticipated. While the plan is not considered ideal, EU officials seem satisfied with the proposal, provided the government can enact the necessary reforms to lend it credibility.

• The shift to make the wealthy primarily responsible for repaying debt shows that governments are becoming less willing to impose austerity measures on the general population. This is a significant change from a few years ago when France increased taxes on the lower and middle classes, leading to the Yellow Vest protests. Targeting the wealthy and corporations may result in capital outflows to countries with more favorable tax policies and could lead to increased resistance to green initiatives in Europe.

In Other News: Microsoft-backed startup OpenAI has asked its investors not to support rival xAI as it looks to ensure dominance within the space. New Japanese Prime Minister Shigeru Ishiba downplayed the need for another rate hike due to the state of the economy, which has weighed on the yen (JPY). Additionally, Bank of England Governor Andrew Bailey has suggested that the central bank may favor cutting rates aggressively if inflation shows signs of improving.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are still grappling with the ongoing Middle Eastern conflict. Today’s Comment will analyze the escalating Israel-Iran tensions, explore the reasons behind the positive surprise from JOLTS, and provide our perspective on the recent vice presidential debate. Finally, we’ll conclude with a roundup of key domestic and international economic data.

Israel-Iran: The two countries have launched attacks against one another in a sign that tensions in the Middle East are rising.

• Iran launched a massive barrage of 180 ballistic missiles against Israel on Tuesday, hours after the White House issued a stern warning about potential Iranian retaliation for a ground incursion into Lebanon. While most of the missiles were intercepted, the recent rocket launches penetrated farther into Israeli territory and came with less warning than the previous attack in April. So far, there is uncertainty as to whether tensions will escalate further, with Israeli Prime Minister Benjamin Netanyahu vowing that Iran “will pay” for the attack and Iran insisting that it is not interested in a broader war. 
• The recent attack on Israel has triggered a sharp spike in oil prices, with Brent crude climbing above $75 a barrel — a level not seen since August. While the immediate impact of the attack is clear, the longer-term price trajectory remains less certain. Before the incident, the two warring factions in Libya agreed to a compromise, paving the way for a resumption of oil exports. Meanwhile, the Saudi-led OPEC+ alliance is scheduled to convene today to discuss increasing its production target. As a result, the potential increase in supply is likely to keep oil prices in check.

• The extent to which the conflict escalates will significantly influence oil prices. A broader war, involving Israeli strikes on Iranian oil infrastructure or an Iranian blockade of the Strait of Hormuz, could drive crude prices substantially higher. Currently, there is no indication that either side is seeking a major escalation. The US and its allies are actively working to de-escalate the situation. However, Israel’s recent denial of entry to UN Secretary-General António Guterres has raised concerns about its willingness to reduce tensions.

 Job’s Surprise: Job openings surged in August; however, there are still signs that the labor market is cooling.

• The Job Openings and Labor Turnover Survey (JOLTS) revealed a surge in job openings in August, reaching a three-month high of 8.04 million. This uptick was primarily fueled by increased openings in construction and state and local government sectors. Despite the rise in available positions, concerns persist regarding labor demand. Hiring rates dipped to 3.3%, equaling their lowest point since the pandemic began. The number of job openings to the number of unemployed ratio was held to a three-year low of 1.1, down from the post-pandemic peak of 2.0 and slightly below the pre-pandemic ratio of 1.2.
• The mixed JOLTS report has muddied the waters on the labor market’s true health. The rise in construction jobs was likely fueled by lower interest rates, reflecting expectations of Fed cuts. The 10-year Treasury yield declined by nearly 50 basis points from early July to late August. Although this did not lead to an increase in construction spending, there was a noticeable rise in activity, particularly in housing starts. However, sectors less sensitive to interest rate changes, such as retail trade and transportation, experienced noticeable declines, which is likely to reinforce concerns that hiring is cooling.

• The size and timing of the Fed’s next rate cut will be heavily influenced by the jobs report, which will be released on Friday. While the JOLTS report was broadly positive, other surveys released last month have predominantly flashed warning signs that the labor market is cooling. If the BLS jobs report shows a slowdown in job creation or another uptick in the unemployment rate, Fed officials may seek to adjust policy to ensure that they do not lose control over the maximum employment mandate.

Vice Presidential Debate: The contest between the two vice-presidential candidates may not have produced sound bites, but it offered both sides a strong platform to share their visions for the country.

• During the debate, both sides tried to highlight the qualifications of their respective presidential candidates. Senator JD Vance argued that former President Donald Trump helped to lower inflation to 1.5% and increase take-home pay for American families while he was in office. Meanwhile, Minnesota Governor Tim Walz argued that Vice President Kamala Harris had helped lower insulin prices and had passed much-needed infrastructure legislation. Neither candidate made a significant impact, but they did not make any major mistakes either.
• With 33 days remaining until the election, there doesn’t appear to be a clear front-runner, which is different from previous election cycles. In the last election, President Joe Biden was considered the comfortable favorite to win the presidency and enjoyed very favorable polling. However, this year, the polls have tightened considerably, with Harris trailing broadly across swing states, according to data collected by Real Clear Politics.

(Source: www.270towin.com and Polymarket)

• While Ohio Senator JD Vance appeared the most poised and composed during the debate, the lack of viral moments may render the contest inconsequential to the election. According to our current electoral forecast, based on betting odds, the election is likely to be a toss-up, potentially coming down to Pennsylvania. Betting odds slightly favor Harris, although polling shows an advantage in the other direction. It’s important to note that the president’s impact on financial markets is not as significant as that of the legislative branch, with betting odds currently favoring a split Congress.

In Other News: French Prime Minister Michel Barnier has proposed raising taxes to address the country’s debt, indicating a move towards unpopular measures. At the same time, dockworkers in the US have gone on strike, which could potentially disrupt US supply chains. Additionally, UK Prime Minister Keir Starmer is heading to Brussels to help improve relations with the EU as the two sides seek to secure deals on defense and food.

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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 consumer price inflation in the eurozone is now below the European Central Bank’s target of 2% for the first time in three years — a development that portends further interest-rate cuts and potentially renewed depreciation of the euro. We next review several other international and US developments with the potential to affect the financial markets today, including the inauguration of a new president in Mexico and a statement by Federal Reserve Chair Powell suggesting US interest rates will fall only gradually going forward.

Eurozone: In an initial estimate, the September consumer price index was up just 1.8% from the same month one year earlier, after a 2.2% gain in the year to August. That means price inflation is now below the European Central Bank’s target of 2.0% for the first time in three years. The continued cooling in inflation, which stems in part from weakening economic activity, will likely encourage the ECB to keep cutting interest rates at its next policy meeting later this month. As a result, the euro so far today is trading about 0.5% lower to $1.1079.

Japan: The Bank of Japan’s third-quarter “tankan” index of major manufacturers’ sentiment came in at a relatively subdued +13, matching the second-quarter figure. The third-quarter reading suggests Japanese manufacturers remain cautious as they face slowing economic growth in China and an appreciating yen (JPY). As we mentioned in our Comment yesterday, they are also now dealing with a new prime minister, Shigeru Ishiba, who was confirmed by the Diet today.

Russia-Ukraine: The Russian government’s proposed budget for 2025 envisions defense outlays jumping to the equivalent of $145 billion, up 25% from 2024. According to the government, the proposed military budget is necessary to ensure victory in the invasion of Ukraine. The huge increase also suggests President Putin is comfortable with the massive economic stimulus that has come with increased defense spending.

• The proposed defense budget would equal almost 7% of Russian gross domestic product, as forecasted by the International Monetary Fund. As we’ve noted before, higher defense spending tends to correlate with higher economic growth, so long as the “defense burden” remains below about 10.0% of GDP.
• However, given that the Russian military retains so many Soviet-style habits and operational approaches, it would not be surprising if Russia was hiding some defense spending in ostensibly civilian budget accounts or off budget. If so, Russia’s total defense spending could be above 10% of GDP, in which case it could soon start to weigh on the country’s economy.

Israel-Hezbollah: The Israeli military last night began what it called “limited, localized” ground raids against Hezbollah positions in southern Lebanon, marking Israel’s latest step in its nearly year-long war to eliminate the threats from Iran-backed Islamist militants. Israel’s increasingly aggressive moves suggest Prime Minister Netanyahu senses his country’s huge preponderance of power versus Hamas, Hezbollah, and Iran and is looking to defang them while he can.

• The risk, of course, is that Netanyahu could go too far, perhaps by attacking Iran directly to try to eliminate its nuclear program.
• Such a scenario could prompt Iran to retaliate against Israel or other regional countries with whatever weapons it can muster, leading to further destruction and potential economic disruptions across the region.

Mexico: Claudia Sheinbaum of the leftist Morena Party will be inaugurated today as the country’s new president. However, all signs suggest outgoing President Andrés Manuel López Obrador, the founder of Morena, will remain closely involved in governance and constrain Sheinbaum’s actions as she manages problems such as Mexico’s expanding budget deficit and high crime rate. Both those problems have hurt Mexico’s ability to benefit from global fracturing and the shifting of production toward the US from China.

US Politics: Republican vice presidential candidate JD Vance and his Democratic counterpart, Tim Walz, will square off in their only debate of the campaign season tonight at 9:00 PM ET. Vice presidential debates typically get somewhat less television viewership and attention than presidential debates. However, given how close this year’s race is, the success or failure of either vice presidential candidate could have a meaningful impact on who wins the presidency.

US Monetary Policy: At a conference yesterday, Fed Chair Powell said that the monetary policymakers are aiming to cut interest rates only to the “neutral” level, and that the course to get there is not pre-set. Rather, Powell said the path of rate cuts could still be gradual, depending on how the economic data comes in. In other words, Powell seemed to be suggesting that the Fed could cut rates more slowly than some investors still expect.

US Shipping Industry: As expected, the International Longshoremen’s Association today launched its big strike at East Coast and Gulf Coast ports. The affected ports typically account for about 41% of US containerized shipping volume, so the work stoppage is anticipated to have a major impact on the country’s exports and imports for as long as it lasts. Importantly, the disruption to imports could spark a new round of price inflation. As we’ve noted before, key issues in the dispute center on dockworker pay and the use of automation at the ports.

US Storm Damage: Authorities are still assessing the damage caused by Hurricane Helene as it moved across Florida, Georgia, and the Carolinas over the weekend, but it now appears the storm killed more than 100 people. In addition, Moody’s has estimated the massive hurricane caused at least $15 billion in property damage, and Fitch Ratings puts insurable losses between $5 billion and $10 billion.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a note on the enormous jump in Chinese stock prices today. We next review several other international and US developments with the potential to affect the financial markets today, including some observations on Japan’s new prime minister and a preview of the likely longshoremen’s strike that is expected to shut down major US ports along the East Coast and Gulf Coast starting at midnight tonight.

China: Chinese officials unleashed more economic stimulus measures over the weekend, including eased home-purchase rules in major cities. Coupled with the slew of interest-rate cuts, stock market support, and other measures discussed in several of our Comment publications last week, today’s announcements helped spark a flurry of Chinese stock buying. Chinese stock indexes posted their biggest daily gain since 2008, bringing their rise in September to 17% and putting them in a bull market despite lingering questions about the measures’ effectiveness.

China-Philippines: Even though Beijing has said that it lifted a moratorium on fishing around the Scarborough Shoal in the South China Sea, Philippine fishermen say numerous Chinese coast guard vessels are keeping them out of the area, to the detriment of their livelihoods. Beijing has long implemented seasonal moratoria in the disputed waters, ostensibly to protect fish stocks, but it hasn’t strongly enforced them. The more aggressive tack now suggests China is ratcheting up its effort to seize control over the waters it claims in the area.

Japan: Over the weekends, former Defense Minister Shigeru Ishiba, who won the presidency of the ruling Liberal Democratic Party on Friday and will be made prime minister in a Diet vote on Tuesday, took steps toward fleshing out his cabinet and policy agenda. So far, it appears Ishiba’s cabinet will be stacked reassuringly with political veterans. For example, another former defense minister, Takeshi Iwaya, is expected to be named foreign minister, and former Chief Cabinet Secretary Katsunobu Katō is set to be named finance minister. Expected policy moves include:

• Foreign Affairs and National Defense. Ishiba has shown a keen awareness of the rising security threats from China and its geopolitical bloc, including Russia and North Korea. He has therefore advocated forming an “Asian NATO” with strong mutual defense treaties between Japan and its key regional allies. Ishiba has also called for making Japan a more equal partner in the US-Japan defense treaty, perhaps by giving Japan more responsibility to help defend the US in return for more access to US military bases.
• Economic Policy. Before winning the LDP presidency, Ishiba suggested that he supports the Bank of Japan’s campaign to hike interest rates. He also called for higher corporate taxes to fund measures helping consumers hurt by high price inflation. News of his win, therefore, put strong upward pressure on the yen (JPY) and downward pressure on Japanese stocks. Ishiba yesterday tried to reverse the damage, saying the BOJ should keep policy accommodative for now, but Japanese stocks still fell 4.8% today.
• Electoral Calendar. Ishiba today said he wants to hold new parliamentary elections on October 27 in order to have a popular mandate for his policies. That suggests Japan could go through a nearly one-month period of policy stagnation, political uncertainty, and volatile markets.

Israel-Hezbollah: After Israel’s massive airstrike against the Hezbollah leadership in Beirut on Friday, the militant Islamist group confirmed on Saturday that its leader for the last three decades, Hassan Nasrallah, had been killed, along with a high-ranking Iranian military officer who had been advising him. Although Israel’s big offensive over the last two weeks has certainly weakened Hezbollah, there is a risk that its remaining leaders and their backers in Tehran will try to retaliate in force, potentially sparking a destabilizing regional war.

• Notably, however, Iranian Supreme Leader Ali Khamenei suggested over the weekend that any retaliation would have to come from Hezbollah itself, with Iran merely playing a supportive role.
• The apparent Iranian reluctance to get more deeply involved is probably a key reason why the Israelis are now attacking Hezbollah so aggressively. All the same, it’s not entirely clear that Iran will continue to hold its fire, so we assess that the situation remains risky.

United Kingdom: The government has reportedly bought a faltering semiconductor fabrication facility in northern England to ensure that the British military continues to have access to its specialized computer chips. The purchase illustrates how Western governments are starting to think more creatively about how to ensure a secure, domestic supply of critical military goods.

• The purchase is also reminiscent to how the US mobilized its defense industry during World War II. Many people see that mobilization largely as a patriotic surge by private firms, but it was actually the US government that paid for and owned most of new defense production facilities built during the war. Private firms like General Motors then used the facilities to produce defense goods, generally being paid on a cost-plus-fixed-fee basis and receiving a $1 purchase option on the facilities when the war ended.
• Many Western defense industry firms have been slow to boost output despite the current rise in demand as geopolitical tensions worsen. Reports suggest that in many cases, that’s because defense firms fear investing in new facilities only to find that peace breaks out and they’re left holding the bag financially. Direct government investment in new or existing factories could become more prevalent because it can help alleviate that risk.

Austria: In parliamentary elections yesterday, the far-right Freedom Party came in first with about 29% of ballots cast, while the center-right ÖVP, which governs in coalition with the Greens, secured about 26%. The center-left Social Democrats took about 21%. The question now is which parties can stitch together a ruling coalition, since the ÖVP has signaled it is only interested in joining a centrist coalition.

US Monetary Policy: In a Friday interview with the Financial Times, St. Louis FRB President Musalem said the Federal Reserve should now revert to “gradually” easing monetary policy after its big 50-basis point cut in early September. Since Musalem will be on the Fed’s policy-setting committee in 2025, the statement suggests the central bank may cut interest rates more slowly in the coming year compared with its initial cut this month. In other words, despite the jumbo cut in early September, the Fed could still keep rates “higher for longer” in 2025.

US Shipping Industry: The US is now just one day away from a potential major strike at its East Coast and Gulf Coast ports. If the US Maritime Alliance, which represents carriers and marine terminal operators, and the International Longshoremen’s Association can’t agree on a new contract before the current one expires today, the resulting work stoppage would affect about 41% of the country’s containerized shipping volume. Key issues in the dispute center on dockworker pay and the use of automation at the ports.

US Nuclear Energy Industry: The Department of Energy today announced it has approved a $1.5-billion loan to help reopen the Holtec Palisades nuclear generating plant in Michigan. The plant would be the first mothballed nuclear facility to be brought back online. Coming just days after Constellation Energy and Microsoft agreed to a deal that will restart a Three Mile Island reactor in Pennsylvania, the Palisades loan illustrates the burgeoning interest in developing new nuclear power as US electricity demand rises.

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