by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are actively digesting this morning’s landmark court ruling on tariffs. Today’s Comment examines how the Trump administration might respond to this latest trade policy setback, discusses the market implications of Nvidia’s stronger-than-expected earnings, and reviews other notable news moving global markets. As always, we’ll wrap up with a comprehensive overview of today’s most important domestic and international economic data releases.

No TACO For Trump: A court ruling has delivered a major setback to the US president’s trade agenda, yet his supporters are pressuring him not to retreat.

• The US Court of International Trade ruled that the president lacked the authority to impose tariffs under the emergency economic powers legislation he cited. This decision will invalidate certain reciprocal tariffs enacted on April 2, while leaving in place sector-specific tariffs on automobiles and steel. Although the White House has stated it will appeal the ruling, the verdict raises doubts about the legality of his broader tariff strategy.
• The ruling is expected to halt 6.7% of levies announced this year. However, the president appears to have alternative options to circumvent the court’s decision. According to Goldman Sachs, the administration could implement Section 122 tariffs for up to 150 days as a replacement for reciprocal tariffs, while simultaneously applying Section 301 and 232 tariffs on a country-specific basis.
• That said, the ruling could place the White House in a difficult position as it seeks to negotiate trade agreements with other nations. In recent weeks, tariff threats have successfully pressured several countries into trade discussions. Notably, the European Union, which initially pushed for complete tariff elimination, has now softened its stance, seeking reduced tariffs in exchange for concessions in other areas.

• Additionally, Trump faces mounting pressure to maintain his stance, particularly given concerns over market stability. The White House was compelled on Wednesday to push back against claims that “Trump Always Chickens Out,” a narrative that belittles the so-called “Trump put,” the perception that the president will consistently safeguard equity markets.
• While the court’s decision represents a setback for the administration, it is unlikely to be the final word on the matter as the White House prepares its appeal. Investors should therefore view the tariff reversal with caution. Our primary focus will be on the president’s response, as he may use this ruling to reinforce his protectionist stance rather than retreat. Given the potential for increased volatility, we maintain that conservative investors should adopt a wait-and-see approach in the current environment.

AI Rally Continues: Big tech stocks rallied on Wednesday after the world’s leading chipmaker reported stronger-than-expected earnings, reinforcing confidence in the sector’s growth.

• Nvidia surpassed analyst expectations with a strong quarterly revenue of $44.1 billion, marking 70% year-over-year growth despite significant headwinds from US export controls. The results comfortably exceeded Wall Street’s $43.3 billion consensus estimate, demonstrating remarkable resilience in the face of geopolitical challenges. For the current quarter, the chipmaker issued bullish guidance of $45 billion in revenue while disclosing an anticipated $8 billion hit from ongoing China sales restrictions.
• The earnings beat is poised to reinvigorate confidence in the AI rally, which has been largely driven by the seven biggest tech giants propelling the S&P 500. Recent concerns over US trade restrictions, particularly on exports, had raised fears that tech earnings could suffer and potentially dampen investment enthusiasm. Yet, Nvidia’s robust results suggest that major players remain committed to AI investments and undeterred by global economic uncertainty.

• Despite reporting robust earnings, Nvidia raised alarms over potential new US export controls on China. In a direct appeal to President Trump, CEO Jensen Huang warned that existing restrictions could completely shut Nvidia out of the Chinese market — a devastating outcome for the chipmaker’s revenue. His plea follows reports that the Trump administration is considering expanded bans, including cutting off sales of critical chip design software to China.
• The strong earnings report indicates that high-quality risk assets will remain appealing to investors navigating ongoing economic uncertainty. Companies with robust earnings growth potential and minimal foreign supply chain exposure are particularly well-positioned in this environment. Additionally, firms aligned with government strategic priorities, such as AI, present compelling opportunities for investment.

FOMC Meeting Minutes: According to its meeting minutes, the Federal Reserve opted to hold interest rates steady as it continues to navigate the economic fallout from the trade war.

• During the FOMC meeting held on May 6-7, Fed officials acknowledged they might face difficult trade-offs when deciding which aspect of their dual mandate — price stability or full employment — to prioritize. Their unease stemmed from navigating turbulent financial market conditions, including heightened volatility in equities and bonds. Adding to their concerns was the dollar’s significant depreciation, which further complicated the economic outlook.
• On a positive note, Fed officials expressed cautious optimism that households could weather the impact of tariffs. While acknowledging rising delinquencies on auto and credit card loans, they noted that household balance sheets remain fundamentally strong. Additionally, some policymakers suggested that lower energy prices might help offset trade-related pressures. There was even hope that consumer spending could gradually shift from goods to services, further easing economic strains.
• On the other hand, Fed officials also highlighted several growing vulnerabilities in the economy. One key area of concern is rising leverage within the financial sector, with banks potentially exposed to interest rate risks and hedge funds carrying significant debt. Additionally, they expressed concerns about the weakening status of US assets as a safe haven, raising questions about the economy’s long-term stability.
• Regarding policy, there appears to be broad agreement that significant uncertainty will persist until the president finalizes tariff rates. The staff economic outlook projects inflation will prove transitory, with a temporary increase this year and next before returning to the 2% target by 2027. Additionally, staff estimates suggest the unemployment rate may rise above its natural level by year-end.
• The meeting minutes indicate that the central bank may refrain from cutting rates at its next meeting and could delay rate cuts this year if inflationary pressures persist. This stance would likely push bond yields higher while dampening bond prices. Moreover, elevated interest rates may weigh on equity markets, particularly riskier assets.

DOGE Future: Tesla CEO Elon Musk has officially stepped down from overseeing the cost-cutting initiative, though the future of his efforts remains uncertain. 

• The world’s richest man has stepped down from his role to dedicate more time to his business ventures. His position as a “special government employee” was capped at 130 days, meaning it was always expected to conclude by the end of the month. While leading the Department of Government Efficiency, he was tasked with identifying cost-saving measures to reduce government spending. While he successfully uncovered some inefficiencies, the effort fell far short of his ambitious $1 trillion savings target.
• However, he has submitted a list of $9.4 billion worth of proposed spending cuts to Congress, which must now decide whether to enact them into law. President Trump has urged lawmakers to prioritize these cuts, which include reduced funding for USAID and the Corporation for Public Broadcasting (CPB), the entity overseeing PBS and NPR.
• While Musk may be departing his government role, sustained efforts will still be needed to address the nation’s fiscal challenges. We believe the growing supply-demand imbalance in bond markets is exacerbating pressure on yields, particularly for long-term bonds. Consequently, we expect the DOGE initiative to persist in promoting fiscal discipline — a critical factor in restoring confidence among bond market participants.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently paying close attention to the bond market and Nvidia’s earnings. Today’s Comment will talk about the unexpected jump in consumer sentiment and explore the factors behind this shift in optimism. We will also examine why King Charles’ speech added to US-Canada tensions and provide updates on other key financial reports. Finally, we’ll close with a summary of today’s major international and domestic data releases.

Confidence Bounce: Consumer sentiment rebounded in May, reflecting household relief amid progress in trade negotiations.

• The Conference Board’s Consumer Confidence Index significantly outperformed expectations in May, rising to 98.0 from a revised 85.7 in April. This notable increase was driven primarily by a dramatic improvement in consumer expectations, which surged 17.4 points from a historic low of 55.4 to 72.8. The Present Situation Index also showed strength, climbing from 131.1 to 135.9, suggesting households are growing less concerned about immediate recession risks.
• The recent improvement in consumer sentiment was largely driven by reduced concerns about potential tariffs fueling inflation. Notably, inflation expectations declined from 7.0% to 6.5%, reflecting growing confidence in price stability despite tariff concerns. The survey also revealed increased consumer willingness to make major purchases, with more respondents indicating plans to buy automobiles and take vacations within the next twelve months.

• While inflation expectations have moderated, lingering concerns about economic stability persist. The labor market indicators present a mixed picture. The share of respondents reporting jobs as “plentiful” edged up modestly from 31.2% to 31.8%, while those describing jobs as “hard to get” rose more significantly from 17.5% to 18.6%. This divergence suggests continued consumer skepticism about labor market strength, despite some positive signals.
• The latest Conference Board survey indicates consumers are increasingly attuned to economic shifts. While household spending is expected to remain strong if the economy continues its positive trend, a scenario where tariffs don’t spark inflation and the labor market softens could push the Federal Reserve to ease monetary policy.

The 51^st State? The king’s recent speech in front of the Canadian Parliament has brought renewed attention to the US threat of acquiring Canada.

• In his address, King Charles III emphasized that the nation faces grave threats to its democratic institutions, rule of law, and right to self-determination. Although he did not explicitly mention President Trump by name, the timing of these remarks is significant, as they coincide with the US president’s persistent efforts to bring the country under greater American influence. This speech will likely intensify ongoing debates about Canada’s relationship with its southern neighbor and the future of bilateral sovereignty issues.
• Discussions about reshaping the US-Canada bilateral relationship come as leaders from both nations seek to redefine their strategic partnership. The two countries explored collaborating on a joint missile defense system, dubbed the “Golden Iron Dome,” which would be capable of detecting, tracking, and intercepting attacks. While President Trump has threatened to charge Canada $61 billion for access to the system, its success would depend heavily on Canada’s radar coverage and Arctic airspace access.
• Rising tensions with its southern neighbor could further pressure Canadian equities. The country is already grappling with a weakening economic outlook, including slowing job growth, subdued business optimism, and a GDP contraction in Q1. A protracted dispute with its largest trading partner would only compound these challenges, adding fresh uncertainty to an already strained market environment.

• Despite escalating tensions between Canada and its largest trading partner, the country’s benchmark S&P/TSX Composite Index continues to trade near all-time highs — even outperforming the S&P 500 year-to-date. This resilience stems from the index’s heavy weighting in Energy and Financials, sectors relatively insulated from tariff risks. While economic pressures from trade disputes remain a concern, Canada’s market strength serves as a reminder that even in politically uncertain environments, pockets of opportunity can still emerge.

Japan’s Auction Blunder: Global bond yields rose following weak demand for longer-duration security issuance in Japan.

• Japan’s 40-year government bond auction drew its weakest demand since last July, despite offering higher yields. The bid-to-cover ratio — a key gauge of investor appetite — came in at 2.21, marking the second-lowest level since the pandemic. This tepid response underscores growing market reluctance to take on longer-duration risk, particularly in heavily indebted economies.
• The tepid demand for ultra-long bonds is increasing pressure on Japan’s Ministry of Finance to rebalance its issuance strategy toward shorter-dated securities. This shift would help contain long-term borrowing costs while meeting market demand, a move already showing some effect after Tuesday’s report about potential changes to the issuance mix helped ease 10-year JGB yields.
• The weak auction also presents new complications for the Bank of Japan’s normalization path. With investors showing limited appetite for duration risk, the central bank may need to adjust its balance sheet runoff plans to prevent excessive yield volatility. This development highlights the delicate policy coordination required between Japan’s fiscal and monetary authorities as they navigate an environment of rising global yields.
• The key trend we’re monitoring is the shift toward shorter-duration bond issuance among indebted developed countries. While this move helps alleviate yield pressures on longer-duration securities, it also increases the government’s exposure to rollover risk as bonds mature. This could pose challenges if unexpected shocks drive short-term rates higher. Although we do not anticipate this scenario materializing in the near term, we will closely track this dynamic.

Big Tech’s Litmus Test: The last Magnificent 7 company will report earnings this afternoon, in what could be the next major catalyst for equity markets.

• Nvidia’s upcoming quarterly earnings report represents far more than a routine corporate update — it will serve as the most consequential barometer of AI adoption and tech sector health. As the undisputed leader in AI accelerators, Nvidia has delivered eight consecutive quarters of earnings beats, transforming each report into a market-moving event that sets the tone for the entire technology ecosystem.
• The chipmaker’s unique position at the center of the AI infrastructure boom makes its financial performance particularly revealing. With every major cloud provider and tech giant racing to expand AI capabilities, Nvidia’s results will provide critical insight into whether corporate investment cycles remain intact despite macroeconomic pressures. Strong revenue growth and guidance would confirm sustained demand for AI infrastructure, while any weakness could signal broader enterprise spending pullbacks.
• Market implications extend well beyond the semiconductor sector. A bullish report could reignite the AI trade and potentially propel the S&P 500 above key psychological resistance at 6,000, as it would validate current growth expectations. Conversely, disappointing results might trigger a sector-wide repricing, particularly for high-multiple tech stocks that have benefited from the AI narrative.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the positive news that President Trump has postponed his threatened additional tariff hikes on the European Union, and the EU has agreed to accelerate the negotiations for a US-EU trade deal. We next review several other international and US developments with the potential to affect the financial markets today, including a welcome pause in the sell-off of Japanese government bonds and a potentially important change in the asset allocation strategy of major US university endowments.

United States-European Union: President Trump on Sunday finally had an extended phone call with European Commission President von der Leyen, which itself was newsworthy after Trump and his administration had kept the European Union at arm’s length and sharply criticized it for months. Perhaps more important, Trump also agreed to push out his deadline to reach a US-EU trade deal and avoid massive new tariffs on the EU. The deadline is now July 9. The events point to a thaw in US-EU relations, giving a boost to US and foreign stocks today.

United States-Russia: After Russia on Sunday launched a huge missile and drone attack against about 30 Ukrainian cities, killing dozens, President Trump blasted President Putin on social media, saying, “I’ve always had a very good relationship with Vladimir Putin of Russia, but something has happened to him . . . . He has gone absolutely CRAZY! He is needlessly killing a lot of people, and I’m not just talking about soldiers.”

• The rare criticism of Putin could be a sign that Trump is finally recognizing the Russian leader’s uncompromising aggression and menace he poses to European countries. Reports today indicate Trump is even considering new US sanctions against Russia.
• All the same, even if that’s the case, it’s not entirely clear how Trump’s foreign policy would really change. For example, he could still wash his hands of the Russia-Ukraine war and further cut US support for Kyiv, putting more of the burden on Europe. Alternatively, he could conceivably swing toward more support for Kyiv, potentially helping improve the security situation in Europe.

Japan: After weeks of falling values and rising yields, Japanese government bonds with longer maturities are rallying strongly today, pushing yields lower. The shift came after the finance ministry took the rare step of canvassing primary dealers and other market participants for their views on issuance. The move suggests the ministry may be preparing to scale back supply, which could help put an end to the market’s recent volatility. However, issues such as the US-Japan trade war and reduced buying by the Bank of Japan could still be a concern.

Chinese Fiscal Policy: The Chinese government has green-lighted a new 767-kilometer canal to link Jiangxi province, a center for electric-vehicle manufacturing and rare earths production, with the coastal powerhouse of Zhejiang. The canal is part of a $44-billion mega project to provide low-cost freight transport via canal between Guangdong, Jiangxi, and Zhejiang. While it’s tempting to think China has already made all the high-return infrastructure investments it needs, the canal project is considered an important step in cutting China’s high freight costs.

Chinese Electric Vehicle Industry: EV giant BYD on Monday announced a series of deep, new price cuts, one of which would drop the domestic price of its cheapest model to just $7,770. The move is expected to worsen the on-going price war in China’s EV market, so Chinese EV stocks dropped sharply yesterday. The move could also incentivize Chinese manufacturers to boost their export efforts, pressuring foreign EV makers as well.

India: Monsoon rains hit the southernmost state of Kerela on Saturday, arriving eight days earlier than normal and marking the earliest monsoon in 16 years. If sustained, the early rains are expected to boost India’s agricultural output, help keep a lid on food prices, increase economic output, and potentially bolster political support for Prime Minister Modi. Also, any increase in Indian crop production could have some negative impact on the value of global agricultural commodities.

Eurozone: The hawkish head of Austria’s central bank, Robert Holzmann, said in an interview that he sees “no reason” for the European Central Bank to further cut interest rates in either June or July. Since Holzmann sits on the ECB’s policymaking committee, the statement suggests a high level of disagreement among ECB policymakers about how to best shield the eurozone economy from the US-EU trade war.

United Kingdom: In an interview, the chief of the government’s Debt Management Office, Jessica Pulay, said her agency is starting to reduce its heavy issuance of longer-dated obligations because of waning demand among institutional investors. Shifting issuance more toward shorter-duration debt would likely help to contain the UK’s rising interest costs, but it would also subject the government to more financial volatility and give investors more leverage to demand fiscal discipline.

• In any case, Pulay’s statement about waning demand for long-dated government debt appears to reflect a growing trend worldwide. For example, it’s consistent with the “buyer’s strike” hitting Japanese debt, as mentioned earlier in this Comment. It’s also consistent with the volatility in the US bond market after Moody’s recent cut to the US debt rating.
• More broadly, global investors’ growing skittishness about long government debt also probably reflects the increased uncertainty and transition risks as the world moves beyond globalization to the new era of greater geopolitical tension, risk, and economic change.

US Financial Markets: Major university endowments are reportedly mulling big changes in their investment strategies in response to the Republican tax and spending bill passed by the House last week. If passed into law, the bill would sharply boost the tax on endowments’ investment income. Endowment managers are therefore considering shifting billions of dollars of investments away from assets that generate short-term gains. Instead, they may allocate even more to private equity and debt, which don’t realize gains for years into the future.

US Pharmaceutical Industry: The Wall Street Journal today carries an article showing how the popular GLP-1 drugs for obesity and diabetes are increasingly being found effective in treating other conditions, including heart disease, kidney disease, liver disease, sleep apnea, arthritis, and even Alzheimer’s. With researchers continuing to find new uses for them, GLP-1 drugs could become an even more important part of the pharmaceutical industry’s health going forward. However, much will depend on the Trump administration’s regulation of the drugs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Financial markets are digesting the president’s latest comments on potential new tariffs. In sports, the Oklahoma City Thunder secured a 2-0 advantage in the Western Conference Finals against the Timberwolves. Today’s Comment focuses on the Federal Reserve’s recent court victory, important details emerging from the Republican tax bill proposal, and other market-moving news. We’ll conclude with our regular roundup of economic data releases from both domestic and international sources.

Fed Independence Win: The Supreme Court’s ruling is expected to reinforce market confidence in the central bank, potentially easing recent bond market jitters.

• The Supreme Court ruled that the president has the authority to dismiss the heads of independent agencies while a court case is pending. However, the decision explicitly excluded the Federal Reserve’s board, describing the central bank as a “uniquely structured, quasi-private entity” and thus outside the scope of the ruling. This outcome reinforces the view that the president lacks the power to remove the Federal Reserve’s chair, Jerome Powell.
• The ruling should reassure bond markets that the president cannot single-handedly control the Fed. Concerns had grown after the president repeatedly threatened to oust Fed Chair Powell for refusing to align interest rate decisions with White House demands. These threats spurred a bond sell-off as investors feared political interference in monetary policy, particularly the president’s push to lower rates simply to follow moves by other countries.

• The ruling further solidifies the central bank’s ability to sustain its moderately restrictive policy stance. Fed officials have repeatedly expressed hesitancy about cutting interest rates, warning that inflation could rebound by mid or late summer, keeping short-term rates elevated. Meanwhile, Federal Reserve Governor Chris Waller has dismissed speculation about expanding the Fed’s balance sheet to stabilize bond markets, instead maintaining its strategy of shrinking holdings to transition reserves from abundant to ample levels.
• In summary, the court’s decision to shield the Fed from presidential dismissal authority is ultimately market-positive but presents short-term uncertainties. While the ruling strengthens the central bank’s long-term credibility by cementing its political independence, it may paradoxically make the Fed more cautious about near-term market interventions. Policymakers could now require clearer signs of financial stress before acting after becoming wary of appearing politically influenced even when staying on the sidelines.

Republican Tax Bill: The GOP succeeded in passing its tax bill through the House, but there is still a strong chance the final legislation will differ from the current version.

• The bill passed by the narrowest possible margin, with a 215-214 vote. The legislation now heads to the Senate where bipartisan calls for changes are growing, particularly over proposed Medicaid cuts and the rollback of renewable energy tax incentives. At the same time, there does seem to be some concerns among moderate Republicans that the bill could hurt them in the mid-term election.
• That said, the House bill fulfills several of President Trump’s major campaign promises, including an extension of the corporate and individual tax cuts initially passed under his 2017 tax reform. The legislation also embraces more populist proposals, such as tax exemptions for tipped wages, overtime income, and auto loan interest. Additionally, the bill increases funding for immigration enforcement and border security while raising the SALT deduction cap from $10,000 to $40,000 for households earning $500,000 or less.

• The bill introduces significant changes to Medicaid, including stricter work requirements for able-bodied recipients, more frequent eligibility checks, and verification provisions to confirm beneficiaries’ legal status. It also reduces Medicaid funding for states that provide coverage to undocumented workers. Additionally, the bill imposes stricter work requirements on food programs like SNAP. It also eliminates energy tax breaks for consumers and phases out tax credits supporting green energy investments.
• While the final legislation may differ, we expect many of the tax benefits to remain largely intact. However, spending cuts could gain more attention as the Senate works to reduce the bill’s overall cost. As previously noted, we believe the tax package will be a net positive for equities. The proposed changes should help offset the impact of tariffs while encouraging greater private investment.

Trade Flows to Capital Flows: There are signs that some countries have started to take aim at foreign investments as they look to prevent market distortion.

• In response to Spain’s worsening housing crisis, the Socialist Party of Prime Minister Pedro Sánchez has introduced legislation that would impose a 100% tax on property purchases by non-EU buyers. While the proposal includes exemptions for foreign workers legally residing in Spain, its passage remains uncertain given the government’s slim parliamentary majority. If approved, the measure would take effect in January 2026.
• Spain’s focus on restricting foreign real estate investment may signal a shift in how governments view capital flows. While countries typically welcome beneficial investments like foreign direct investment for job creation and infrastructure, portfolio investments are increasingly scrutinized due to their links with asset bubbles and widening wealth gaps.
• While these measures for the Spain housing market specifically target the distortive effects of foreign capital inflows, they also underscore a fundamental tension in global economic governance. The challenge is particularly acute in trade relations with China, where the systematic recycling of export revenues into importing nations serves as an implicit currency stabilization mechanism. These permissive capital flow regimes have exacerbated structural imbalances in global trade.
• We do not anticipate that Spain’s measures will trigger widespread EU restrictions on foreign investment in financial assets, nor do we expect significant spillover into equity markets. However, these actions may signal an emerging trend as governments increasingly seek to shield domestic markets from distortive foreign capital flows. Over the long term, we expect countries will focus on developing domestic industrial capacity — a shift that could ultimately enhance the appeal of international investment opportunities.

Trade Hardline: While the market believes trade tensions are easing, Trump’s actions suggest that they could heat up again.

• President Trump has threatened to impose 25% tariffs on iPhones unless Apple shifts production back to the US. This comes as the tech giant plans to move much of its iPhone manufacturing from China to India. The escalation reflects the administration’s broader push to force companies to relocate supply chains to the US.
• The Trump administration has rejected the EU’s proposal for a mutual tariff reduction, warning that negotiations will stall unless the EU accepts stricter reciprocal duties. The remarks underscore how far apart the two sides remain in trade talks.
• We’ve noted the president’s strategic pattern of creating high expectations before negotiations, only to later secure a more favorable compromise. A prime example was his initial proposal of an 80% tariff floor rate ahead of China talks, which was subsequently reduced to 30% following discussions. Given this precedent, the current EU tariff threats likely serve as a tactical opening position rather than a definitive policy. We therefore recommend maintaining perspective and avoiding an overreaction to these developments.
• That said, the president’s recent remarks underscore how quickly the administration’s stance can shift from easing tensions to sudden cooling. As a result, we maintain that a “wait-and-see” approach remains prudent for conservative investors. However, those willing to take on risk may find opportunities by focusing on key factors such as strong earnings growth and minimal overseas supply chain exposure.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Financial markets are monitoring developments in the pending tax legislation. In sports, Tottenham Hotspur ended their 17-year trophy drought with a dramatic Europa League final victory over Manchester United. Today’s Comment will examine growing concerns about US debt sustainability, analyze progress in EU-US trade negotiations, and highlight other market developments. As usual our report includes a summary of domestic and international economic data releases.

Debt Problem: Tepid demand at auction reflects investor focus pivoting from trade and toward fiscal deficits.

• The Treasury’s $16 billion 20-year bond auction on Wednesday saw weak demand as yields rose above 5% for the first time since October 2023. The poor showing resulted in a 1.2 basis point tail (the spread between average and lowest accepted yields), which was significantly wider than the recent -0.4 bp average. This miss reflects dwindling appetite among rate-sensitive buyers, with domestic investors particularly reluctant to absorb the bulk of issuance at current yield levels.
• The weak auction results will likely fuel concerns about sovereign credit quality, especially after Moody’s downgrade of the US credit rating last week. Since the decision, long-dated bond yields have climbed across the US and other G-7 economies as investors grow wary of duration risk. Rising debt sustainability worries, persistent inflation, and ongoing trade tensions have all contributed to this reluctance.

• Investors are closely tracking the new tax bill’s progress through Congress as lawmakers debate critical provisions. Key sticking points include proposed cuts to green energy credits and Medicaid, along with potential tax increases aimed at covering the bill’s costs. According to Congressional Budget Office estimates, the legislation could increase the national debt by approximately $3.8 billion over the next 10 years.
• The interplay between rising interest rates and the proposed tax bill creates competing forces for equity markets. While the stimulus measures could bolster business and household incomes, potentially driving higher consumption and investment, tightening financial conditions may pressure corporate margins and dampen household borrowing. Although we currently assess the tax package as a net positive, the trajectory of interest rates warrants close monitoring, as further increases could pose headwinds for equities.

EU Wants a Deal: Brussels has updated its trade proposal to the Trump administration in an effort to prevent further tariff escalation.

• The new proposal aims to address White House priorities on regulatory reform and trade policy more effectively. Although specific details have not yet been released, the framework seeks to identify areas of alignment, particularly regarding international labor standards, environmental protections, and economic security measures. The plan also includes provisions for targeted investments and strategic procurement initiatives in key sectors such as energy and artificial intelligence.
• The EU’s latest proposal comes as it seeks to revive negotiations with the US and build diplomatic momentum. Initially, the bloc offered a “zero-for-zero” tariff arrangement on automobiles and industrial goods, but the White House rejected the proposal. The EU remains hopeful that it can persuade the current administration to reduce tariffs and has warned of retaliatory measures if it fails to secure a more favorable deal than the one recently obtained by the UK.

• The upcoming US-EU negotiations are expected to focus primarily on trade reciprocity and equitable market access. Washington has consistently argued that Brussels maintains regulatory frameworks that effectively serve as non-tariff barriers, particularly targeting American agricultural exports and digital services. These measures have significantly hindered the ability of US companies to compete fairly in the European market.
• Nevertheless, a US-EU agreement appears increasingly likely, as the White House has emphasized its goal of finalizing a trade deal by mid-summer. We anticipate the new framework will center on coordinated efforts to counterbalance China’s economic influence, resulting in a mutual reduction — though not complete elimination — of tariffs. As negotiations progress, we expect trade tensions to gradually ease in the coming weeks.

AI Importance: A senior CIA official has declared that outpacing China in artificial intelligence development now represents America’s foremost intelligence priority.

• The official’s remarks follow concerted US efforts to strengthen international partnerships regarding semiconductor supply chains. CIA leadership has announced plans to reorganize the agency and refocus priorities to better counter China’s technological advancements. This strategic shift reflects the expanding nature of US-China competition, which has evolved beyond trade disputes to encompass critical technology sectors.
• President Trump’s recent trip to the Middle East signaled this shift in US policy priorities. During his visit, the president sought to strengthen alliances with Gulf nations by offering access to advanced American AI technology and commitments to support their technological infrastructure development. Additionally, his administration has rolled back previous restrictions that limited these countries’ ability to acquire critical components for building domestic tech ecosystems.
• The escalating competition has prompted new restrictions for companies and nations engaging in technology trade with China. The White House has warned that countries utilizing Chinese-developed semiconductor technology risk losing access to critical US technological exports. Meanwhile, American firms continue lobbying the administration to maintain access to China’s lucrative and expanding technology market.
• As outlined in our escalation ladder framework mentioned in our export controls report, the focus on AI trade restrictions represents an escalation in tensions. We anticipate that these trade measures, currently targeting goods, will expand to the diplomatic sphere as both nations seek to rally third-party countries to their respective positions. While we do not view this technological competition as likely to trigger immediate military conflict, the emerging AI arms race is clearly exacerbating strategic tensions between the two powers.

The Golden Dome: The president’s push to develop an advanced missile defense system aims to bolster national security, but risks accelerating a new arms race in space.

• Earlier this week, the president approved a $175 billion missile defense shield initiative, appointing a Space Force general to oversee its development. The program aims to deploy a constellation of advanced satellites capable of detecting, tracking, and potentially intercepting inbound missiles targeting the United States — a direct response to escalating threats from Russia and China.
• China has condemned the move, warning it could trigger a destabilizing space arms race and further escalate tensions between the two powers. Beijing has called on the US to reconsider the program’s development, although it recognizes that Washington is unlikely to alter course. Analysts suggest China’s objections may signal its intent to pursue a comparable system, potentially accelerating military competition in orbit.
• The missile shield initiative highlights the return of Cold War-era tensions between global powers. This strategy evokes strong parallels with the Mutually Assured Destruction (MAD) doctrine that dominated geopolitics in the 1980s, when rival nations amassed nuclear arsenals solely to prevent first strikes. Notably, similar defensive systems were considered but ultimately abandoned during that period. We think the situation is a reminder of the rise in global geopolitical tensions.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets remain cautious as investors weigh fiscal concerns amid the tax bill’s progress through Congress. In sports, the Oklahoma City Thunder claimed Game 1 against the Minnesota Timberwolves in the Western Conference finals. Today’s Comment will address renewed tensions in the Middle East, the Fed’s patient approach to rate cuts, and other market-moving developments. As usual, the report will include a summary of key domestic and international economic data releases.

Middle Eastern Tensions Rise: Israel has adopted a more assertive stance amid stalled US negotiations with Iran and escalating hostilities from Houthi rebels.

• US intelligence indicates Israel may be preparing to strike Iranian nuclear facilities. While no final decision to execute such an attack has been confirmed, Israeli officials have reportedly been weighing this option for months and military preparations appear to be intensifying recently. These developments suggest Israel may be losing confidence in the White House’s ability to diplomatically curb Iran’s nuclear program through diplomacy.
• The heightened tensions have emerged as US-Iran nuclear negotiations reached an impasse. Recent weeks saw active White House efforts to curb Iran’s nuclear program, with the US president noting last week that Iran had “sort of agreed to terms.” However, Iran’s Supreme Leader Ayatollah Ali Khamenei has rejected this optimism, declaring the talks “unlikely to succeed” and labeling US demands as “outrageous.” His ominous conclusion, “whatever happens will happen,” signals a dangerous hardening of Iran’s position.
• Israel’s increasingly aggressive posture toward Iran follows a dangerous escalation by Tehran-backed Houthi rebels. On Sunday, the group launched missile attacks against an Israeli airport, all intercepted by defense systems, while imposing a naval blockade on Israel’s Haifa port. The coordinated provocations prompted immediate retaliation, with Israel expanding its Gaza ground operations.

• While an immediate attack appears unlikely, escalating tensions in the Middle East have already begun driving up energy prices due to supply concerns. Brent crude has risen 3.5% following recent developments, trading above $66 a barrel. We believe Israel’s threats against Iran may partly be a negotiating tactic to pressure Tehran into accepting previous terms, though this strategy could backfire if Iran perceives it as offering no tangible benefits. A war in the Middle East will likely weigh on global risk assets.

Wait and See Approach: Fed officials are consistently trying to dampen expectations for rate cuts this year.

• Two Federal Reserve officials emphasized the need for policy patience during Tuesday’s remarks. San Francisco Fed President Mary Daly cautioned that policymakers still lack sufficient data to justify easing monetary policy. Separately, Cleveland Fed President Beth Hammack highlighted ongoing analysis of whether recent tariffs will produce only temporary inflationary effects or more persistent price pressures, noting that clearer insights should emerge in coming months.
• Their comments coincide with shifting market expectations for Fed rate cuts this year. Just a month ago, investors anticipated aggressive easing, potentially beginning as early as June with up to 100 basis points of cuts by year’s end amid fears of an economic slowdown. However, receding trade tensions and stronger-than-expected data have since led forecasters to revise projections, now pricing in just 50 basis points of cuts, likely starting in September.
• The Fed’s focus on cutting interest rates appears to be driven by rising inflation expectations. The latest Michigan Consumer Sentiment Survey revealed that households expect inflation to rise 7.3% next year — the highest expected level since the 1980s. While inflation expectations are not typically a reliable indicator of future price pressures, these concerns likely explain the Fed’s decision to prioritize inflation over economic growth.

• So far, there is little evidence of broad-based inflation outside a few raw material intensive sectors. As we noted last week, many firms, including Home Depot, seem willing to absorb some tariff-related cost increases. While this could pressure earnings, it may also delay or mitigate the broader inflationary effects of tariffs. This dynamic could give the Fed room to cut rates once or even twice by year’s end, assuming the economy avoids a recession.

Trump Gets Involved: President Trump is pressuring Republican lawmakers to fall in line and is determined to push through his signature tax plan before year’s end.

• The president’s decision to personally lobby lawmakers reflects growing uncertainty about whether his tax legislation can secure enough votes to pass. The bill faces resistance from fiscal conservatives and SALT deduction supporters. Fiscal conservatives insist on larger social spending cuts to control the deficit and enhance fiscal sustainability. On the other side, SALT advocates are working to secure tax breaks for states most impacted by the potential expiration of the previous tax cuts.
• Despite some opposition, Republican lawmakers are fast-tracking a bill in the House this week. The current iteration proposes raising the SALT deduction cap to $40,000 for individuals earning up to $500,000, with a 1% annual income phase-in before making the deduction permanent. Concurrently, fiscal conservatives are advocating for an accelerated implementation of Medicaid work requirements, moving up the original 2029 timeline, which is likely to neutralize potential political fallout ahead of the election.
• While the Trump tax bill is expected to partially offset the tariffs’ economic impact, most analysts agree it won’t fully neutralize the drag. Economists now project import taxes could slow 2025 GDP growth to 1.4%, avoiding outright downturn but marking a sharp slowdown from previous years. This growth floor, however, may support equity markets. If the economy avoids recession, firms could maintain margins by passing some tariff costs through to consumers.

Buy European: The EU is starting to embrace more populist elements as it looks to protect its companies from foreign competitors.

• Brussels is urging EU member states to restrict foreign bidders from public procurement contracts as part of a broader strategy to strengthen economic sovereignty. This push comes alongside significant investments to bolster the bloc’s defense industry and reduce dependence on foreign technology. By nurturing homegrown companies, the EU aims to decrease its reliance on the US and China for critical technologies and essential raw materials while building domestic industrial resilience.
• The EU has similarly announced measures to curb the influx of small packages from China, aiming to avoid becoming an alternative destination for Chinese firms circumventing US tariffs. Under the new policy, e-commerce shipments will face a 2 GBP fee for direct-to-consumer deliveries and a 0.50 GBP charge for warehouse-bound packages. This tiered fee structure is designed to incentivize bulk shipments and distribution from warehouses within the EU.
• We believe these measures should marginally improve the attractiveness of companies within the region. However, the primary concern remains the regulatory framework around climate change. If the bloc moderates some of its green initiatives, we anticipate a stronger and more sustainable rally in European equities.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a summary of President Trump’s conversation with Russian President Putin yesterday. We next review several other international and US developments that could affect the financial markets today, including a warning by the Japanese government that it will take a tough stance in the next round of US-Japanese trade talks and interesting new US data suggesting Trump’s immigration crackdown isn’t weighing on employment levels yet.

United States-Russia-Ukraine: President Trump yesterday held a two-hour phone call with President Putin to discuss ending Russia’s war against Ukraine. Trump later termed the call “excellent.” However, he also said Russia and Ukraine would immediately start negotiations for a peace deal by themselves, hinting that he is preparing to pull the US out of the process and leave the situation for the Europeans to handle. In any case, Putin didn’t commit to any interim ceasefire, suggesting he wants to keep fighting.

• Indeed, Putin has continued to insist that any peace deal would have to address the conflict’s “root causes,” which is basically codeword for Russia achieving its maximalist territorial and political goals in Ukraine.
• Western European leaders and Ukrainian President Zelensky have implored Trump not to withdraw from the peace efforts, arguing that it would play into Putin’s hands. However, it isn’t yet clear whether he can still be persuaded to remain engaged.

Japan-United States: Discussing Tokyo’s approach to the next round of US-Japan trade talks, chief negotiator Ryosei Akazawa today clarified that he will insist that the US completely remove President Trump’s new “reciprocal” tariffs and his product-specific duties on autos, auto parts, steel, and aluminum.

• The statement suggests that foreign leaders have interpreted the recent US trade deals with China and the UK to mean that it’s better to take a tough stance against Washington. A tough stance like China’s can get Trump to back down, while a relatively conciliatory stance like the UK’s yields few concessions from the president.
• That suggests the remaining US trade talks with big, developed countries could be slower and more arduous than previously expected. In turn, that could push global stock markets lower again if investors lose the complacency that they took on after the China and UK deals.

Japan-China: The Japanese government has revealed that it is exploring the removal of a tariff exemption for small-value parcels from China. If implemented, the move would mirror the US’s revocation of its exemption for “de minimis” Chinese packages with a value below $800. Indeed, the European Union and the United Kingdom are also reviewing their exemptions.

• The broad initiative probably reflects how the US is trying to get its traditional allies to present a unified wall against Chinese goods.
• The result would likely be negative for big Chinese purveyors of low-cost clothes, trinkets, and other goods, such as Shein and Temu.

Japan: Yields on long-duration Japanese government bonds are surging today after a poor auction revealed timid demand for the obligations. The yield on the 30-year bond rose as high as 3.14%, while the 40-year bond yield reached an all-time high of 3.61%. The weak demand likely reflects the Bank of Japan’s continuing program to scale down its bond purchases and concerns about the impact of higher US import tariffs. Given that Moody’s cut its US debt rating late Friday, the weak demand probably also reflects concern about Japan’s high debt.

China: The People’s Bank of China today cut its five-year bank prime loan interest rate by 10 basis points to 3.50%. The five-year prime rate is the main benchmark for home mortgage loans, so the move was probably designed to help spur new housing activity and residential purchases. The PBOC also cut its one-year prime loan rate by 10 basis points to 3.00%, in a likely effort to spur more corporate lending. All the same, the moves are likely too timid to provide much stimulus in the face of China’s big, structural economic headwinds.

United Kingdom: The Bank of England’s chief economist, Huw Pill, warned in an interview today that the central bank’s policymakers are cutting interest rates too fast. Pill said he had advocated for a pause in rate cuts at the last policy meeting because of signs that the UK’s disinflationary process is weakening. Indeed, Pill has warned that UK price inflation could remain elevated because of the knock-on effects of high energy prices and poor productivity growth.

US Tariff Policy: At JPMorgan’s investor day yesterday, CEO Jamie Dimon warned that President Trump’s tariff hikes have probably not fully worked themselves into the economy and that investors are underestimating the risk of an economic slowdown and stock market decline. Dimon warned that even though Trump has paused his maximum tariffs, the remaining levies are still “pretty extreme.” The statement is a useful reminder that it’s still much too early to be complacent about the new US tariff policy, economic growth, and corporate profits.

US Labor Market: An article in the Wall Street Journal yesterday noted that despite President Trump’s heavy-handed effort to deport legions of illegal aliens, the economic data shows continued employment gains even in industries heavily reliant on immigrant labor. The article suggests most undocumented workers are continuing to work because of economic necessity. Despite being publicized heavily, the policies also may not have made much of a dent in the large total cohort of immigrant workers.

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