by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is processing the latest jobs data. In sports news, the Detroit Lions pulled off an impressive comeback against the Green Bay Packers, continuing their historically strong season. In today’s Comment, we’ll delve into the highly anticipated task force led by Elon Musk and Vivek Ramaswamy and its budget-cutting plans. Next, we’ll examine the future of US chip manufacturing. Finally, we’ll analyze Brazil’s fiscal policies and the renewed tensions they’ve caused with the military. As always, we’ll conclude with a roundup of key domestic and international data releases.

Trump Budget Cuts: The Department of Government Efficiency is beginning to unveil its strategy to reduce government spending by over $2 trillion.

• Elon Musk and Vivek Ramaswamy met with lawmakers to advocate for cost-cutting initiatives aimed at “reducing the federal deficit. The newly appointed group seeks to dismantle government bureaucracy, curtail government regulations, eliminate wasteful expenditures, and restructure federal agencies.” The Trump appointed commission’s outline plans to reduce the number of federal agencies from 428 to 99 and mandate a return to the office for all federal employees. Most changes will require congressional approval, but the duo will seek to implement some reforms through executive order.
• While reducing the government workforce could alleviate some budgetary pressures, deeper spending cuts will likely be necessary to achieve significant savings. Federal employee compensation, including wages, salaries, and benefits, has been declining as a percentage of the federal budget since 2005, dropping from a peak of 11.7% to 8.7% in 2023, according to the Bureau of Economic Analysis. Although, even if all federal employees were eliminated, there would still be approximately $1.5 trillion needed annually in order to meet the deficit reduction goal.

• The push for government efficiency might be little more than a distraction as Republicans concentrate on addressing the budget deficit and securing funding to make the Trump tax cuts permanent. While the group can recommend spending cuts, it lacks the authority to enact them without approval from Congress. However, the creation of the task force indicates that the incoming administration may be more mindful of the fiscal deficit than markets anticipated in the run up to the election. Consequently, we remain optimistic that prior deficit projections for the Trump budget are higher than what the reality will be.

CHIPS Act: While achieving US self-reliance remains a long-term objective, many firms are reluctant to make the necessary investments due to prevailing uncertainty.

• Intel’s recent dismissal of its CEO Pat Gelsinger highlights the challenges faced by US chipmakers in reshoring manufacturing operations. The company failed in its ability to grab market share from its competitors AMD and TSMC. Also, the financial losses incurred by its independent foundry have raised significant concerns about the future of its manufacturing initiatives. Despite securing contracts with Microsoft and Amazon, the Intel foundry’s primary customer remains Intel itself. As a result, the possibility of a pivot has led to concerns that it may lose out on the $7.9 billion it was granted by the CHIPS Act.
• Reshoring chipmaking is poised to evolve under the next administration, which has traditionally prioritized tariffs over subsidies to bolster American manufacturing. While incoming President Trump has criticized the CHIPS and Science Act as inefficient, he is widely expected to preserve much of the funding for semiconductor factories initiated by his predecessor. Furthermore, he is anticipated to push for supply chain restructuring by introducing component-based tariffs, which tax products based on the origin of their components rather than their final assembly location.

• The shift toward a more aggressive trade policy to support the reshoring of chipmaking is likely to have both positive and negative effects on the US economy. On the positive side, it could reduce the need for additional subsidies, making the approach more cost-effective, while generating increased revenue through tariffs. However, this strategy may also trigger a costly restructuring of supply chains, raising domestic costs for firms, dampening global growth, and potentially fueling inflationary pressures and weighing on equity prices.

Brazil’s Military Austerity: Brazilian President Luiz Inácio Lula da Silva has targeted defense as a way to reduce the country’s ballooning debt problem.

• Lula’s administration is proposing a mandatory minimum retirement age for its military personnel. This decision, part of Lula’s broader plan to curb the country’s spending, would cap the tenure of those serving in the armed forces. So far, the proposal has faced significant pushback, with officials urging for a less stringent approach. This has led to the idea being put on hold. However, it is likely to further strain relations between Lula and the military, particularly in light of recent revelations about a plot to overthrow the government in favor of the former president Jair Bolsonaro.
• The decision comes as Lula’s administration seeks to make constitutional adjustments and complementary laws to control public sector salary spending. Under the new arrangement, only salaries explicitly authorized by supplementary law will be exempt from the salary cap. Additionally, the country’s new fiscal framework has been amended to allow for expenditure growth of 0.6% to 2.5% above inflation, which is also expected to change the minimum wage.

• The Lula administration’s comprehensive approach to addressing the country’s deficit challenges is expected to face significant obstacles, as various groups may resist these changes. The complexities of establishing a stable fiscal framework could hinder efforts to reduce inflation, which, in turn, may negatively impact the country’s currency. Given the country’s history of military dictatorship, we will be paying closer attention to the ongoing rift between the military and Lula, as there clearly appears to be a divide between the two.

In Other News: OPEC+ has again delayed its plan to increase oil production for the third time, aiming to stabilize prices at current levels. Meanwhile, French far-right leader Marine Le Pen has signaled a willingness to support the government’s budget proposal if President Macron agrees to a slower pace of deficit reduction.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The markets have US jobs data in focus as they look to gauge the Fed’s next move. In sports, unranked Creighton pulled off an upset against No.1 ranked Kansas. Today’s Comment will explore why Republicans have postponed their push for tax reforms in favor of prioritizing border security. We will then analyze the Federal Reserve’s confidence in achieving a soft landing and provide an update on the no-confidence vote in France. As always, the report will include a roundup of key international and domestic data releases.

Trump Tax Doubts: Despite controlling both houses of Congress, Republican apprehension regarding the feasibility of comprehensive tax reform has led to a prioritization of border security.

• The decision to prioritize immigration over taxes came after a five-hour closed-door meeting, which included a phone call with incoming President Donald Trump. The Republicans plan to advance his agenda by passing a border security bill, along with legislation on defense and energy, within Trump’s first 30 days in office. They intend to achieve this through the use of budget reconciliation — a process that allows bills to pass with only a simple majority. After completing the initial legislation, the GOP intends to revisit and extend Trump’s tax cuts using the same procedure later in the year.
• Hesitation by the Republicans to address taxes likely stems from concerns that a budget battle could complicate efforts to raise the debt ceiling, which is set to be reinstated on January 2. Although the party controls both chambers of Congress, its majority is narrow, especially in the House of Representatives where it holds only a five-seat advantage. While the border security vote is expected to garner bipartisan support, passing tax cuts may require every Republican vote. This could prove challenging, as several Republicans voiced concerns about the impact that tax cuts could have on the deficit.

• Although delaying tax legislation in favor of border security entails certain risks, it may afford lawmakers an opportunity to secure an easy legislative win and build momentum before addressing the tax reform. One of the primary challenges will be ensuring the permanence of tax cuts, as this may necessitate offsetting measures to comply with budget reconciliation rules. Such measures could involve unpopular budget cuts. Nonetheless, the decision to postpone tax reform may alleviate pressure on Treasury yields, as it could mitigate concerns about the ballooning deficit.

Central Bank Confidence: Federal Reserve Chair Jerome Powell has doubled down on his view that the central bank will be able to achieve a soft landing.

• On Wednesday, the central bank head reassured markets that the Fed is in no rush to cut interest rates further. He added that the current economic outlook appears stronger than in September, when the Fed cut rates by 50 basis points. His comments suggest that the Fed is leaning toward a more gradual approach to future rate cuts and aiming to balance economic growth with inflation concerns. Powell emphasized that this year’s rate cuts were intended to provide insurance against potential economic weakness and to support the labor market but were not a declaration of victory over inflation.
• Fed Chair Jerome Powell’s cautious stance on future rate cuts may be in response to a recent surge in optimism following Donald Trump’s election victory. The latest Beige Book reported that although economic activity has been relatively sluggish in recent months, many of the central bank’s business contacts are optimistic about a potential rebound in demand. This optimism was also reflected in the latest Conference Board Consumer Confidence Index, which showed that the gap between respondents saying jobs are “plentiful” versus “hard to get” has reached its highest level since June.

• Powell’s comments highlight the prevailing belief that the Fed is prioritizing maximum employment over price stability. As a result, the central bank may hold off on rate cuts if Friday’s payroll report significantly exceeds expectations, with the consensus projecting a gain of 215,000 jobs for November. According to the latest CME FedWatch Tool, markets currently assign a 74% probability of a rate cut at the Fed’s meeting in two weeks. A stronger-than-expected jobs report, however, could spoil those expectations.

French No-Confidence Vote: The political crisis in France deepened as right- and left-wing lawmakers joined forces to topple the government.

• French Prime Minister Michel Barnier lost a no-confidence vote on Wednesday after he bypassed the lower house of parliament to push through an unpopular portion of the budget. This is the first time in nearly 60 years that a prime minister has been ousted, raising significant uncertainty about how the government will tackle its budget challenges. Barnier is expected to tender his resignation later today but will remain in office until French President Emmanuel Macron appoints a successor.
• Barnier’s ouster leaves the French government without a functioning budget or stable leadership as it heads into 2025. This instability has created significant uncertainty in the markets, with investors increasingly reluctant to hold French assets due to the country’s growing deficit and slowing economic growth. While the market exhibited relative indifference to Wednesday’s no-confidence vote, underlying concerns remain. France’s benchmark stock market index has declined by 11% since its 2024 peak in May, and its borrowing costs have converged to parity with Greece’s for the first time in 16 years.

• The muted response from investors following the government’s collapse suggests that the market had anticipated the outcome. However, significant uncertainty remains about France’s future after the no-confidence vote. President Macron has limited options for appointing a Prime Minister, given the deeply divided parliament, which is likely to prolong political gridlock. If Macron remains in office, this stalemate could persist, adding to the uncertainty. We believe these developments may weigh on the euro (EUR) in the coming months.

In Other News: Bitcoin surged past $100,000 for the first time, as crypto investors celebrated Trump’s decision to appoint a pro-crypto advocate to lead the SEC. Meanwhile, in South Korea, the People Power Party leader has pledged to vote against impeachment proceedings but called on President Yoon Suk Yeol to step down from the ruling party. In the US, projections from the Congressional Budget Office suggest that Trump’s tax cuts are unlikely to generate sufficient economic growth to offset the resulting increase in the budget deficit.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is processing the latest ADP employment change data. In sports news, MLB free agent Juan Soto is nearing a deal with a new team. Today’s Comment will discuss why uncertainty abroad has helped boost US mega cap tech companies, explain how a strengthening labor market will likely hinder the Fed’s ability to cut rates, and discuss the path of global interest rates and its implications for the dollar. As usual, the report will conclude with a roundup of international and domestic data releases.

Equities Shrug Off Turmoil: Despite rising geopolitical tensions in Asia, Europe, and the Middle East, the S&P 500 increased as investors sought safety in the US.

• Important news emerged from South Korea, where President Yoon Suk Yeol attempted to enforce martial law amid fears that the opposition was collaborating with North Korea. Although the order was ultimately rescinded, calls for his resignation or impeachment are increasing. In Europe, French President Emmanuel Macron pushed back against calls for his resignation as the nation approaches a no-confidence vote. Finally, there are rising worries in the Middle East that the recent ceasefire between Israel and Lebanon could fail, as well as concerns about a possible revitalization of the civil war in Syria.
• Investors responded to the news by pouring money into US equities, particularly technology stocks. On Tuesday, the S&P 500 saw a modest 0.05% increase, while the Magnificent 7 gained 1.01%. The strong interest in large US tech companies likely reflects optimism about robust economic growth and investor aversion to bonds, given the significant deficit. This likely explains why 10-year Treasury yields rose 3 bps on the day, despite their traditional role as a safe-haven asset.

• Robust economic growth and a smooth presidential transition are expected to bolster the appeal of US assets for investors, especially amidst rising global uncertainty. Mega cap tech companies, well-positioned to capitalize on this trend, may continue to attract investors due to their capacity to sustain strong earnings, particularly in the short term. However, this trend may shift in favor of less valued stocks as the market gains confidence that the new administration will moderate some campaign promises, and the Federal Reserve will maintain its accommodative stance in 2025.

 Job Market Heats Up: The Federal Reserve’s willingness to ease policy is being challenged by signs of a rebound in the labor market.

• Several Fed officials spoke on Tuesday about the central bank’s current policy outlook. San Francisco Fed President Mary Daly and Chicago Fed President Austan Goolsbee argued that while a December rate cut is not guaranteed, conditions still favor further easing in the future. Meanwhile, Fed Governor Adriana Kugler echoed this sentiment but dismissed criticism that incoming President Donald Trump’s policies could impact the Fed’s decision at the upcoming meeting. She argued that it is too early to assess the impact of potential tariffs and immigration restrictions on inflation.
• While the Fed has assessed the risks to employment and inflation as balanced, mounting evidence points to a strengthening labor market. In October, job openings surged by 372,000 to 7.74 million, significantly exceeding market expectations of 7.48 million and the downwardly revised prior reading of 7.37 million. Also, layoffs declined at their fastest pace in over a year and a half. The surge in labor demand suggests that businesses may again turn to wage increases to attract workers. The ratio of job openings to unemployed rose from 1.08 to 1.11.

• Friday’s job report and next week’s CPI report will likely be pivotal in determining the Fed’s rate-setting decision at its next meeting. An upside surprise in both reports could force the Fed to pause rate cuts indefinitely. However, if only one report surprises to the upside, a December rate cut remains on the table with the Fed possibly opting to reduce the number of expected rate cuts in its updated projections for 2025. Currently, the market is pricing in a 74% probability of a rate cut later this month and two rate cuts for next year, which we suspect is relatively high given the risks to inflation.

Global Rate Uncertainty: While the Fed’s future policy direction is unclear, other G-7 rate setters seem to be maintaining their current course.

• The European Central Bank (ECB) and the Bank of England (BoE) are expected to continue cutting rates this year and next. European policymakers are poised to implement a 25 basis point rate cut next week and signal a commitment to further easing measures next year to avert a recession. Meanwhile, BoE Governor Andrew Bailey has indicated a willingness to cut rates four times next year, with the assumption that inflation will continue to make progress toward the central bank’s 2% target. On the other end of the spectrum, the Bank of Japan has signaled a potential rate hike later this month.
• Changes in policy rates are likely to continue influencing dollar movements, although growth expectations will also be a significant factor. The US is expected to maintain a tighter monetary policy relative to many of its peers, and the interest rate differential with several G-7 countries is projected to widen. Additionally, the US economy appears to be better positioned to lead global growth. This combination of factors should make the US an attractive destination for capital flows, which should drive up the value of the dollar going into 2025.

• The dollar’s strength in the coming months is contingent on investors maintaining a weak outlook for the rest of the world. The economies of the eurozone and the UK are showing signs of growth despite fears of recession. At the same time, inflation in these regions appears to be stalling. As a result, these central banks may not ease as much as investors expect which could slow the dollar’s upward trajectory. That said, given the potential for positive economic surprises abroad, international equities may present attractive investment opportunities.

In Other News: President-elect Donald Trump is considering selecting Florida Governor Ron DeSantis as a replacement for Pentagon nominee Pete Hegseth. This move suggests that he may be shifting toward more traditional choices for positions in his administration. Meanwhile, there are growing labor strikes in Germany to protest Volkswagen’s decision to close plants in a sign that growth in the country could slow further. Lastly, A Chinese state newspaper suggested that the country may not need to achieve 5% annual growth to meet its long-term objectives. This signals that the country does not anticipate a rapid improvement in its economic challenges.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a provocative new operation by the Russian navy that may reflect the increased coordination and cooperation of the countries in the China-led bloc. We next review several other international and US developments with the potential to affect the financial markets today, including the impending downfall of the French government and new signs that the Federal Reserve is likely to cut US interest rates again later this month.

Russia-Philippines: New reports say the Russian navy surfaced an advanced attack submarine off the western Philippines late last week. Such a surfacing isn’t necessarily outside the ordinary, and the sub’s crew properly responded to a Philippine navy request for identification. All the same, we think the incident may have been designed to show Russian support for Beijing’s territorial claims against Manila in the region.

• If so, the incident would be more evidence of increasing coordination and cooperation among the key countries of the China-led geopolitical bloc. On a separate note, NATO General Secretary Rutte said in an interview yesterday that he has warned President-elect Trump about the increasingly close coordination among the China-bloc countries. Rutte said he also advised Trump that an overly generous peace deal for Russia in its war against Ukraine would further incentivize greater cohesion in the China bloc.
• If China, Russia, Iran, and North Korea really are coordinating and cooperating more, global tensions would likely increase. In turn, that would likely spark further fracturing of the world into separate blocs, increased global defense spending, and higher and more volatile inflation and interest rates in the West.

Russia-Ukraine: In recent interviews and public statements, Ukrainian President Zelensky has shifted from his previous stance that Kyiv would keep fighting against the Kremlin’s invasion forces until all Russian troops have been pushed out of the country. In his new statements, Zelensky has signaled that Ukraine would stop fighting to regain its Russian-held territory in exchange for membership in the North Atlantic Treaty Organization.

• Zelensky’s new stance is consistent with our long-held view that the heavy losses on each side would eventually lead to peace negotiations, rather than any clear-cut victory for either Russia or Ukraine.
• Still, Zelensky’s statements don’t mean peace talks are imminent. We suspect the Ukrainians still have some fight left in them, while the US and its NATO allies also remain far from ready to bring Ukraine into the alliance.
• Perhaps most important, a Russian oligarch close to the Kremlin says President Putin will reject the peace plan President-elect Trump is working on, which reportedly would let Russia keep the territory it has seized in Ukraine in return for a truce supported by European peacekeepers.
• Emboldened by the support of his China-bloc allies, his recent successes on the Ukrainian battlefield, and the fact that he has gotten away with his recent sabotage campaign against NATO, Putin will reportedly seek maximalist goals in any peace talks involving Trump, such as broad, regional spheres of influence for Russia and its China-bloc partners.

France: Faced with resistance from opposition lawmakers, Prime Minister Barnier yesterday used a special constitutional provision to push his austere 2025 social security budget into law. However, the maneuver set the stage for far-left lawmakers to request a no-confidence motion, which is likely to pass with the support of the far right when it takes place as early as Wednesday. The French government would then fall, creating a political and economic crisis that could shake the European Union and its markets.

• The chaos yesterday pushed the yield spread of 10-year French government bonds over German government bonds to nearly a 12-year high of 0.87%.
• The crisis also pushed the value of the euro (EUR) down sharply. As of this morning, the currency is trading at $1.0523, up 0.2% from yesterday but down approximately 5% since the end of September.

China-United States: The Chinese Ministry of Commerce today said it will ban exports to the US of gallium, germanium, antimony, and certain other dual-use minerals with both military and civilian uses. The ministry also said it will conduct stricter end-user and end-use reviews for graphite going to the US. The ban is consistent with our past warnings that China and its bloc will likely weaponize their dominance of key mineral markets amid growing tensions with the US and its bloc.

• The new ban is likely in retaliation for the Biden administration’s new curbs on sending advanced memory chips and related technology to China, which was announced on Monday.
• The ban could disrupt supply chains in US industries ranging from semiconductors to defense.

United States-China: The outgoing Biden administration has imposed new anti-dumping tariffs on solar panels and components made by Chinese firms in Malaysia, Thailand, Cambodia, and Vietnam. To get around the existing US tariffs on solar energy goods shipped directly from China, the targeted firms have been setting up production facilities around Southeast Asia. The new tariffs likely aim to signal that the US won’t tolerate this back-door entry of low-cost Chinese goods into the US market.

US Monetary Policy: Fed board member Christopher Waller said yesterday that he expects to support another cut in the benchmark fed funds interest rate at the central bank’s next policy meeting on December 17-18. However, he warned that he would switch to supporting a pause if the economic data between now and then point to rebounding economic growth or reaccelerating price inflation.

• Waller’s statement has helped increase investor confidence that the Fed will cut rates again this month. So far this morning, pricing in the fed-funds futures market suggests investors are putting a 73% probability on the policymakers cutting rates by 0.25%, up from a probability of 59% one week ago.
• Nevertheless, we think Waller’s caution on the data is evidence of how the continued strength in the economy and remaining price pressures could keep interest rates from falling as fast as investors expect.

US Construction Industry: The Wall Street Journal today carries a story on the challenges that  the construction industry could face under the tariff and migration policies of the incoming Trump administration. The article claims increased tariffs could raise the cost of the industry’s many imported inputs, while mass deportations would reduce its labor supply. Nevertheless, it’s important to remember that the policies put into place next year are likely to be adjusted and/or watered down from current discussions, so it’s still too early to predict their exact impact.

US Agriculture Industry: Cargill, the privately held agricultural commodity giant, today said it will cut 5% of its global workforce and restructure to improve profitability. The move reflects softer agriculture markets over the last couple of years as the supply shortages and high prices associated with the coronavirus pandemic and the Ukraine war recede into memory. Now, ample supplies, modest demand, and lower prices are challenging major commodity traders such as Cargill, Bunge, and Archer Daniels Midland.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with further evidence that the Bank of Japan is likely to hike its benchmark interest rate again later this month. We next review several other international and US developments with the potential to affect the financial markets today, including an effort by the European Parliament’s biggest political group to scrap the EU’s ban on selling autos with internal combustion engines by 2035 and President-elect Trump’s weekend threat to impose 100% tariffs against countries that try to stop using the US dollar for trade.

Japan: In an interview published Saturday, Bank of Japan Governor Ueda hinted that the central bank could hike its benchmark short-term interest rate again when its policy board next meets on December 18-19. According to Ueda, the timing of the next rate hike is “approaching” as the data on Japanese wage growth, consumer spending, and price inflation continues to move in line with the central bank’s forecasts. The statement will act as confirmation for the modest majority of market participants who already expected a rate hike this month.

• The BOJ’s benchmark interest rate currently stands at just 0.25%. If the central bank hikes rates in December, it would be the first policy change since a rate hike in July.
• The BOJ’s slow pace of rate hikes and the continuing wide disparity between Japanese rates and the major Western rates have weighed on the yen (JPY) over the last couple of months. Despite Ueda’s statement, the currency has weakened about 0.2% today and is currently trading at 150.00 per dollar ($0.0067).

China: The yield on long-term Chinese bonds fell below Japanese yields for the first time on Friday. China’s 30-year government bond declined to just 2.21% versus 2.27% on 30-year JGBs. The fall in Chinese yields reflects investor concerns that China faces years of slow economic growth, deflation, and ultralow interest rates similar to what Japan faced starting around 1990. The concern is generally consistent with our view that the Chinese economy has hit several big structural headwinds, such as high debt and poor demographics.

• Despite the Chinese economy’s unfavorable long-term outlook, the government’s recent modest stimulus program has given a small boost to the factory sector.
• The government on Saturday said its official November purchasing managers’ index for manufacturing rose to a seasonally adjusted 50.3, up from 50.1 in October. Like most major PMIs, the Chinese one is designed so that readings over 50 indicate expanding activity. The figures therefore suggest China’s factory sector has now grown modestly for two straight months. Before that, however, the index had shown that the sector had declined for five straight months.

European Union: On Friday, the Financial Times scooped that the largest political group in the European Parliament, the center-right European People’s Party, is working to scrap the EU’s planned 2035 ban on selling automobiles with internal combustion engines. Working with aligned national leaders, it also wants to reverse the EU’s interim rules imposing fines on carmakers that exceed certain emissions limits.

• The auto industry is a huge part of the EU economy, but it is struggling with challenges ranging from threatened US import tariffs and electric-vehicle dumping by China to high energy costs and the EU’s own stringent regulations.
• The new initiative to soften the regulatory burden likely stems at least in part from the recent political shift to the right in the US and the EU. Since the regulatory burden isn’t the only headwind for Europe’s automakers, the EPP initiative isn’t a silver bullet. However, if successful, it could ease some of the pressure on the auto industry.

France: Prime Minister Barnier’s minority government today is on the brink of collapse after the far-right populist National Rally (RN) signaled it might trigger a no-confidence vote over the austerity policies in the proposed 2025 budget. Barnier is desperately trying to control France’s ballooning budget deficit, which has started to spook investors, but he responded to RN by dumping a proposed hike in electricity taxes. Now, RN insists that he restore cost-of-living adjustments for pensions and reverse other spending cuts, which may be a bridge too far for Barnier.

• On a more positive note, President Macron on Friday was given a tour of Notre Dame cathedral, which has finally been repaired and refurbished after its 2019 fire. Initial reports say the new stonework and cleaned older stone have brightened its interior, giving viewers a sense of what it must have been like when it first opened in 1260.
• The cathedral is due to be reopened to the public on December 7.

Ireland: After elections on Friday, centrist party Fianna Fáil appears on track to win the largest number of seats in parliament and continue its coalition with the center-right Fine Gael. To gain a majority, however, it will have to strike a deal with some small parties and independents after the Greens, a former coalition partner, suffered a dramatic loss of support. The results make Ireland a rare island of relative political stability in Europe.

Romania: In yesterday’s parliamentary elections, initial tallies suggest the center-left PSD party came in first with about 22.5% of the vote, while two center-right parties got about 15% each. The nationalist far-right AUR group garnered 18%, and another far-right group, SOS Romania, got about 5%. If confirmed, the results mean Romania will also continue to be governed by mainstream parties, despite a populist right-wing nationalist winning the first round of the presidential election last week.

• The parliamentary election came exactly one week after pro-Russia, NATO-skeptic candidate Călin Georgescu came out of nowhere to win the first round of the presidential election. Liberal candidate Elena Lasconi came in second.
• Under law, Georgescu and Lasconi would normally compete in the presidential run-off election scheduled for next Sunday. However, the run-off election is now in limbo after the country’s top court on Thursday ordered a recount of the first round.
• The court and election officials are suspicious of Georgescu’s sudden rise from obscurity after only campaigning on the Chinese-owned social media platform TikTok. The authorities are probing whether Georgescu’s first-round win was the result of a covert Russian interference operation utilizing thousands of fake TikTok accounts, perhaps with the connivance of TikTok’s Chinese owners and/or the Chinese government.
• There are also suspicions that widely followed social media influencers in Romania were paid off to channel viewers to Georgescu’s posts. Several influencers had reportedly admitted to being paid for those services. However, Georgescu’s campaign filings have shown no expenses whatsoever.
• Officials from the European Union have also been brought in to investigate whether TikTok violated its new Digital Services Act, which requires big social media platforms to take action against disinformation and electoral interference.

Georgia: In another sign that Russia is managing to bring some Eastern European countries back into its orbit, Prime Minister Irakli Kobakhidze on Thursday said he will suspend Georgia’s process of EU accession until 2028 and decline all grants from the bloc. The announcement has sparked mass protests and clashes with police in the capital of Tbilisi every night since then.

Russia-Ukraine: While it’s now widely acknowledged that the Kremlin’s forces are gradually reducing the Ukrainians’ salient in the Russian region of Kursk, new reporting shows the Russians have also suddenly started to take more territory in eastern Ukraine. The Russian momentum will likely put further pressure on Kyiv to start peace negotiations, even beyond the pressure that is likely to come from the US once President-elect Trump is back in office.

Syria-Russia-Turkey: The rebels who have been battling the Assad government for years staged a surprise offensive over the weekend, capturing much of the major city of Aleppo and wide swaths of western and northwestern Syria. Underlining the international dimension of the civil war, the rebels are reportedly being aided by Turkish-backed fighters. In return, the Assad government and its Russian allies are fighting back with airstrikes, and Iran has sent its foreign minister to Damascus in a show of support.

• The offensive is yet another spark that could lead to a broader conflict in the Middle East and threaten its energy output.
• Importantly, the meddling by outside powers such as Russia, Iran, and Turkey has the potential to spark fighting between major powers.

United States-China: The outgoing Biden administration today imposed new restrictions on sending advanced semiconductors and related equipment to China. Under the new initiative, the US’s previous export curbs will be extended to cover memory chips used in artificial-intelligence applications and certain types of chipmaking equipment. The move also adds 140 Chinese companies to the US export blacklist. Even though the administration has taken a flexible approach to applying the rules, the new move is likely to further exacerbate US-China tensions.

US Trade and Currency Policy: President-elect Trump on Saturday warned the BRICS group of developing countries that he will impose 100% import tariffs against them if they keep trying to create their own currency to use in place of the dollar. The warning appears to reflect concerns that reduced use of the greenback for trade would undermine its value or its role as the world’s reserve currency. However, Trump and his advisors have also floated the idea of weakening the dollar to help eliminate the US trade deficit.

• As we noted in our Bi-Weekly Geopolitical Report from September 9, 2024, the dollar’s share in global central bank currency reserves has been falling gradually for more than two decades as countries make greater use of non-dollar currencies in trade. Nevertheless, the dollar remains in a bull market and is trading close to a record high. It has appreciated the most against major BRICS currencies, even as those countries try to reduce their use of the greenback.
• In our view, the value of the dollar is more driven by international capital flows than by its use in trade. Given the US economy’s superior growth, deep and well-regulated financial markets, and better protections for private property, capital flows into the US are likely to keep supporting the dollar in the near term.
• All the same, some public policy observers note that the strong dollar exacerbates the US trade deficit by making US exports more expensive and imports less expensive. That’s probably why some politicians have suggested taking steps to weaken the dollar, perhaps by imposing a tax on foreign capital inflows. Trump now appears to be siding with the strong-dollar advocates, which may make it harder to achieve his goal of bringing US trade back into balance.

US Postal System: The US Postal Service has finally started rolling out its new delivery trucks, and initial reports suggest mail carriers are happy with them. The new trucks, which will replace the current boxy vehicles introduced in the 1980s, are not only electrified, but they also finally have air conditioning and are designed for better access to parcels stored in the back. Sadly, however, they’re also being panned as extremely ugly!

(Source: US Postal Service)

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with President-elect Trump’s latest vow to impose steep import tariffs on key trade partners once he is inaugurated to his new term. We next review several other international and US developments with the potential to affect the financial markets today, including signs that Germany may be ready to relax its government debt rules to spur economic growth and a few observations on the recent surge in US small cap stock prices.

United States-Canada-Mexico-China: President-elect Trump yesterday said he’ll impose 25% tariffs on all imports from Canada and Mexico on his first day in office to push them to crack down on illegal immigrants and drugs crossing their borders into the US. He also said he would impose an additional 10% tariff on imports from China, on top of existing levies. The threats are likely to deepen concerns that foreign countries, including key US allies, could face devastating tariffs once Trump is inaugurated, and not just for economic or protectionist reasons.

• In response, both the Canadian dollar (CAD) and the Mexican peso (MXN) are trading down about 0.8% versus the greenback so far today.
• Canadian and Mexican stock price indexes are also lower today. In addition, stock values for major foreign exporters to the US are also trading down, including Japanese automakers.

China: New reports based on satellite imagery and public documents suggest the Chinese military has built a prototype nuclear reactor to power its upcoming aircraft carriers. That means the country’s fourth carrier, under development now, could be its first to have the advantages of nuclear propulsion, including global range, faster speeds, greater capacity for carrying aircraft and munitions, and faster aircraft launch tempos — all of which would help make the Chinese navy an even greater challenge for Western naval forces.

China-United States: Apple CEO Tim Cook is in China today for the third time this year as he seeks government approval to add artificial-intelligence to the iPhone offerings in the country. However, a high-ranking government official has warned that Apple and other foreign firms wanting to bring AI to China would face long and complex approval processes if they don’t partner with a local company. The statement suggests China is turning back to a technology-transfer tactic it previously used to steal innovations from foreign firms.

Russia-North Korea: South Korean security officials say Russia has delivered advanced air defense systems to North Korea in return for the 10,000 or more troops and other military aid that Pyongyang has sent to Russia for its war against Ukraine. The air defense systems and potentially other military goods are on top of the energy and food deliveries that Russia has also reportedly sent to North Korea to pay for its aid. North Korea is also expanding a key factory that produces missiles for itself and Russia, possibly with Russian financing.

• The air-defense transfers illustrate the growing internationalization of the Russia-Ukraine conflict. They also reflect the increasing cooperation and coordination among the major countries in the China-led geopolitical and economic bloc, including China itself, Russia, Iran, and North Korea.
• As we’ve noted before, we think the trend of growing cooperation and coordination in the China-led bloc will become increasingly evident in 2025. Indeed, the commander of US forces in the Indo-Pacific region last week warned that Russia is likely to transfer critical submarine technology to China, helping make its naval forces an even bigger threat. The trend will likely strengthen the China-led bloc, sharpening tensions with the US-led bloc.

Germany: Former Chancellor Angela Merkel, who helped introduce the country’s controversial “debt brake” into the constitution in 2009, has written in her memoir that she now thinks it should be relaxed. The news comes just days after Friedrich Merz, now the leader of Merkel’s center-right Christian Democratic Union, said he could support making the rule more flexible. Since the CDU is currently in the pole position to win February’s parliamentary elections, the statements suggest the politics are moving toward a change in the brake in 2025.

• The debt brake caps new borrowing by the federal government at 0.35% of GDP, adjusted for the economic cycle. It also bars Germany’s 16 individual states from taking on any new debt at all.
• The debt brake has come to be seen as shackling the German economy. For example, some economists believe it has inhibited needed investment in high-return public goods such as infrastructure. Amending the rule could help reinvigorate German economic growth, which in turn would likely give a boost to the broader European Union economy.

Italy: Banking giant UniCredit yesterday launched an all-stock, 10.1 billion EUR ($10.6 billion) takeover bid for domestic rival Banco BPM. If successful, the takeover would create Europe’s third-largest lender by market capitalization. It could also potentially spark a wave of much needed consolidation and efficiency gains in the sector. The takeover bid comes as UniCredit’s effort to buy German lender Commerzbank has gotten a frosty reception.

US Stock Market: The Russell 2000 price index of small capitalization stocks yesterday jumped to a new record for the first time in three years, closing at 2,442.03. The index is now up 10.1% since election day and 20.5% for the year-to-date. The recent jump largely reflects optimism over the future impact of President-elect Trump’s likely economic policies. As we have argued in the past, we also think small caps are benefiting as the world fractures into relatively separate geopolitical and economic blocs — a trend that is fostering US re-industrialization.

US Economy: The American Farm Bureau has released its annual estimate of the cost of a Thanksgiving dinner for 10 people, and the figure comes to just $58.08, down 5% from last year. Adjusted for inflation, that’s one of the cheapest Thanksgiving dinners since 1982. The estimate assumes a dinner of turkey, cranberries, sweet potatoes, pumpkin pie mix, and more. Apparently, the estimate doesn’t include the nice wine, like a Zinfandel or German Riesling, that this author will be sipping alongside his turkey and stuffing!

Global Health: New research shows global rates of HIV infections and deaths related to the virus dropped sharply between 2010 and 2021. New infections fell almost 22% globally in the period, to 1.65 million, and HIV-related deaths decreased nearly 40%, to 718,000. The declines are largely attributable to new drugs and better prevention methods against the disease, which has killed some 40 million people since 1980 and was once seen as a virtual death sentence.

The Daily Comment will go on hiatus beginning Wednesday, November 27, and will return on Monday, December 2. Confluence wishes everyone a Happy Thanksgiving!

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