by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is analyzing the latest PPI data to gauge the Fed’s next move. In sports news, former New England Patriots coach Bill Belichick has agreed to lead the University of North Carolina’s football team. Today’s Comment will explore why Fed policymakers remain concerned about inflation, provide an update on the government’s efforts to avoid a shutdown, and share insights on Canada’s monetary policy. As always, we’ll summarize key domestic and international data releases.

Inflation in Line: The CPI report did not disappoint, but there are still concerns about the future path of inflation.

• According to the Bureau of Labor Statistics, the overall consumer price index accelerated slightly in October. The year-over-year change rose from 2.6% to 2.7%, while the core index, which excludes volatile food and energy, rose 3.3%, roughly in line with the previous month. The rise in inflation was driven by a few components, including transportation and food prices, which both showed signs of acceleration. That said, the report was likely good enough for policymakers to cut rates next week; however, there are still questions concerning the path of monetary policy for 2025.
• Fed officials will remain vigilant for signs of renewed inflationary pressures, especially at the beginning of the year. In the first quarter of 2024, core CPI surged well above its pre-pandemic trend, mainly driven by unexpected spikes in financial services and shelter costs. While price pressures eventually eased throughout the year, this early surge led the Fed to doubt its progress and delay rate cuts until September when a 50-basis-point reduction was implemented. If a similar scenario unfolds in 2025, the Fed could signal an indefinite pause on rate cuts for the year.

• Our primary concern is the potential resurgence of goods inflation driven by tariffs, which could reverse recent progress in moderating price pressures. The last time tariffs were implemented there was a significant increase in durable goods prices, particularly for home appliances. While this didn’t have a major impact on overall inflation then, it could diminish a key driver of disinflation this time. Although we don’t expect this to influence policy decisions at next week’s meeting, it could prompt Federal Reserve officials to adopt a more hawkish stance in 2025.

Spending Gap Bill: Lawmakers are working together to put together a stop gap spending bill to prevent the government from shutting down on December 20.

• The House of Representatives passed an $895 billion defense spending bill on Wednesday, the first of several appropriations bills needed to fund the government. While this bill garnered bipartisan support, upcoming appropriations are expected to be more contentious. Lawmakers face disagreements over the scale of disaster relief for Hurricanes Milton and Helene and whether to increase funding for agencies like the DOE and the EPA. Despite these challenges, there’s hope for a short-term funding agreement to keep the government open until the new year.
• In the post-financial crisis era, political infighting has forced lawmakers to repeatedly extend government funding with temporary measures known as continuing resolutions. Only once since 2009 has more than one appropriations bill been passed before the October 1 deadline. These stopgaps prevent government shutdowns but also prolong the appropriations process and contribute to the ballooning budget deficit. The government has already relied on five continuing resolutions this year, which has helped push the deficit to nearly $2.0 trillion this fiscal year. This puts it on track to be the largest deficit outside the pandemic era.

• The dispute over the budget will set up a showdown regarding how to raise the debt ceiling, which expires January 1. The ongoing political infighting over the budget is likely to raise investor concerns about the US government’s ability to address its fiscal challenges. The two major rating agencies have already downgraded the US credit rating, citing concerns about partisan gridlock, which could prevent a bipartisan agreement to reduce the deficit. As a result, we anticipate that continued political bickering over the debt will likely impact long-term interest rates in the future.

BOC and Tariff Threats: The Bank of Canada slashed rates by 50 basis points to stimulate its economy but warned of economic risks due to trade tensions with the US.

• The central bank lowered its policy rate to 3.25%, its lowest level since September 2022. Following the reduction, the central bank signaled a more gradual approach to future rate cuts. This shift in tone suggests that larger rate cuts may be less likely, and the central bank could adopt a more modest approach to its guidance as it seeks to stimulate the economy. During the press conference, Bank of Canada Governor Tiff Macklem warned that the economic outlook has deteriorated due to the threat of tariffs against Canada.
• The threat of tariffs poses a significant risk to the Canadian economy, which is already facing a slowdown. In the third quarter of 2024, GDP growth decelerated from an annualized pace of 2.2% to 1.0%. This slowdown was primarily driven by a decline in investment spending, which has been a drag on GDP for five of the last six quarters. The threat of a trade war could intensify business uncertainty, making it harder for companies to justify capital expenditures and job creation in Canada.

• A potential trade war with the US could significantly harm Canada’s economy, as roughly 20% of its GDP is tied to trade with its southern neighbor. To mitigate the negative impact of potential tariffs, the Bank of Canada is likely to ease monetary policy further to make it easier for households and firms to borrow. This could lead to a depreciation of the Canadian dollar relative to the US dollar, but it could also make Canadian exports more competitive globally.

In Other News: President-elect Trump has asked Chinese President Xi Jinping to join him at his inauguration as a possible olive branch. This move suggests a possible easing of tensions between the two sides. Microsoft shareholders voted down a measure that would allow the company to add bitcoin to its balance sheet, indicating that crypto is becoming more widely accepted. The European Central Bank voted to cut its benchmark policy rate by 25 bps to 3.00%.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently digesting the latest inflation data. In sports news, two-time All-Star left-handed pitcher Max Fried inked a $218 million deal with the New York Yankees. Today’s Comment will delve into our thoughts on Trump’s pick to head the Federal Trade Commission, the potential for a stronger dollar in 2025, and the latest developments in South Korean politics. As always, we’ll conclude with a roundup of key domestic and international economic data releases.

Trump Anti-Trust Busting: The president-elect has chosen Andrew Ferguson to lead the Federal Trade Commission (FTC), signaling the administration’s intent to moderate the agency’s stance on monopoly power.

• The new agency head is set to continue the FTC’s oversight of Big Tech, but will likely leave other sectors alone. He is also expected to adopt a softer approach to AI regulation and take a more lenient stance on merger standards compared to his predecessor, Lina Khan. His primary focus will be safeguarding free speech on social media platforms. In this role, which does not require Senate confirmation, he will oversee ongoing cases against tech giants, which could pave the way for the breakup of companies like Google and Meta.
• Ferguson is expected to limit the regulatory body’s authority as he looks to create the pro-innovation environment pushed by the president. He has publicly opposed measures like judicial job protection, challenged the agency’s rule-making authority, and argued against regulations that could stifle AI innovation. His appointment will likely bolster business optimism, as evidenced by the recent spike in the National Federation of Independent Business’s Small Business Optimism Index. In November, it surpassed its long-term average of 98 for the first time in 34 months.

• A less stringent FTC could boost the broader equity market, as industries like finance, energy, and pharmaceuticals face reduced regulatory scrutiny. These industries have traditionally been focal points for regulatory actions concerning consumer protection. However, the outlook for tech stocks remains uncertain, as they are likely to remain under heightened scrutiny due to concerns about monopoly power and perceived biases against conservative speech. While we see some potential upside in tech, we believe investors may find better value opportunities in other industries as well.

Super Greenback: Hawkish trade policy and relatively restrictive monetary policy are expected to support the dollar in the coming year.

• Reports surfaced Wednesday that Beijing may allow its currency to depreciate next year as a potential response to a looming US trade war. The new measure along with additional stimulus from the government is intended to bolster the competitiveness of Chinese exports and revitalize its ailing manufacturing sector. Later today, Beijing is expected to outline its economic plans, including measures to stimulate growth, at its annual economic policy meeting.
• The looming threat of a US trade war has strengthened the dollar significantly against major currencies. Since September, the dollar has appreciated by 4.2% versus the Chinese yuan (CNY), 4.6% versus the Mexican peso (MXN), 6.0% versus the Canadian dollar (CAD), and 6.7% versus the euro (EUR). As trade tensions intensify, growth prospects for these economies may deteriorate, potentially pushing them towards more accommodative monetary policies. Meanwhile, the Federal Reserve’s stance on interest rate cuts remains uncertain, which could also exacerbate the dollar’s strength.

• The strengthening dollar poses a significant risk to the global economy, especially for nations with substantial US dollar-denominated debt. This trend could make the US an increasingly attractive investment destination, particularly if the incoming administration implements its promised tax cuts. For investors seeking international exposure, a prudent strategy would be to prioritize countries with low debt levels and minimal trade exposure to the US. This could involve focusing on nations within the European Union and South/Central America, given their relatively limited import exposure to the US.

Korea’s Turmoil: South Korea is currently looking to pave the way forward as it tries to move past the recent attempt by its president to impose martial law.

• On Tuesday, in a historic move, South Korea’s opposition-controlled parliament approved a government budget without the consent of government ministries. South Korea’s budget has been a major point of contention with proposed cuts clashing with the president’s desire for increased spending. This tension escalated to the point where the president attempted to declare martial law last week. However, South Korea’s unique legislative system allows its lawmakers to implement budget cuts without presidential approval, which is likely to weigh on an already struggling economy and exacerbate political tensions.
• The budget dispute highlights a strategic move by the opposition party to leverage its position and impose austerity measures to both balance the nation’s finances and weaken the ruling party. While the potential economic slowdown could aid in removing the ruling party from power, this questionable approach mirrors global trends as South Korea (like many other countries) navigates the transition from pandemic-era deficit spending to fiscal sustainability. Despite a relatively low debt-to-GDP ratio of 45% compared to Western nations, the country still faces its largest-ever budget deficit.

• While the new budget may not significantly boost economic prospects, it could provide some level of certainty amidst the country’s ongoing crisis. The opposition party is poised to hold a second impeachment vote on Saturday, following the failure of the first attempt due to a lack of quorum. This second attempt may prove more successful, as the head of the ruling party has distanced himself from Yoon following his decision to impose martial law. However, the political uncertainty within the country is likely to persist, as it remains unclear who would succeed Yoon if the impeachment proceeding is successful.

In Other News: Two major mergers faced setbacks as President Biden moved to block the sale of US Steel to Nippon Steel, and a judge halted Kroger’s acquisition of Albertsons. Meanwhile, French President Emmanuel Macron is working with moderates to select a new prime minister within the next 24 hours. President-elect Donald Trump has pledged to fast-track permits for a $1 billion US investment initiative.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with more signs that European countries intend to keep boosting their defense spending to counter the rising threat from Russia. We next review several other international and US developments with the potential to affect the financial markets today, including moves by China to cut off the US from its drone exports and a major bond manager’s move to reduce exposure to long-term US government debt.

European Union: The European Commission’s new Defense and Space chief, former Lithuanian Prime Minister Andrius Kubilius, said he will seek about 100 billion EUR ($105 billion) for weaponry in the EU’s next seven-year budget to help prepare the bloc for possible aggression by Russia. That would mark a dramatic increase from the current budget’s 10 billion EUR ($10.5 billion) for defense and defense industry spending. Kubilius also said he would support excluding member states’ own defense outlays from EU limits on fiscal deficits and public debt totals.

• Spread out over seven years, the 100 billion EUR that Kubilius is seeking wouldn’t account for a large share of European defense spending. Most military outlays in the region would still come from EU member states’ own budgets.
• Nevertheless, the statement illustrates how top EU leaders are increasingly looking to boost their defense rebuilding efforts. We continue to think the result will be higher revenues, profits, and stock prices for European defense contractors.
• Now that France has dropped its previous insistence that all common EU defense funds be spent only within the bloc, it is likely that some of the EU’s new spending will also benefit US defense firms. However, the US firms may see relatively weaker stock performance because of the incoming Trump administration’s plan to extend the 2017 tax cuts, rein in government spending, and re-channel some funds toward smaller, cheaper weapons systems such as drones.

Russia-North Korea: During the weekend, the commander of US forces in the Indo-Pacific region, Adm. Samuel Paparo, said he has seen intelligence that Russia plans to send advanced Su-27 and Su-29 fighter jets to North Korea. The jets would presumably be partial payment for North Korea sending some 12,000 troops to Russia to help in its war against Ukraine, along with the cash, food, fuel, and air defense systems that Russia has also reportedly sent. If true, the deal is more evidence of increasing cooperation in the China/Russia geopolitical bloc.

China-Taiwan: Military officials in Taiwan today said they see evidence that China is planning what could be its largest naval exercise in the Western Pacific since 1996. The Chinese military has closed the airspace near Taiwan and is reportedly massing dozens of navy and coastguard vessels to the west and east of the island.

• The impending exercise (if that’s all it is) likely aims to express Beijing’s anger over Taiwanese President Lai Ching-te’s recent visit to Hawaii and Guam as part of his first official international trip.
• The deployment of Chinese navy and coastguard ships to both the east and west of Taiwan is probably a signal to the US and its Western Pacific allies that Beijing has the ability to blockade the island and prevent outside forces from intervening.

Syria: To start forming a transition government, rebel leader Abu Mohammed al-Jawlani, whose HTS fighters led the toppling of dictator Bashar al-Assad over the weekend, has convened a meeting with Assad’s prime minister and Mohammed al-Bashir, the head of a de facto government that HTS backed for years in Syria’s rebel-held northwest. Al-Jawlani’s forces have also reportedly worked to impose order on Damascus. Nevertheless, it will probably still be weeks before the contours of a transition government are laid out.

Brazil: President Lula da Silva, who is 79 years old, this morning is in intensive care after surgery for a brain hemorrhage related to a fall in October. Lula was reportedly complaining of severe headaches, which led doctors to discover the injury. According to doctors, the surgery went “well,” and government officials say Lula is awake, alert, and on the road to recovery.

El Salvador: The government of cryptocurrency supporter President Nayib Bukele is reportedly close to clinching a deal with the International Monetary Fund for a new $1.3-billion loan program. However, the deal will require El Salvador to change its laws so that firms are no longer required to accept cryptocurrency as legal tender. The IMF insists on making acceptance of cryptocurrency voluntary to reduce the risk of financial instability.

China-United States: Less than a week after Beijing banned direct or indirect exports of key minerals with military applications to the US, Bloomberg yesterday said multiple Chinese firms have stopped or limited their sales of aerial drone components to the US and Europe. The firms are reportedly trying to get ahead of formal government curbs on the export of motors, batteries, and flight controllers expected to be in place in 2025.

• The Chinese curbs on drone parts would likely crimp US and European drone production, including both civilian and military drones. Since drones have become a critical new technology for defense, the moves are likely to spur further decoupling from China and stronger efforts to develop complete drone supply chains in the US and Europe.
• On a related note, US lawmakers in the House of Representatives have put language in the annual National Defense Authorization Act that would stop China-based DJI and Autel Robotics from selling new drones in the US unless a national defense agency specifically authorizes the sales. If the provision is still in the bill when it is ultimately signed into law, it would further decouple the US from the Chinese drone industry.

Canada-United States: Canadian Prime Minister Trudeau told a chamber of commerce event in Nova Scotia yesterday that his government would retaliate with its own tariffs on US goods if President-elect Trump follows through with his threat to impose 25% tariffs on imports from Canada. Trudeau reminded his audience that his government also retaliated with tariffs when President Trump imposed duties on Canadian goods during his first administration.

• Trudeau’s statement serves as a reminder that a disruptive US-Canada trade war remains a possibility, despite Trudeau’s recent meeting with Trump to head it off.
• Due to the complexities of how import tariffs can affect an economy, it still isn’t possible to gauge exactly how Trump’s threatened duties would affect the US, although there is probably a high chance that they would boost consumer price inflation, at least temporarily. In contrast, since Canada is so dependent on exporting to the US, the threatened tariffs would almost certainly have a negative impact on Canada’s economy and financial markets.

US Workforce Quality: In the latest International Assessment of Adult Competencies, a test given to 160,000 workers around the world to assess their basic reasoning and problem-solving skills, the US ranked a lowly 14^th in reading, 15^th in adaptive problem solving, and 24^th in numeracy. The countries scoring the highest in the three categories in 2023 included Japan, Norway, Sweden, Finland, Estonia, Belgium, the Netherlands, and Denmark.

• Worryingly, while the best-educated US workers continue to score higher in each iteration of the test, the least-educated have been scoring lower. In 2023, the share of US test-takers whose math skills didn’t surpass those expected of a primary-school student rose to 34% of the population from 29% in 2017, the last time the test was administered.
• The results are consistent with other studies suggesting low workforce skills are likely holding down US productivity, competitiveness, and economic growth prospects.

US Bond Market: Giant bond-fund manager Pimco yesterday said it is cutting its exposure to long-term US debt because of the country’s big fiscal deficit and rising obligations. Instead, the firm said it has begun favoring shorter-term notes “where investors can find attractive yields without taking greater interest rate risk.” Pimco’s stance is consistent with our view that US debt is likely to keep rising, leading to questions about sustainability and increasing the chance of eventual financial repression (government efforts to artificially hold down interest rates).

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with positive news that China may adopt more economic stimulus, along with the negative news that it has also opened an antitrust probe against Nvidia. We next review several other international and US developments with the potential to affect the financial markets today, including the latest on South Korea’s political chaos, the fall of Syrian dictator Assad, and assurances by President-elect Trump that he won’t try to fire Federal Reserve Chair Powell.

China: The Communist Party’s Politburo today said China will adopt a “moderately loose” monetary policy and more proactive fiscal policy to counter economic downturns. The statement is being interpreted to mean that policymakers at the annual legislative session in March will approve a bigger fiscal deficit and increased spending to boost domestic demand. At the party’s Central Economic Work Conference in a few days, policymakers will start to discuss their policy priorities and growth targets for 2025.

• Press reports say the language used in the Politburo statement is the most aggressive in years. As a result, some investors are hoping for a massive government spending program that will re-ignite fast growth and boost Chinese stock prices.
• All the same, General Secretary Xi and other top Communist leaders will likely remain ideologically opposed to anything like the consumer-led economies of the West, so there is a significant chance that any new stimulus program will be disappointing. It therefore seems much too early to think that China will again become the world’s economic growth engine that it once was.

China-United States: Chinese media today said the State Administration for Market Regulation has opened an antitrust probe into US artificial-intelligence giant Nvidia. The regulator is also reviewing whether Nvidia met the commitments it made in its 2020 acquisition of Mellanox, an Israeli-American supplier of networking products. Meanwhile, four Chinese government-backed industry associations representing big semiconductor buyers issued a statement calling for firms to rethink their purchases of US computer chips, which they called “no longer safe or reliable.”

• As the US and its allies keep trying to crimp China’s military development by cutting off the country’s access to advanced US chips and related technology, the new Chinese actions suggest Beijing will push back by cutting US chipmakers out of the big, lucrative Chinese market.
• At one level, the US and allied strategy of blocking Chinese access to Western chips makes sense, as China and its bloc are heavily dependent on semiconductors from the US bloc. However, the flipside is that US and allied chipmakers derive lots of income from selling to China. The Chinese actions, therefore, will be threatening to big US technology firms. In response, stock prices for Nvidia and some other big US chipmakers are down sharply so far today.

South Korea: Parliament on Saturday failed to impeach President Yoon for his aborted effort to impose martial law last week, but the vote failed only because most of Yoon’s conservative People Power Party (PPP) lawmakers boycotted it and prevented a quorum. The PPP is now looking for a way to ease Yoon out of office without giving up power to opposition parties. That effort has angered South Korean voters, most of whom reportedly support impeachment.

• It remains to be seen whether the PPP can hold on to power. Prosecutors have reportedly opened a criminal probe into Yoon’s declaration, and they have already arrested former Defense Minister Kim Yong Hyun for advising Yoon to make it.
• South Korea is a key US ally in the Indo-Pacific region, so anything that weakens or distracts its military could conceivably tempt China, Russia, or North Korea to try to take advantage of the situation. As it turns out, South Korean military officers are reportedly livid at being drawn into politics and unsure about the chain of command now that the defense minister’s post is vacant.
• We therefore expect South Korea to face weeks or more of political instability. That, in turn, is likely to weigh on the country’s economy and financial markets. So far this morning, for example, the Korean won (KRW) is 0.4% weaker, trading at 1,431.98 per dollar ($0.0007).

India: The government today said Shaktikanta Das, head of the Reserve Bank of India, has been replaced by Revenue Secretary Sanjay Malhotra, who will serve a three-year term. The move comes after a period in which Das was seen as cutting interest rates too slowly, contributing to a slowdown in Indian economic growth. The move also could reflect political interference in India’s monetary policy by Prime Minister Modi.

Syria: Little more than a week after launching their surprise offensive, the rebels who have been battling the Assad government for 13 years swept into Damascus over the weekend and forced the dictator to flee. The rebels have reportedly taken over state television and are preparing to take control over eastern Syria as well. Assad’s prime minister, who remained in Damascus, has vowed to cooperate with the rebels to hand the government over to them.

• The rebels say they will set up a broad governing council to help transition to a new government, but a key risk now is that the rebels may start fighting among themselves, leading to continued instability.
• The strongest rebel group is Hayat Tahrir al-Sham (HTS), a globally designated terrorist group that was formerly an affiliate of al-Qaeda. That means Syria could end up as a fundamentalist Islamic state hostile to Israel, Saudi Arabia, and other key regional governments.
• In any case, the collapse of the Assad government is a stain on its key allies, Russia and Iran. Their unwillingness or inability to help Assad fend off the rebel offensive likely reflects the distractions and resource constraints they face because of their ongoing wars in Ukraine and Lebanon.
• Finally, the quick resolution to the war may preclude the chance of another major wave of destabilizing refugee flows to other regional countries or Europe. If peace really does come to Syria, leaders throughout Europe are likely to breathe a sigh of relief.

Germany: With the February elections looming, the leader of the leftist Greens has suggested a “green-black” coalition with the center-right Christian Democratic Union (CDU) and its partners to keep the surging far-right Alternative for Germany (AfD) party from forming a government. However, while the CDU and the Greens already govern together in some regions, national CDU leaders say they wouldn’t form a coalition with the Greens because they see the party as being responsible for Germany’s current economic stagnation.

Romania: The Constitutional Court on Friday annulled the first-round presidential election held on November 24 due to concerns that it was tainted by a Russian influence campaign. As a result, the second round of voting scheduled for Sunday was postponed. Rescheduling the votes is now in limbo until a new government is formed. The winner of the annulled first round, pro-Russia nationalist Călin Georgescu, has urged his supporters to rally around closed polling stations, raising the risk of mass protests that could destabilize the country.

• Western intelligence agencies and criminal investigators had turned up evidence of Russian election interference in the US, the European Union, and other countries. The Russian tactics include creating large numbers of fake social media accounts and paying off influencers to artificially amplify support for their favored candidates.
• Romania has now become the first democracy to cancel a national election because of the Russian interference. One key problem is that the cancellation will likely feed further distrust of the government among social groups that were already pre-disposed to support Russia over Western governments.

US Monetary Policy: President-elect Trump on Sunday said he would not try to fire Fed Chair Powell before his term expires in May 2026. The statement appears to be a firmer commitment to Powell after Trump said during the summer that he wouldn’t push him out if he did “the right thing,” presumably referring to cutting interest rates. Trump’s new statement suggests he is satisfied with the Fed’s recent rate cuts. That should help ease investor concerns about volatile changes in monetary policy under the new administration.

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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 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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