by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with a discussion of the setbacks challenging the White House’s AI industrialization push. Next, we turn to the increasing influence of the Treasury Department over the Federal Reserve. Our global coverage provides a deeper look into the escalating tensions between Venezuela and the US, the recent stabilization in China-Japan relations, and the latest developments concerning the AUKUS security alliance. We conclude with our essential roundup of key domestic and international data releases to keep you informed.

White House AI Push: The White House has faced setbacks this week in their efforts to gain greater control over AI adoption. On Tuesday, two key initiatives were halted: a bid to expand federal influence by prioritizing American AI firms for contracts, and an attempt to preempt state-level regulation of AI development. Compounding this, a recent Microsoft report revealed that the pace of AI adoption is significantly slower than anticipated. These setbacks represent the obstacles hindering efforts to integrate AI more broadly into the economy.

• The annual defense policy bill currently moving through Congress includes two key AI-related measures. The first is the GAIN AI Act, which would mandate that US chipmakers prioritize domestic customers over China and other countries subject to US arms embargoes when allocating advanced AI chips. The second measure is a provision that would preempt states from passing their own legislation to regulate AI.
• The inability of these provisions to pass into law is a clear setback for the White House’s efforts to create conditions favoring domestic reindustrialization. The administration had hoped to ensure America’s lead by preventing technology firms from prioritizing sales to rivals over US customers. Concurrently, it aimed to prevent state-level regulation from interfering with the industry’s planned expansion.
• On the corporate side, there are mounting signs that AI industrialization may be losing momentum. A recent report indicated that the slow pace of AI adoption has forced Microsoft to reduce sales quotas for certain AI products after staff missed previous targets. Meanwhile, Morgan Stanley announced that it is exploring options to offload some of its data center debt through off-balance-sheet financing structures.

• While government support for the AI sector is expected to continue, we anticipate significant political resistance from both corporations and voters. This pushback could significantly slow the rate of AI adoption across the economy, creating potential volatility within the high-flying tech sector. Although we believe key AI companies retain substantial growth potential, this increased regulatory uncertainty warrants greater portfolio diversification as a necessary risk management strategy.

More Fed Scrutiny: US Treasury Secretary Scott Bessent is actively trying to reshape the Federal Reserve. On Wednesday, Bessent announced a specific plan to push for a residency requirement for the next regional Fed presidents, a reform he argues will better connect the central bank to local districts. This move, combined with Bessent’s pivotal role in selecting the next Fed chair, signals a broader trend toward increased Treasury influence over the historically independent central bank.

• This desire for greater control taps into a long-standing tension, particularly in the period before the 1951 Fed-Treasury Accord. During this time, the Fed was not technically under the Treasury but was compelled to peg interest rates on government debt to keep financing costs low, effectively ceding control over monetary policy. The formal separation of these functions was established after a public dispute over inflation between then Fed Chair Thomas B. McCabe and President Harry S. Truman.
• Even after achieving formal autonomy from the Treasury, the Federal Reserve remained a target for presidential influence. Notable examples include Lyndon B. Johnson’s clashes with Fed Chair William McChesney Martin Jr. and Richard Nixon’s pressure on Arthur Burns. This dynamic only changed when Paul Volcker’s resolutely hawkish stance finally tamed inflation. His success did not just lower inflation; it vindicated the principle of an independent Fed, making political interference far costlier for future presidents.
• This trend has become more apparent today. The Federal Reserve’s loss of credibility, following the inflation surge brought on by the pandemic, continues to generate market skepticism. While the central bank has made headway in taming inflation from its 2022 peak, major concerns persist that it could prematurely abandon its price stability mandate to prioritize maximum employment.
• These concerns have manifested in the bond market, where investors remain skeptical of the Fed’s commitment to maintaining restrictive policy long enough to fully curb inflation. This skepticism is clearly evident in the 10-Year Treasury yield, which has remained stubbornly elevated, refusing to fall below its 2024 lows despite the Fed having lowered its benchmark interest rate by 100 basis points this year.
• Bond investors have reportedly already informed Treasury Secretary Bessent of their opposition to Kevin Hassett, citing his close ties to the White House as a primary concern. While the impact on the nomination is uncertain, this resistance may bolster the chances of former Fed Governor Kevin Warsh, who is seen as a centrist alternative to Hassett and a compromise to the market’s clear preference for current Fed Governor Christopher Waller.

Maduro Stepping Down: Brazilian billionaire Joesley Batista travelled to Venezuela to privately urge President Nicolás Maduro to step down, which coincided with aggressive US counternarcotics pressure on the regime. While Maduro sought to de-escalate with an offer of resignation in exchange for amnesty, the White House reportedly rejected the terms. We view this escalating US pressure as part of a longer-term strategy aimed at containing China’s expanding influence in South America.

Japan-China Tensions Cool: Japanese Prime Minister Sanae Takaichi has attempted to appease Beijing by reiterating Japan’s conventional stance on Taiwan. This move follows a significant diplomatic rift triggered by Takaichi’s earlier remarks that a Chinese military takeover of Taiwan could constitute a “survival-threatening situation” for Japan. While this repetition of the official position is expected to temporarily cool tensions, the underlying security concerns she raised suggest that the possibility of conflict remains elevated.

AUKUS Confirmed: Australian Prime Minister Anthony Albanese announced the US will maintain its commitment to the AUKUS security pact with the UK. His remarks followed the conclusion of the White House’s six-month review of the agreement’s nuclear powered submarine sale (Pillar 1). The pact’s continuation clears the way for the three nations to proceed with building crucial defense capabilities and enhance interoperability in the Indo-Pacific.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with an analysis of the president’s forthcoming decision for the next Federal Reserve chair. We then examine the growing trend of state-level intervention in the national economy and provide insights on the Tennessee special election as well as the potential alliance between the UK’s Reform and Conservative parties. We conclude with an essential roundup of key domestic and international data releases to keep you informed.

Fed Chair Nominee Delay: The White House has delayed the announcement of the president’s nominee to lead the Federal Reserve until early 2026. This decision follows reports that National Economic Council Director Kevin Hassett was the frontrunner to succeed current Fed Chair Jerome Powell when his term expires next May. The postponement suggests the president has yet to finalize his selection for the central bank’s leadership, as he seeks a candidate who can simultaneously respect market sensibilities while fulfilling his desire for interest rate cuts.

• The White House had previously narrowed the shortlist for the Federal Reserve chair to three officials: former Fed Governor Kevin Warsh, current Fed Governor Christopher Waller, and Kevin Hassett. While Hassett and Warsh have enjoyed particular favor with the president — having both served as key economic advisors — financial markets have generally expressed a preference for Waller to lead the central bank.
• The White House’s delay in naming a nominee is likely a ploy to build political momentum for Kevin Hassett, who faces intense scrutiny over his reputation as a partisan loyalist. This strategic caution is warranted by the president’s failures during his first term, where polarizing candidates like Marvin Goodfriend and Judy Shelton both failed to secure confirmations due to bipartisan concerns over their ideological beliefs.
• While the president successfully confirmed Stephen Miran to the Federal Reserve Board this term, the chairship faces a substantially higher hurdle. The nominee’s role is critical given the central bank’s current internal division. Recent FOMC meeting minutes revealed a sharp debate among officials over whether to prioritize maximum employment or price stability within the dual mandate. As a result, the new chair could potentially serve as the crucial swing vote determining the Fed’s near-term policy direction.
• US equities remain highly focused on monetary policy, particularly as big tech companies pivot from cash-funded to debt-funded capital expenditures. Recent market pessimism regarding a likely Fed pause in December, which keeps borrowing costs high, has resulted in a broad sell-off of tech stocks, driven by worries over the viability of their large-scale financing plans.
• Federal Reserve policy and the specter of political interference have significantly influenced fixed income and international equity investors. Concerns over a potential loss of Fed independence — and the resulting threat of rising inflation — have reduced the appetite for US Treasurys and the dollar. This pivot toward foreign markets is a major factor in the outperformance of international versus domestic equities that has been observed this year, as investors seek refuge from presidential influence over monetary policy.

Government Support: The US government continues to demonstrate a growing willingness to intervene directly in the economy as it works to strengthen domestic supply chains. On Tuesday, officials announced up to $150 million in funding for chip-technology startup xLight. The administration also awarded $800 million to two energy companies to support the development of new nuclear power plants. Together, these actions reinforce the view that equities tied to strategically important industries stand to benefit from sustained government support.

• Investment in xLight is a strategic move and reflects the US goal of fostering a domestic competitor to the advanced lithography equipment produced by the Netherlands’ ASML. These highly specialized machines are crucial for manufacturing the cutting-edge, nanoscale semiconductors that power modern technology. Developing an alternative to an allied nation’s dominant technology underscores the US commitment to supply-chain resilience and technological self-sufficiency.
• The US is strategically investing in energy companies to ensure the scalability of domestic power production. Specifically, funding for nuclear power plants is being prioritized to meet the steep rise in electricity demand driven by the proliferation of data centers. By expanding supply through nuclear reactors, the US aims to satisfy this industrial demand surge and mitigate potential increases in household utility costs.

• Direct US intervention stabilizes businesses but restricts new owners. Nippon Steel, for example, reported a net loss months after acquiring US Steel in June. The firm’s ability to implement profitability boosting changes is limited because the US holds a “golden share,” which provides veto power over key decisions and inhibits swift restructuring.
• We maintain our view that the US economy is gradually shifting away from the laissez-faire model of the past four decades. This trend toward greater state intervention will likely support corporate earnings stability but may reduce incentives for efficiency gains. Consequently, while equity valuations could continue to rise, corporate focus on long-term profitability may wane. Investors should therefore prioritize portfolio diversification to mitigate potential future volatility.

 Tennessee Special Election: Republican Matt Van Epps defeated Democrat Aftyn Behn for a House seat on Tuesday with a 9-point margin (54% to 45%), in a contest viewed as a barometer for 2026. While the victory offers the White House confidence, Behn’s strong performance in a deep-red district indicates a mixed signal. This political backdrop continues to suggest the likelihood of further stimulus measures, such as tariff rebate checks, which should boost near-term economic growth and market performance next year.

Protectionist EU: Brussels is preparing to significantly increase domestic sourcing requirements for companies operating within the bloc. The proposed law, which would require up to 70% of content in certain products (such as cars) to be sourced domestically, could cost companies an estimated 10 billion EUR ($11.6 billion) annually. Though the final draft is pending (expected December 10), this measure strongly signals the EU’s heightened commitment to boosting its own industrial competitiveness and reducing reliance on foreign, particularly Chinese, exports.

Populist Acceptance: In a reflection of the global rise of populism, the UK Reform Party has announced it may agree to an electoral deal with the Conservative Party ahead of the next general election. This move underscores the growing international support for fringe parties, as voters increasingly seek alternative policies focused on cracking down on immigration and combating high inflation.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest example of how building tensions between China and Japan have boosted the risk of conflict between the two countries. We next review several other international and US developments with the potential to affect the financial markets today, including key developments in the US artificial intelligence and air travel industries and a potential risk to the Italian central bank’s independence.

China-Japan: Amid heightened tensions caused by Japanese Prime Minister Takaichi’s recent comments that Tokyo would intervene militarily if China tried to blockade Taiwan, Japan said two Chinese coast guard patrol ships entered Japan’s territorial waters around the disputed Senkaku Islands in the East China Sea today and only left after being chased away by Japanese coast guard vessels.

• The incident is a reminder that the new tensions pose some risk of a potential military conflict between China and Japan.
• Of course, that in turn would risk drawing in the US and perhaps its other allies, all of which would likely cause global economic disruptions and weigh on global financial markets.

US Artificial Intelligence Industry: In the latest examples of circular investment in the AI space, chip giant Nvidia yesterday said it will invest $2 billion in chip design software maker Synopsys, one of its customers. Separately, AI model developer OpenAI said it will help fund startup investment vehicle Thrive Holdings, which was established by Thrive Capital, an investor in OpenAI. The deals are likely to further raise concerns about circular investment flows driving up valuations in the sector and helping create a bubble that will at some point pop.

 US Air Travel Industry: The Transportation Security Administration yesterday said it will start charging a $45 fee to travel on a domestic flight without a Real ID form of identification starting February 1. The fee would have to be paid in advance and would be valid for 10 days, after which another fee would be charged. The purpose of the charge is to cover enhanced biometric screening for those without Real ID. The new rule could potentially cause major disruptions to the airlines if people continue to put off getting a Real ID.

US Cryptocurrency Market: Leading cryptocurrency bitcoin yesterday lost some 6% of its value, marking its worst day since mid-2021 and leaving the asset’s price below $86,000. Other key cryptocurrencies and related stocks have also sharply depreciated in recent weeks. The market rout reflects growing concern about market concentration, technical issues, and reduced enthusiasm among investors. Just as important, the rout appears to have stemmed in large part from rising bond yields in Japan and other developed markets.

 US Commercial Real Estate Market: The Wall Street Journal today carries a useful article showing how commercial properties such as office and apartment buildings are perhaps the only major US asset class that is fairly valued right now. The article examines whether those fair prices would help make the asset class a relatively safe place for investors to hide in the event of a market downturn for other, high-flying assets classes, especially now that the commercial real estate market is starting to show nascent signs of a rebound.

Global Bond Market: After Bank of Japan Governor Ueda yesterday hinted at another hike in his central bank’s benchmark interest rate, bond prices fell not only in Japan but also in key developed countries. The yield on the US’s 10-year Treasury note jumped to 4.092%, while the yield on Germany’s 10-year government bonds jumped to 2.756%. The market action appears to reflect growing concern about government debt burdens. As noted above, rising government bond yields are likely to push down the value of riskier, non-yielding assets.

Eurozone: The November consumer price index was up 2.2% from the same month one year earlier, unexpectedly accelerating from the 2.1% rise in the year to October. That means eurozone inflation has now been above the European Central Bank’s target of 2.0% for three straight months. The acceleration stemmed in part from a jump in German prices and continued high services inflation. The figures will help solidify expectations that the ECB will keep its benchmark interest rate steady at its upcoming December policy meeting.

Italy: Prime Minister Meloni’s right-wing coalition is pushing a parliamentary bill declaring that, “the gold reserves managed and held by the Bank of Italy belong to the Italian people.” The central bank sees its gold reserves — the world’s third-largest at 2,452 tons — as a foundation of its credibility, but observers fear that declaring the gold as the people’s property might tempt the government to force its sale to fund fiscal spending. The move is therefore an example of how some major governments are chipping away at central bank independence.

United Kingdom: The Bank of England today said it will roll back the stringent capital rules it imposed on banks following the Global Financial Crisis. Under the new requirements, the institution’s benchmark ratio of capital to risk-weighted assets will fall to 13% from 14%. The change is expected to encourage British banks to lend more and potentially return more profits to investors in the form of dividends and share buybacks. It is also expected to encourage the ongoing efforts toward a similar cut to bank capital requirements in the US.

India: New Delhi yesterday ordered that all smartphones sold in the country come preloaded with a government-developed cybersecurity app that would give officials access to the phone’s call log, memory, and camera. The rule is likely to generate pushback by US cellphone giants such as Apple and Google, potentially putting them into conflict with the government and risking their access to the Indian market.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today is dominated by Asian and other international developments, as might be expected after the long Thanksgiving holiday weekend in the US. Our coverage includes several important political and economic developments in Japan, as well as some economic and foreign relations stories related to China. We end with a few lower-profile items from the US and beyond that could also affect the financial markets today.

Japanese Politics: On Friday, Prime Minister Takaichi’s Liberal Democratic Party (LDP) and its junior coalition partner, the Japan Innovation Party, gained a majority in the lower house of parliament when three independent lawmakers agreed to vote with the LDP. That gives the ruling coalition 233 of the 465 seats in the Diet, meaning Takaichi won’t need to rely on opposition parties to approve her budget or other legislation.

• Takaichi also continues to score unusually high approval ratings in public opinion polls.
• We believe that Takaichi’s solid political position will be supportive of Japanese stocks going forward and help them reverse their price pullback from November, so long as the current China-Japan dispute doesn’t worsen (see next section).

Japanese Fiscal Policy: Prime Minister Takaichi’s cabinet on Friday approved a supplementary budget equal to about $117 billion for the fiscal year ending March 2026, with the additional spending requiring about $75 billion in new bond issuance. The plan, which reflects the near-term stimulus program laid out by Takaichi the week before, is likely to put additional upward pressure on Japanese interest rates and consumer price inflation in the coming months.

• On a related note, Finance Minister Katayama on Sunday said it is “clear” that the yen’s depreciation over the last few months hasn’t been “based on fundamentals.” Her statement marks the latest expression of the government’s frustration over the currency.
• In contrast to Katayama’s assertion, the weakness in the roughly 6% depreciation in the yen versus the dollar over the last three months and the pullback in Japanese stock prices since the end of October do appear to reflect fundamentals, in the sense that investors are increasingly worried about Prime Minister Takaichi’s willingness to boost debt issuance in order to put into place more stimulative fiscal policy.
• Katayama’s statements raise the specter of impending government action to support the yen. We think that would be even more likely if the US government takes note of the yen’s dropping value and begins to pressure Tokyo to do something about it.

Japanese Monetary Policy: Consistent with concerns that more stimulative fiscal policy will not only boost government debt issuance but also exacerbate price inflation, Bank of Japan chief Ueda hinted in a speech today that he is prepared to hike the central bank’s benchmark interest rate at the next policy meeting this month. Futures trading now suggests there is about a 75% chance that the BOJ will hike rates at the meeting. In response, the yen has appreciated about 0.6% versus the dollar so far today, while Japanese stock and bond prices have retreated.

China-Japan: Diplomatic sources say China has now frozen all youth exchange programs with Japan, marking the latest in a long string of retaliatory measures for Japanese Prime Minister Takaichi’s statement earlier in November that Tokyo would intervene militarily if Beijing tried to take over Taiwan by force. China still hasn’t taken its most disruptive possible steps, such as cutting Japan off from its rare-earth magnets. Nevertheless, the continuing dispute raises risks for the Japanese economy and financial markets if it worsens.

Taiwan-China: Last Wednesday, President Lai touched off an international and domestic political storm with a statement that China is prepping for “complete unification with Taiwan by force by 2027.” Lai’s office later clarified that he meant Beijing is preparing for such an option, but the statement still brought a strong rebuke from China and political attacks by opposition parties back home. The row marks the latest example of Lai’s aggressive rhetoric against China, which likely raises the risk of a dangerous military conflict across the Taiwan Strait.

China: The government’s official purchasing managers’ index for manufacturing rose to a seasonally adjusted 49.2 in November, meeting expectations and improving from 49.0 in October. Still, that marked the eighth straight month in which the index was below the 50.0 level that indicates expansion. Moreover, the November PMI for services merely rose to 50.1 from 50.0 in the previous month, suggesting that sector is barely growing. The data suggests that China’s economy continues to struggle against factors such as trade curbs and excess capacity.

United States-Venezuela: In a Thanksgiving call to US service members, President Trump warned that his administration’s military campaign against Venezuelan drug traffickers would “very soon” expand from attacking drug boats to hitting land targets. With the big US military force that has been assembled in the region, the administration could easily launch such attacks. However, it’s less clear that it can achieve its goal of ousting President Maduro in the near term or avoid anger among the isolationists in Trump’s political base.

• In a more recent development, President Trump on Saturday issued a warning to airlines and private pilots that they should consider Venezuelan airspace “closed.”
• The warning could be just another tactic to heap pressure on President Maduro to resign, but it could also be aimed at laying the groundwork for US air attacks on Venezuelan ground targets.

US Labor Market: In response to last week’s shooting of two national guard members as they patrolled in Washington, DC, President Trump said he’ll ban migration from less-developed nations and push for “reverse migration,” even deporting legal migrants. By late Friday, officials had already begun to follow through on those goals.

• From an economic perspective, a further tightening of immigration policy will likely cut the number of available non-native workers even as firms slow their hiring. That could boost employment opportunities for native workers, at least if they have required skills.
• In turn, that could help keep the unemployment rate low, potentially encouraging the Fed to go slower in cutting interest rates.

European Artificial Intelligence: Since US and Chinese firms are so prominent in the AI space, it’s tempting to think that Europe isn’t a player at all. However, the Financial Times today has a useful article on Germany’s privately held Black Forest, which has quickly become a big player in the exploding market for image-editing AI models. The firm’s valuation has reportedly tripled in just the last year. The article suggests that European AI firms such as Black Forest and France’s Mistral could eventually be attractive opportunities when they have their IPO.

Note: The next and final Asset Allocation Bi-Weekly for 2025 will be published next Monday, December 8.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a sudden shift in the US’s proposed new peace deal to end the war in Ukraine. We next review several other international and US developments with the potential to affect the financial markets today, including a statement by another influential Federal Reserve policymaker supporting a further interest rate cut in December and new Chinese economic retaliation against Japan for Prime Minister Takaichi’s recent comments suggesting Japan would intervene militarily against a Chinese blockade of Taiwan.

United States-Russia-Ukraine: Press reports last night said US and Ukrainian negotiators have reached a tentative 19-point peace deal to end Russia’s invasion of Ukraine, intending it to replace last week’s 28-point, Russian-inspired proposal. The reports say several points from the original proposal have been left for President Trump and Ukrainian President Zelensky to hash out. Nevertheless, the revised plan is much more palatable to the Ukrainians, confirming our view that the original plan was likely a non-starter.

• Now, however, the question is whether the Russians will find the revised proposal acceptable. The Financial Times today reports that Russian Foreign Minister Lavrov has already complained that the revised plan overrides “key understandings” that President Putin believed that he had reached with President Trump.
• If the Russians do reject the revised plan, as they have rejected previous proposals that didn’t meet their maximalist goals, it seems likely that the war will continue.

United States-European Union: US Commerce Secretary Lutnick said on a visit to Brussels yesterday that the EU must relax its digital commerce regulations before the US would consider lowering its 50% import tariffs on EU steel and aluminum. The statement is consistent with the US administration’s longstanding effort to increase business for its allies in the technology sector.

United States-Venezuela: President Trump yesterday reportedly told his advisors that he is planning to talk directly with Venezuelan President Maduro, even as the State Department designated Maduro as the head of a terrorist organization, and even as the US continues its big military buildup off Venezuela’s coast. Trump’s statement suggests that any attack on Venezuela to force Maduro from power isn’t necessarily imminent.

US Monetary Policy: San Francisco FRB President Daly yesterday said she supports cutting the benchmark fed funds interest rate again at the Fed’s policy meeting early next month, citing her fear that weakened labor demand is more likely than worsening price inflation. Daly doesn’t sit on the policymaking committee this year, but she usually reflects the views of Chair Powell. Her statement, therefore, will likely help raise expectations for a new rate cut in December. Per futures trading, investors now see an 85% chance of a rate cut at the meeting.

US Fiscal Policy: Faced with White House plans to extend the Affordable Care Act’s enhanced tax credits for two years in return for tighter eligibility rules, which we flagged in our Comment yesterday, House Speaker Johnson has warned the administration that most Republicans in his chamber wouldn’t support the move. Even though the White House wants to avoid spiking health insurance premiums once the current subsidies expire at the end of the year, Johnson’s warning shows that extending the subsidies will be a political challenge.

US Artificial Intelligence Industry: OpenAI CEO Sam Altman has reportedly told company staffers to brace for “rough vibes” and “temporary economic headwinds” as the company suddenly faces an intense challenge from Google’s latest AI program, Gemini 3. Analysts, users, and industry insiders say Gemini 3’s superior benchmarks, integration into Google’s ecosystem, and cost efficiencies are poised to help it grab market share from OpenAI’s Chat-GPT, especially after the underwhelming August release of GPT-5.

US Travel Industry: In its annual pre-Thanksgiving projections, AAA said 81.8 million US residents will travel at least 50 miles from home from November 25 to December 1, up from just over 80.0 million last year. According to AAA’s forecast, 73 million people, or about 90% of Thanksgiving travelers, are expected to travel by car. The good growth in travelers is a reflection of continued economic expansion, which we expect to keep supporting stock values in 2026.

China-Japan: Reports today say the Chinese government has told the country’s airlines to cut their flights to Japan through March 2026. Beijing had already warned its citizens against travel to Japan and taken other measures to retaliate for Prime Minister Takaichi’s recent comments suggesting Japan would intervene militarily against a Chinese effort to blockade Taiwan. The prolonged flight cuts are being taken as a signal that Beijing is bracing for a protracted spat between the two nations, which could potentially weigh on Japan’s economy and stocks.

Global Demographics: According to new research by the European Bank for Reconstruction and Development (EBRD), falling birthrates and shrinking workforces will reduce per-capita gross domestic product in Eastern Europe and the Caucasus by about 0.4% per year between 2025 and 2050. The expected hit to per-capita GDP is expected to be even greater in South Korea, at 1.7%, Italy and Spain, at 0.7%, and 0.6% in Japan and China.

• The EBRD research echoes a study earlier this year by the Organization for Economic Cooperation and Development.
• Both studies show how low birth rates and population aging are putting upward pressure on government budget deficits and debt. However, the studies suggest that politically powerful older people are resisting efforts to tackle the fiscal fallout, such as raising retirement ages, cutting social spending, and allowing more migration.
• As a result, the demographic pressures are likely to keep pushing government debt loads higher in key developed and emerging countries alike, raising the risk of eventual debt crises.

The Daily Comment will go on hiatus beginning Wednesday, November 26, and will return on Monday, December 1. Confluence wishes everyone a Happy Thanksgiving!

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a report confirming our view that the US administration will try to find fallback options even if the Supreme Court eventually rules against its broad use of import tariffs. We next review several other international and US developments with the potential to affect the financial markets today, including important new articles on the growing use of debt and creative financing in the artificial intelligence boom and the latest on the new peace proposal being pushed by the US to end the war in Ukraine.

US Tariff Policy: Reports at the weekend said the Department of Commerce and the Office of the US Trade Representative are quietly working on fallback options in case the Supreme Court invalidates the administration’s broad tariffs. Such a negative decision now seems like a distinct possibility, given that the judges sounded skeptical of the administration’s argument in favor of its tough trade policies at the court’s recent hearing on the matter. As we’ve argued previously, we think the administration is committed to its tariff policies no matter what the court rules.

• The administration’s possible options include switching the legal basis of its tariffs to Sections 122 or 301 of the Trade Act.
• Those provisions are slower and less flexible than the emergency provisions currently relied on, but we think the administration would use them aggressively if necessary as it seeks to rebalance US trade.

US Healthcare Policy: As President Trump works to defend himself against political attacks over cost-of-living issues, the White House is reportedly preparing to unveil a health care plan that would extend the Affordable Care Act’s enhanced tax credits for two years in exchange for new eligibility limits and other changes. Extending the tax credits to avoid spiking health insurance premiums was a key demand of Democrats in the recent budget standoff, so they are likely to support it. However, it’s not clear whether they would support the other changes.

US Artificial Intelligence Industry: A report in the Wall Street Journal yesterday said AI “hyperscalers” Amazon, Alphabet, Meta, and Oracle have issued a total of $90 billion in investment-grade bonds just since September 1, and firms such as TeraWulf and Cipher Mining have issued at least $7 billion in junk bonds. The figures show how tech firms have suddenly turned strongly toward debt financing to build out their AI infrastructure, raising investor concerns about potential defaults if the AI boom suddenly goes into reverse.

• Separately, the Journal today also has an article that takes a deep dive into the creative financing that Meta has used for its new $27-billion data center in Louisiana.
• Coupled with the increasing use of debt for AI infrastructure, the newly revealed signs of creative financing will likely feed into investors’ growing concerns about the AI boom turning into an unsustainable bubble. However, it’s notoriously difficult to predict when a boom or a bubble will run out of steam and go sharply into reverse. Indeed, we don’t see clear signs of such a turn being imminent at the moment.

US Motion Picture Industry: Sources say Wicked: For Good, the second part of the popular Broadway show’s film adaptation, earned a record-smashing $150 million in North America and $226 million globally during its opening weekend. As usual, the strong opening for the Universal Pictures movie is likely to revive hopes for a revival of the US theater and film-studio industries, and perhaps even give a boost today to the stock of Comcast (which owns Universal). At any rate, it provides a must-see movie for this week’s Thanksgiving holiday weekend!

United States-Russia-Ukraine: Secretary of State Rubio said on Saturday that the 28-point peace plan that the administration forwarded to Ukraine last week was actually drafted by the Russians, and the US merely passed it on to Ukraine in its role as an intermediary. The statement went far toward explaining why the plan was so tilted in favor of Russia. However, Rubio later issued a contradictory statement that the US had authored the plan.

• The back-and-forth on the plan suggests it has little chance of being implemented as drafted.
• White House reports today say talks with European and Ukrainian officials over the weekend were “constructive” and have led to some modifications of the proposal. However, no details have been released as of this writing.

China-Russia: New research by the Bank of Finland shows that the average price of Chinese export-controlled military products sold to Russia rose by an average of 87% from 2021 to 2024, while the price of similar products sold to other countries rose only 9%. A Western sanctions official interviewed about the report by the Financial Times said it would be better if Russian defense firms were totally cut off from their suppliers, but Chinese companies “ripping them off” is perhaps the next best thing, as it limits what the Russians can buy.

Libya: A delegation from the Tripoli-based Libyan government has been in Washington this week to drum up interest in Libya’s first oil exploration licenses in 18 years. Oil giants Shell, Chevron, TotalEnergies, Eni, and Repsol are all pre-qualified to bid on the tracts, while Exxon signed a deal in August to explore for gas off Libya’s coast. The major oil firms’ interest reflects recent analyses suggesting global oil demand will remain robust far longer than previously predicted.

European Union-China: Facing a wave of Chinese imports and investment into the EU, the European Commission is reportedly planning to tighten its foreign investment rules to ensure the new capital spending doesn’t give Chinese firms an advantage in the bloc. The rules will seek to ensure that new Chinese investment bolsters the EU’s overall supply chains and provides broad benefits for EU workers. We see the likely new rules as more evidence of global fracturing, which will produce less efficient supply chains, higher price inflation, and higher interest rates.

Netherlands-Russia: Unidentified drone sightings yesterday prompted officials to shut down Eindhoven airport in southern Netherlands, marking the latest incident in which presumed Russian provocations shut down a major European airport. On Friday, the Dutch military opened fire on unidentified drones over its air force base at Volkel, although no drones were brought down. As we have noted before, the likely Russian provocations probably aim to unsettle NATO countries but run the risk of sparking a kinetic conflict at some point in the future.

United Kingdom: Chancellor of the Exchequer Reeves will release her proposed budget for the coming year on Wednesday, raising the risk of volatility in British asset prices over the next few days. In recent weeks, many details of the proposed budget have come out, including plans for broad new income tax hikes, but market reaction forced the government to retract that measure. The incident illustrates how Reeves is struggling to get control over the UK’s enormous borrowing without imposing economically disruptive tax hikes or spending cuts.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the US is now slowing down its plans to impose big, new tariffs on foreign semiconductors to avoid spoiling the US-China trade truce. We next review several other international and US developments that could affect the financial markets today, including a new speech by European Central Bank President Lagarde on what’s causing Europe’s slow economic growth and a hawkish forecast of Federal Reserve interest-rate cuts by the head of Vanguard’s fixed-income investing.

United States-China: According to Reuters, several officials have said the administration is slow walking the 100% tariffs on foreign semiconductor imports that it announced in August, largely to avoid provoking China into another clampdown on its critical minerals exports. The officials say the administration could still announce the tariffs at any time, but for now, the new imposts are on hold.

• President Trump said in August that the US would impose a tariff of about 100% on imports of semiconductors but exempted companies that are manufacturing in the US or have committed to do so.
• The decision to put the tariffs on ice to avoid another cutoff of Chinese critical minerals illustrates how the trade war earlier this year revealed the immense leverage China has gained from its near monopoly on key minerals and products made from them.
• In our view, that realization has helped convince many US leaders that China’s comprehensive power — military, diplomatic, economic, and technological — has now increased to the point where it is essentially on par with that of the US.
• We think that has forced the US to become more circumspect in its competition with China, possibly heralding the end of the long era of sole US hegemony. On the other hand, the more-or-less equal balance of power could force a coexistence deal that would reduce US-China tensions and potentially give a boost to US and Chinese stocks.

United States-Russia-European Union-Ukraine: As flagged in our Comment yesterday, the US’s new proposed peace deal to end the war in Ukraine is generating intense resistance from leaders in Europe. The Ukrainian government has been more circumspect, but after text of the proposal was leaked yesterday, the major concessions it requires from Kyiv would suggest there is little chance that President Zelensky’s government would approve it. Even though financial markets were buoyed by news of the plan, we now suspect it will be another false dawn.

United States-Argentina: According to reports late yesterday, major US banks including JPMorgan Chase, Bank of America, and Citigroup have shelved an administration-driven plan to provide a $20 billion bailout to the Argentine government. Instead, the banks will just help Buenos Aires handle a $4-billion debt payment in January. The US’s separate currency swap of $20 billion for Argentina remains in place, but since President Milei’s party scored a decisive victory in Argentina’s recent Congressional elections, the private funding is no longer needed.

United States-Brazil: President Trump yesterday lifted a 40% import tariff against certain Brazilian food products, including coffee, beef, and nuts, citing “initial progress” in trade negotiations with the country’s leftist government. The move comes less than a week after the president cut import tariffs on a wide range of food imports in an effort to bring down prices and diffuse criticism that he hasn’t done enough to reduce the cost of living. The move should be beneficial to a range of Brazilian food exporters.

US Monetary Policy: Sara Devereux, the chief of Vanguard’s $2.8-trillion fixed-income portfolio, warned in an interview with the Financial Times earlier today that the Fed probably won’t cut US interest rates as aggressively as investors expect over the coming year. Devereux said she expects only one or two more 25-basis-point cuts from the Fed over the next year, while investors generally expect four or five.

• Devereux’s forecast largely reflects her expectation from continued good economic growth in the US, driven by AI investment.
• In contrast, we continue to believe that strong political pressure and the replacement of current Fed officials with more dovish policymakers argues for faster rate cuts in 2026 than in 2025.

Eurozone: In a scathing speech today, ECB President Lagarde accused European leaders of being too wedded to an export-driven economic model at a time of global fracturing with more competitive exporters elsewhere. Instead, Lagarde urged European officials to focus on boosting the bloc’s domestic economy, which she said has plenty of latent strengths and could grow faster with fewer hurdles to internal trade.

• Coupled with former ECB President Draghi’s big report last year, which tied Europe’s lethargic economy largely to investment hurdles, Lagarde’s major new speech adds to the expanding body of major analyses aimed at sparking faster growth in the region. However, her focus on easing domestic trade suggests there still isn’t a strong consensus on what’s causing the problem.
• As we’ve noted before, the geopolitical threat from Russia over the last three years has spurred stronger defense spending, which has helped encourage looser fiscal policy more generally and even some modest steps toward deregulation. Combined with the decline in the value of the dollar, that has given a boost to European stocks so far this year.
• All the same, we’re still looking for deeper, more fundamental economic reforms before we can be certain that Europe is on the path to faster growth and better stock performance over the longer term.

United Kingdom: The November GfK consumer confidence index dropped to -19.0, worse than both the expected reading of -18.0 and the October reading of -17.0. The figure was also far worse than the 2014-2019 average of -5.6. The reading suggests British consumers are worried about their prospects amid continued high inflation and expectations that the Labour government of Prime Minister Starmer is about to announce a new round of tax hikes.

Japan: As the government continues to reopen nuclear power plants shut down after the Fukushima disaster of 2011, today it approved the restart of Tokyo Electric Power’s enormous Kashiwazaki-Kariwa nuclear plant in Niigata prefecture. The plant is the world’s largest facility for generating electricity from nuclear power. Japan has now approved restarting 14 of the 54 nuclear generating stations shut down after Fukushima, with four more awaiting approval by local governments and eight awaiting national regulatory approval.

• Japan’s re-embrace of stable, affordable nuclear power is increasingly giving it an economic advantage over Europe. Coupled with the weaker dollar and the likelihood of more stimulative economic policies under the new prime minister, that helps explain the good returns from Japanese stocks over the last year or more. The re-embrace of nuclear energy is probably also a positive for uranium and uranium miners.
• Regarding Prime Minister Takaichi’s economic program, her government today unveiled a massive fiscal stimulus package worth the equivalent of $135.4 billion, consisting largely of tax cuts, increased public investment in national security and infrastructure, cash handouts to parents, and gas and electricity subsidies for consumers. The package isn’t quite as big as some bond investors feared, so Japanese government bonds have rallied modestly so far today, driving the yield on 10-year JGBs down to 1.788%.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words on Nvidia’s third-quarter earnings release and its broader implications. We next review several other international and US developments that could affect the financial markets today, including the minutes from the Federal Reserve’s October policy meeting and more details on the administration’s new plan to end the war in Ukraine.

US Artificial Intelligence Sector: After market close yesterday, Nvidia said its third-quarter revenues and profits reached new record highs, amid what CEO Jensen Huang called “off the charts” demand for its advanced Blackwell artificial-intelligence chips. Revenues were up 62% year-over-year, while earnings were up 65%, in both cases beating expectations. Looking forward, the results could well give a new rush of momentum to Nvidia’s stock price and the broader AI sector.

• Separately, the Commerce Department late yesterday approved the sale of up to 70,000 advanced AI chips to two firms based in the United Arab Emirates and Saudi Arabia, reversing a decision earlier this year that rejected the application over security concerns.
• The earlier security concerns focused on the risk that the state-owned firms receiving the chips could give China or other adversarial countries access to them, potentially undermining the US lead in the technology.
• In our view, the decision to allow the sale illustrates how the administration is now clearly favoring the so-called “tech bros” element of President Trump’s political coalition over its “China hawk” element.

US Fiscal Policy: As President Trump continues to push his idea of using new tariff revenues to provide a $2,000 “dividend” payment to low- and moderate-income households, reports today say legislators are politely pushing back on the idea. One key theme of the reporting is that Republicans in the Senate and House prefer to use the new revenues to lower the US’s yawning budget deficit. The Republicans’ willingness to push back against the White House could also reflect a subtle shift of power toward Congress after the recent Epstein files controversy.

US Monetary Policy: Minutes released yesterday from the Fed’s October policy meeting showed that the policymakers were deeply divided and expressed “strongly differing views” on the need to cut interest rates for a third time this year at the meeting in December. Recent public statements by policymakers had already made it clear that there is disagreement on the policy committee about how quickly to cut rates. However, the minutes suggest the disagreement is even deeper than previously known.

• The deep divisions on the policy committee suggest that if the White House is able to replace Chair Powell and perhaps other committee members with more dovish officials next year, as expected, it could dramatically shift the Fed’s policy stance.
• Futures trading currently suggests there is more than a 70% chance that the officials will keep the benchmark fed funds rate steady at a range of 3.75% to 4.00% at the meeting in December, despite administration pressure for another rate cut.

US Labor Market: The Bureau of Labor Statistics yesterday said it won’t produce a monthly employment report for October, when the federal government was shut down because of the Congressional budget dispute. However, the agency said the November report will be released on December 16 — 11 days later than normal — and it will include nonfarm payroll data for October.

• The news means that the Federal Reserve officials meeting to update their monetary policy on December 9-10 will have no employment data for either October or November to work with.
• As shown in our Economic Releases section below, the BLS today released its monthly labor market report for September.

United States-Russia-Ukraine: Reports yesterday said the Trump administration has been in direct talks with Russia about a new 28-point plan to end the war in Ukraine. Russian officials are reportedly delighted with the proposal because it addresses their key concerns. The plan would apparently require Ukraine to make unpalatable concessions, but White House officials believe President Zelensky’s weakened political position would prevent him from resisting. The US officials have given some details to allies and believe it could be publicized by month’s end.

• The plan would reportedly require Ukraine to cede the remainder of its eastern Donbas region — including land currently under Kyiv’s control — and cut the size of its armed forces by half. The plan also calls for Ukraine to abandon key categories of weaponry and would include the rollback of US military aid that has been vital to its defense. In return, the US would offer Europe and Ukraine security guarantees. Russia would be required to stop its current aggression against Ukraine.
• The details so far imply the plan is lopsided in Russia’s favor and would leave Ukraine open to renewed Russian aggression in the future. That suggests it will be resisted by the US’s allies in Europe and by Ukraine itself. Indeed, reports this morning say European officials are already pushing back against the plan.
• News of the plan helped give a boost to global stocks yesterday, but the likely resistance from Europe and Ukraine suggests it is far from a done deal.
• Even if the plan is put into place, it appears unlikely to diffuse Russia’s political and military aims in Eastern Europe. We therefore believe that European defense firms will continue to benefit from rearmament efforts on the Continent, giving a boost to European defense stocks.

United States-Saudi Arabia: President Trump and Crown Prince Muhammad bin Salman yesterday reached a deal in which US rare-earths miner MP Materials will partner with the Department of Defense and Saudi Arabia’s state-owned mining company to build a rare-earth processing facility in the kingdom. The deal reflects the continuing frenzy for Western rare-earth investment to help reduce vulnerabilities from relying on China for supplies.

China-Japan: In further retaliation for Japanese Prime Minister Takaichi’s recent statement that a Chinese blockade of Taiwan would require Japan to intervene militarily, Beijing has now reinstituted its ban on Japanese seafood imports, suspended talks on resuming Japanese beef imports, and threatened more countermeasures. As we have noted before, the key risk in the escalating crisis is that Beijing could reimpose a ban on exporting Chinese critical minerals to Japan, a move that could severely crimp Japan’s auto production and other industries.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a preview of Nvidia’s key earnings release after market close today, as well as some related news involving the company and infrastructure investor Brookfield. We next review several other international and US developments that could affect the financial markets today, including a move to ease Dutch-Chinese tensions and a new European Union body to shore up the bloc’s access to critical minerals.

US Artificial Intelligence Boom: AI chip giant Nvidia will release its quarterly earnings after market close today, setting the stage for either continued investor enthusiasm for the sector or, potentially, a major selloff if the results are disappointing. Given that Nvidia accounts for such a large share of US stock market capitalization — about 10% of the NASDAQ 100 — a significant upside or downside surprise would likely have a major impact on the broader stock market in the coming days.

• Separately, reports say Canadian investment giant Brookfield Asset Management is raising $10 billion for a new fund dedicated to AI infrastructure, with Nvidia and sovereign-wealth fund Kuwait Investment Authority as founding partners. Utilizing additional co-investments and debt, Brookfield plans to build and acquire as much as $100 billion worth of AI infrastructure
• It isn’t clear how much Nvidia is investing in Brookfield’s new fund. Nevertheless, the news could exacerbate growing investor concerns about circular investments in the AI space, where major players essentially invest in their customers to help fund their own sales.

US Technology Industry: A federal judge yesterday ruled that tech giant Meta didn’t break antitrust laws by illegally stifling competition through its purchases of Instagram and WhatsApp. The ruling means the company won’t have to divest the two apps, which should be positive for the broader tech sector.

Netherlands-China: The Dutch government today overturned its recent seizure of Nexperia, the Netherlands-based manufacturer of automotive semiconductors owned by Chinese company Wingtech Technology. Officials said the return of control to Wingtech was an act of “goodwill” toward Beijing, which had retaliated by banning the export of chips from Nexperia’s operations in China. The decision should be a relief to major automakers, which had warned of major chip shortages that could disrupt global car production, weigh on sales, and hurt profits.

China: In a little noticed report at the end of October, the Chinese government mandated that on-line influencers must possess recognized degrees or demonstrate relevant training before discussing professional topics such as law or medicine. The regulation is designed to stamp out misinformation, but it has sparked opposition over concerns about freedom of speech. In any case, given global concerns about misinformation undermining everything from politics to health, a key question is whether the rule might spark copycat regulations in other countries.

Singapore: At a Bloomberg event today, the chief of Singapore’s sovereign wealth fund, Temasek, said the dollar’s depreciation this year has hurt its returns from US assets compared with foreign assets, which will likely prompt the fund to increase its non-US allocations. The statement is consistent with our view that the falling dollar is making it more attractive to invest in foreign stocks than in US stocks. Indeed, we have recently increased our exposure to foreign stocks in our Confluence Asset Allocation strategies.

European Union: Stéphane Séjourné, the EU’s executive vice president for industrial strategy, said today that the bloc will set up a central body to coordinate the purchasing and stockpiling of critical minerals. One key aim of the new organization will be to stop the US from buying up and hoarding the assets. The plan is consistent with our view that amid today’s geopolitical tensions and economic issues, countries and companies will have greater incentives to hoard key resources. In turn, we think that will buoy commodity prices going forward.

United States-Venezuela: President Trump has reportedly approved a CIA plan for covert measures inside Venezuela to pave the way for a potential US military attack on the country. At the same time, the president has authorized a new round of back-channel negotiations that at one point resulted in President Maduro offering to step down after a delay of a couple of years, a proposal the White House rejected. If either strategic prong is successful, the result could ultimately mean a resurgence of Venezuelan oil production and exports.

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