by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is eagerly anticipating the Federal Reserve’s upcoming rate decision. In sports news, Bayern Munich set a new Champions League record for most goals by a single team with a nine-goal victory over Dinamo Zagreb. Today’s Comment will explore our thoughts on the Fed’s anticipated rate cut later today, the potential implications of the ongoing dockworker labor dispute, and the Brazilian central bank’s widely expected U-turn. Finally, we’ll round out our report with a review of the latest economic data.

Inflation to Unemployment: While the market is focused on the size of today’s rate cut, it should also pay close attention to the summary of economic projections, which will outline the future path of interest rates.

• Market expectations for a significant interest rate cut have surged, with the probability of a 50 bps reduction rising from 34% to over 60% since last Tuesday. This shift has been largely driven by former New York Fed President William Dudley’s editorial, in which he expressed optimism that the Fed will take bold action at its next meeting to address labor market challenges. Prior to the July meeting, he pushed the central bank to cut rates, and although the FOMC opted against it, the minutes of the meeting revealed that some members would have supported such a move.
• The decision to implement rate cuts now, rather than at a later time, reflects less of the central bank’s stance on inflation and more of its growing concern about the cooling labor market. These two economic indicators have been moving in opposite directions. While core inflation has decreased from 3.9% to 3.2% since the start of the year, the unemployment rate has risen from 3.7% to 4.2%. Consequently, for the first time since 2021, the unemployment rate now exceeds the inflation rate, reinforcing the view that its mandate of price stability and maximum unemployment is balanced.

• The Federal Reserve is expected to take a nuanced approach at its upcoming meeting, as plans to implement its first rate cut with the release of its eagerly anticipated economic projections. A 50 bps rate cut today would likely prompt the Fed to express a cautious outlook for future rate reductions. Conversely, a 25 bps cut could encourage officials to signal a willingness to take more aggressive action if needed in the future. However, market sentiment could deteriorate if investors perceive that the Fed is not committed to cutting rates to safeguard the economy.

Labor Strikes Back: Just weeks before the election, the dockworkers’ unions are ready to strike in an effort to secure a better labor contract.

• The White House has announced that it will not invoke federal legislation to prevent a potential strike by dockworkers on the East and Gulf Coasts if a labor agreement is not reached by the October 1 deadline. While the US president has the authority to intervene in labor disputes deemed a threat to national security, the administration has chosen not to exercise that power in this instance. Given that over half of US-bound cargo passes through these ports, a strike could significantly disrupt supply chains nationwide and could become a political issue.
• The decision not to intervene in the labor dispute indicates that the administration is keen to avoid actions that could be perceived as anti-union. Since the pandemic, support for labor unions has increased as a tight labor market has compelled employers to offer higher wages to attract and retain workers. This has bolstered the bargaining power of unions as they push for greater concessions. The dockworkers’ labor dispute appears to have reached an impasse over wage increases, with union leaders demanding a 77% pay raise, and a ban on automated cranes, gates, and container movements.

• A strike could disrupt supply chains and raise prices, but a more critical long-term concern is the potential slowdown in technological adoption. After the pandemic, workers initially gained a larger share of company earnings, but their shares sharply declined as the economy reopened. While increased immigration played a role, the rise of AI technology also contributed. The recent dispute suggests that technology could become an increasingly political issue in the coming years, especially if firms use it to offset rising labor costs.

Brazil Turns Hawkish: After being one of the first major economies to implement rate cuts, the central bank of Brazil appears to be on track to undo some of those measures later today.

• Brazil’s central bank is expected to raise its benchmark policy rate by 25 basis points to 10.75% on Wednesday. The decision comes as the central bank looks to establish its independence after previous criticism from President Luiz Lula da Silva. Since taking office, Lula has increased public spending, particularly on social programs, raising concerns that the resulting debt could fuel inflation. His chosen successor to take over the central bank, Gabriel Galípolo, has also adopted a hawkish stance, pledging to take whatever steps are necessary to curb inflation.
• The decision to tighten monetary policy reflects the Brazilian economy’s signs of overheating. In the second quarter, the economy expanded at an annualized rate of 5.9% — the fastest pace since late 2020. This robust growth coincides with a persistently tight labor market, where the unemployment rate remains near 20-year lows. The combination of strong growth and low unemployment has likely contributed to a rise in overall inflation, which is currently above the central bank’s target rate of 3%, and risks exceeding the tolerance range of 4.5%.

• The central bank’s anticipated rate hike should serve as a warning about the dangers of excessive interest rate cuts, particularly if the country fails to rein in its spending. While we do not foresee other central banks adopting a more hawkish stance in the near term, a resurgence of inflation could force central bankers to pause and reverse earlier rate cuts to contain price pressures. Should the central bank of Brazil raise interest rates as expected, the country’s currency is likely to appreciate relative to its peers.

In Other News: Republican presidential candidate Donald Trump has pledged to restore SALT if elected to a second term, aiming to appeal to high-income suburban voters. Meanwhile, Nippon Steel’s merger plans gained momentum as the Biden administration extended its bid for US Steel, despite delays due to national security concerns and bipartisan opposition. In another development, Google successfully appealed its 1.5 billion EUR ($1.67 billion) competition fine, signaling that big tech may be able to fend off further regulatory crackdowns.

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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 China has purportedly found a big, new deposit of rare earth minerals, possibly further cementing its lock on this key resource as the world electrifies. We next review several other international and US developments with the potential to affect the financial markets today, including a proposed European Commission cabinet that could lead the European Union toward adopting French-style economic policy and a few words on the fallout from the second assassination attempt against former US President Trump.

China: A Chinese mining firm told an international conference last week that it has discovered a 5-million-ton deposit of rare earth minerals in the southwestern Sichuan province. If confirmed, the find would increase China’s recognized reserves of rare earths by approximately 5%.

• Rare earths are a critical class of minerals for the electrified economy of the future, and China and its geopolitical bloc already account for the bulk of the world’s reserves, production, and refining.
• The new reserves would further boost China’s control over the key minerals, increasing the risk that Beijing could weaponize the minerals. Indeed, Beijing has already started to clamp down on exports of the minerals to the US and its allies.

United States-Japan-China: Washington and Tokyo are reportedly close to a deal that would cut exports of advanced semiconductor manufacturing equipment from Japan to China. Washington has also pressured The Hague to cut China’s access to Dutch exports of such equipment. The US demands aim to limit China’s economic and military development, but reports say Japan is especially worried that China could retaliate for such a deal by cutting off exports of key minerals, as discussed above.

Japan: The yen (JPY) yesterday appreciated to 139.56 per dollar ($0.0717), marking a 13.5% rise in just the last two months and leaving it at its highest level in more than a year. The appreciation largely expects rising expectations for an aggressive 0.50% interest-rate cut by the Federal Reserve on Wednesday.

European Union: European Commission President von der Leyen today revealed her nominees for the commissioners who will fill out her cabinet. In the EU system, each member country gets to appoint a commissioner, and the commission president gets to decide what portfolio each will get, subject to approval by the European Parliament. In her nominating statement, von der Leyen vowed her commission would focus on economic competitiveness and defense, while de-emphasizing the climate policies that were prevalent in her first term.

• France’s nominee, Stéphane Séjourné, who is a close ally of President Macron, will lead EU industrial strategy, with a charge to focus on investment and innovation. Under the last-minute deal between Macron and von der Leyen that we noted yesterday, Macron will now have increased influence over EU economic policy, while von der Leyen will be rid of former French Commissioner Thierry Breton, a bitter political rival.
• Spain’s Teresa Ribera, the commission’s most senior Socialist, will be in charge of EU competition policy, with a charge to modernize it and develop a new state-aid policy.
• Slovakia’s Maroš Šefčovič will head up the EU’s foreign trade policy.
• Lithuania’s Andrius Kubilius will have a newly created post for EU defense policy.

United Kingdom-European Union: New modeling by an Aston University economist shows that British trade with the EU has plummeted after Brexit and the UK-EU Trade and Cooperation Agreement that came into force in 2021. According to the study, UK exports to the EU are now 17% lower than they would have been without Brexit, while imports from the EU are 23% lower. Prime Minister Starmer has ruled out rejoining the single market or forming a customs union with the EU, but the report will likely put new pressure on him to improve UK-EU trade.

United Kingdom: As British businesses increasingly worry that the government will impose new taxes to close its big fiscal deficit, Prime Minister Starmer yesterday insisted next month’s budget will include no provisions that would hurt economic growth. However, since Starmer has now ruled out increases in income tax, value added tax, corporation tax, and employee national insurance, it appears that he may be setting the stage for increased taxes on capital gains or assets held by the wealthy.

US Politics: As we continue to monitor the aftermath of the second assassination attempt against former President Trump on Sunday, we are struck by two issues.

• First, there was very little market reaction to the incident either Sunday or Monday. Volatility measures remained relatively low. In a sense, that is disturbing, since it suggests the markets and perhaps the broader society is becoming desensitized to political violence. Of course, a successful assassination attempt could well have a bigger impact.
• Second, the reports we’ve seen so far suggest the would-be assassin traversed a wide range of political positions and grievances over time, similar to the first attempted assassin. Whether or not that is ultimately confirmed, there will be plenty of fodder for accusations on either side of the political divide, which could exacerbate political tensions as the November election approaches. In other words, the relative calm in the markets yesterday could still give way to market volatility in the coming weeks.

US Monetary Policy: The Fed begins its latest policy meeting today, with its decision due tomorrow at 2:00 PM ET. The policymakers are widely expected to cut the benchmark fed funds interest rate at least 0.25% from its current range of 5.25% to 5.50%. Of course, some investors are still looking for a cut of 0.50%, but we think it’s more likely that lingering concerns about price inflation will keep the policymakers from being that aggressive.

US Labor Market: Amazon yesterday told its full-time office workers that they must be on site five days a week beginning in January. The move is one of the most aggressive back-to-office directives among US companies. If successful, the directive could prompt a more general return to the office, which would benefit both office building owners and related service businesses surrounding major office buildings.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some interesting new research on how much the Chinese are spending on their military — an issue that has raised concerns about China’s intensions, which helped spawn global fracturing. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the Bank of Canada may be ready to embark on aggressive interest-rate cuts and new reporting on how utility-sized batteries helped the US electrical grid handle near-record demand this summer.

China: A recent study by the American Enterprise Institute (AEI) estimates that China’s true military spending is about three times bigger than it admits publicly and rivals that of the US. Adjusting Beijing’s published defense budget to account for hidden military outlays, defense industry subsidies, and price distortions, the study finds that China’s all-in defense spending in 2022 was $710.6 billion, almost matching the US Department of Defense’s budget of $742.2 billion and rivaling the US’s all-in spending of $860.7 billion.

• Like the Soviet Union during the Cold War, China currently releases only minimal information on its defense spending. The few figures Beijing does release are widely seen as under-counting China’s military effort.
• The AEI estimate is consistent with Congressional statements suggesting that the CIA believes China’s all-in defense spending is around $700 billion per year.
• Leaders in Beijing almost certainly want to replace the US as the global hegemon eventually. For now, however, China remains more like a regional power, with a defense sphere covering roughly the eastern half of the northern hemisphere, or one-quarter of the earth’s surface. If the AEI estimate is correct, China’s military spending is now more than $14,000 per square mile of its defense sphere.
• The US, in contrast, is still the global hegemon, with a defense sphere covering the entire globe excluding Antarctica (which is nominally neutral). US military spending today amounts to only about $4,800 per square mile of its defense sphere.
• The enormous resources that China is pouring into its military within the East Asian region is one reason why countries around the world have become more fearful of Beijing’s intentions. The Chinese military expansion is therefore a key reason why the world is fracturing into relatively separate geopolitical and economic blocs, with big implications for the global economy and financial markets.

(Source: American Enterprise Institute)

China-Philippines: On Sunday, the Philippine coast guard ship Teresa Magbanua, which had been anchored at a disputed shoal in the South China Sea since April to assert Manila’s sovereignty, returned to a Philippine port for repairs and supplies. Manila said the ship will soon return to the disputed shoal, but China is likely to swarm the area in the meantime with its own vessels, potentially setting the stage for a dangerous new crisis.

Russia-Ukraine: Russian forces today continue their counteroffensive against the Ukrainians who have seized some 1,200 square kilometers of Russia’s Kursk region. However, they have apparently only taken back about 63 square kilometers. Since one key reason for the Ukrainian incursion was to gain a bargaining chip for future negotiations, the question now is how tenaciously the Ukrainians will fight to hold the area and what military resources they might lose in defending it.

France: President Macron has nominated his outgoing foreign minister, Stéphane Séjourné, to be France’s next EU commissioner. The move followed a deal in which European Commission chief Ursula von der Leyen told Macron she would give France a more powerful commissioner post if Macron would sack France’s previous commissioner, Thierry Breton, who is a political enemy of von der Leyen. Upon hearing of the deal, Breton resigned, opening the way for Séjourné. (A bit hardball? Yes. But this is why we love French politics.)

Canada: In an interview with the Financial Times, Bank of Canada Governor Tiff Macklem said his policymakers are increasingly concerned about the country’s weakening labor market and the prospect for further declines in oil prices. With consumer price inflation now almost back down to the central bank’s target of 2.0%, Macklem’s statement sets the stage for further and/or more aggressive interest-rate cuts over the coming months.

Argentina: In a speech yesterday, President Milei proposed a 2025 budget with a primary surplus (i.e., revenues minus outlays excluding interest payments) of 1.3% of gross domestic product. Milei’s austerity program produced a primary surplus of about 1.4% of GDP in the first seven months of 2024, but political and popular opposition is rising, and his 2025 goals depend on a dramatic increase in economic growth and a sharp decline in price inflation. It is not yet clear whether he can continue his reforms and rein in Argentina’s destabilizing debt.

United States-China: The Biden administration on Friday proposed a rule change that would dramatically tighten up the “de minimis” tariff exemption, which allows foreign producers to ship goods directly to US customers if the shipment’s value doesn’t exceed $800. The exemption was used by low-cost consumer goods producers in China, such as Shein, to send about one billion tariff-free shipments to the US last year, creating competitive challenges for US producers.

US Monetary Policy: The Fed begins its latest policy meeting tomorrow, with its decision due on Wednesday at 2:00 PM ET. The policymakers are widely expected to cut the benchmark fed funds interest rate at least 0.25% from its current range of 5.25% to 5.50%. Of course, some investors are still looking for a cut of 0.50%, but we think lingering concerns about price inflation will keep the policymakers from being that aggressive.

US Electrical Grid: Despite record-high temperatures and strong electricity demand for air conditioning this summer, a Wall Street Journal article today shows the US electrical grid managed to handle the load with relatively few problems. The article tags the success largely to recent investments in both renewable energy, such as solar and wind farms, and battery storage, especially in California and Texas. The surprisingly critical role played by batteries suggests investors will continue pouring funds into battery makers and battery materials.

US Technology Industry: In another article today, the Journal highlights a little-noticed announcement as Apple rolled out its new iPhone last week. According to the company, the Food and Drug Administration has approved use of its AirPods Pro 2 as a hearing aid. Once Apple releases the required software update this fall, an AirPod Pro 2 will be a medical device. It also could well become one of the most popular, low-cost, over-the-counter hearing aids on the market and open a whole new market for consumer tech firms.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets await more data to assess the economy’s health. In sports news, Dolphins quarterback Tua Tagovailoa suffered multiple concussions during the team’s loss to the Buffalo Bills. Today’s Comment delves into growing concerns about a government shutdown, explains why the Fed may not ease as aggressively as the market expects, and offers our perspective on the recent European Central Bank’s rate decision. As always, the report concludes with international and domestic data releases.

Shutdown Coming? With time running out, House officials are racing to prevent a government shutdown in October.

• House Minority Leader Hakeem Jeffries firmly stated that Democrats will not support the Republican funding bill. Earlier this week, Republican leader Mike Johnson had to withdraw a vote on the stopgap measure due to strong opposition from both House Democrats and members of his own party. A major sticking point is the proposed requirement for proof of citizenship to vote. Despite this, there is hope that a short-term funding agreement will keep the government open until mid-December.
• 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 appropriation bill been passed before the October 1 deadline. These stopgaps prevent government shutdowns but also prolong the appropriation process and contribute to the ballooning budget deficit. The government has already relied on four continuing resolutions this year, which have helped push the deficit to $1.9 trillion. This puts it on track to be the largest deficit outside the pandemic era.

• While budget disputes are common, there seems to be a heightened risk of a government shutdown during the election this year. 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 preventing an 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.

Too Much, Too Soon: The market remains optimistic about a significant shift in monetary policy, even though the economy is still demonstrating signs of resilience.

• As of today, market sentiment suggests a nearly 60% likelihood of the Fed implementing a rate cut of 125 basis points or more before year’s end. This expectation is fueled by concerns about a potential economic slowdown, which have been exacerbated by a series of weak labor market indicators. The rise in the unemployment rate in July, which triggered the Sahm Rule, along with this month’s confirmation of slowing hiring trends, has heightened concerns. However, we remain optimistic that the market may be getting ahead of itself.
• Historically, the Fed “takes the stairs up” during rate-hike cycles and “takes the elevator down” during rate cuts, typically in response to recessions. However, there are currently no clear signs of an economic downturn. The recent uptick in the unemployment rate is largely due to new entrants into the labor force. Meanwhile, the Atlanta Fed’s GDPNow forecast indicates a modest economic slowdown in the third quarter, with growth projected at an annualized rate of 2.5%, down from 3.0% in the previous month.

• The recent market reaction aligns with a pattern observed in the past two years, where investors often overestimate the likelihood of aggressive rate cuts in response to perceived economic weakness. This tendency has consistently been met with resistance from the Fed. Despite recent unfavorable data, the economy is expected to remain in expansion, suggesting that this pattern may continue in the coming months. While we anticipate a rate cut in September, we believe the Fed will adopt a more measured approach, with less reliance on jumbo cuts than the market currently expects.

ECB Rate Decision: The European Central Bank (ECB) has lowered benchmark interest rates for the second time in three months and has signaled more to come.

• The ECB on Thursday lowered its deposit rate by 25 basis points to 3.50%, signaling a shift in focus from inflation control to economic support. ECB President Christine Lagarde emphasized during a press conference that interest rates are not predetermined but are on a downward trajectory. While the central bank has not ruled out a rate cut in October, there is speculation that it might do so at the December meeting, when the central bankers will have more data to paint a better picture of the economy.
• Closely monitoring regional wage trends will provide valuable insights into the trajectory of services inflation. Unlike the US, which has experienced a steady rise in unemployment, the EU has witnessed a historic decline. This tight labor market has contributed to persistent wage pressures that have defied the central bank’s tightening efforts and the economic slowdown. This has translated to higher earnings, which explains nearly 60% of its variation of services inflation. As a result, if these wage pressures persist, the ECB may be forced to halt its easing cycle prematurely.

• Historically, the ECB has tended to be less aggressive than the US in raising rates during easing cycles but more cautious in lowering them. Given the persistent tightness of the labor market and its impact on wages, we anticipate that the ECB will likely adopt a more moderate approach to rate cuts to prevent a resurgence of inflation. This could help narrow the interest rate gap between the ECB and the US, potentially providing a boost to the euro. However, the currency could face downward pressure if inflation unexpectedly returns.

In Other News: OpenAI released a new artificial intelligence model that will help process complicated mathematical and coding problems. The development is a reminder of how AI capabilities are evolving. Former members of the Trump administration are considering selling shares in Fannie Mae and Freddie Mac in a move that could disrupt the housing market. Meanwhile, Russian President Vladimir Putin has threatened retaliation against a NATO ally if Ukraine is allowed to use US weapons to attack military bases in Russia, raising concerns about escalating tensions.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting the latest inflation data and closely watching for clues on the Federal Reserve’s upcoming rate decisions. In the sports world, WNBA star A’ja Wilson has etched her name in the history books by breaking the single-season scoring record and solidifying her bid for another MVP award. In today’s Comment, we will delve into the continued investor optimism surrounding AI technology, analyze the mixed implications of the CPI report on inflation, and explore the potential impact of Mexican judicial reforms on trade. As always, we’ll conclude with a review of the latest domestic and international economic indicators.

 AI Hype is Back? OpenAI’s latest funding round has boosted investor confidence that AI is here to stay.

• The Microsoft-backed AI startup is in negotiations to secure $6.5 billion in new funding from investors. This significant investment could nearly double the company’s valuation from $86 billion to $150 billion. Such a valuation would further solidify the company’s position as one of the most promising startups globally. The AI company claims that the fresh capital will be used to expand its computing power and cover operational costs. However, there is speculation that this financing round could signal the company’s ambition to go public.
• OpenAI’s recent initiative underscores the surging demand for generative AI technology, a trend echoed by the escalating investments of the “Magnificent 7.” Notably, Amazon, Microsoft, Google, and Meta have all recently announced plans to significantly bolster their AI spending. While these moves have been met with a degree of skepticism from investors who would prefer a more diversified approach, they highlight the intensifying competition among these tech giants as they vie for dominance in the burgeoning AI market.

• As Big Tech companies continue to scale their AI operations, they will require access to advanced, energy-efficient chips. This surging demand has already pushed chip manufacturers like Nvidia to their limits, with the company struggling to keep up with the overwhelming demand for its latest-generation Blackwell chip. Utility companies have also faced mounting pressure to supply the substantial energy needs of these firms that are expanding their data centers. While some investors may have cooled on the Magnificent 7, it’s clear that these companies still command significant investor interest.

 Shelter Still a Problem: While consumer inflation dipped in August, persistent underlying price pressures suggest that the fight against inflation is far from over.

• The overall consumer price index (CPI) increased a modest 0.2% last month, while core CPI, excluding food and energy, rose 0.3%. While this data suggests a general alignment with the central bank’s inflation mandate, significant hurdles remain in achieving its ultimate goal. Commodities continue to provide a bright spot, with food at home and energy prices contracting last month. However, price pressures in services remain a major concern, particularly shelter costs, which accelerated at more than twice the pace of the overall index.
• The disproportionate impact of shelter inflation on the broader price index reflects a lingering effect of the pandemic. The government’s cautious stance on ending eviction moratoriums, coupled with uneven state-level policies, has slowed the pass-through effects of home and rent prices on the CPI. As a result, overall and core CPI have risen by 2.5% and 3.2%, respectively, compared to the previous year. In contrast, overall and core CPI excluding shelter costs reveals much smaller increases of 1.1% and 1.6%, highlighting the significant role of shelter inflation in driving up these measures.

• As a result, the Federal Reserve may be more inclined to downplay the recent sharp increase in core inflation to avoid the further cooling of the labor market. This could indicate a greater willingness to lower interest rates than previously expected, potentially revisiting the March projection of a 50-75 basis point reduction by year-end. However, due to the recent rise in month-over-month inflation figures, the Fed is likely to adopt a more cautious approach. Consequently, we anticipate that the initial interest rate cut will be a modest 25 basis points.

Mexico Judicial Reforms: Mexican President Andrés Manuel López Obrador (AMLO) has made significant progress toward consolidating his ruling party’s control over the judiciary before the end of his term.

• On Wednesday, the Mexican Senate passed a significant judicial reform that would require judges at all levels, including the Supreme Court, to be elected by the public rather than appointed. This follows the lower house’s approval of the legislation last week. The reform now awaits ratification by state legislatures, which are largely controlled by AMLO’s Morena party. Once the legislation becomes law, it is likely to lead to a confrontation between Mexico and its USMCA trade partners as they seek to ensure fair arbitration mechanisms.
• Since taking office, AMLO has pursued a strategy of government control over the country’s energy market, creating conditions that favor state-owned companies in securing contracts over foreign competitors. This approach has strained Mexico’s relationship with its two major trading partners, particularly the United States, as it is in violation of the USMCA agreement. Last year, a federal court struck down an electricity law backed by AMLO, citing anti-competitive practices. Earlier this year, the Supreme Court also ruled against his initiative to grant favorable contracts to state companies.

• Incoming President Claudia Sheinbaum, who is set to assume office on October 1, has sent mixed signals to investors by affirming her commitment to judicial reforms while simultaneously pledging to protect private investors. This ambiguity has heightened investor concerns about her stance on nationalization, leading to a pause in further investments. If she continues to follow in the footsteps of her predecessor, Mexico’s reputation as a reshoring hub could be tarnished. Additionally, it may lead to a trade war and jeopardize the future of USMCA, which is scheduled for a review in July 2026.

In Other News: Canada’s defense minister has thrown cold water on the idea of an Asian NATO, as the West looks to prevent an unnecessary escalation of tensions with China. The European Central Bank cut rates by 25 bps as it looks to prevent the economy from slowing down further. Spanish Prime Minister Pedro Sánchez has urged the EU to seek a compromise on Chinese EV imports rather than to follow through on planned tariffs. His reluctance is a reminder of how divided the EU is when it comes to China.

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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, NBA Commissioner Adam Silver has hinted at the possibility of another expansion team. Today’s Comment will explore why banks remain pessimistic about the future despite a recent regulatory win, how lower oil prices could weigh on the US dollar, and the key takeaways from the second presidential debate. As always, our report will conclude with a roundup of domestic and international news releases.

Banks Are Less Optimistic: While banks received some good news on Wednesday, the outlook for the sector remains bleak.

• In response to pressure from the financial services industry, the Federal Reserve announced a reduction in the proposed capital requirement increase on Tuesday, from 19% to 9%. While the initial proposals targeted banks with assets exceeding $100 million, the revised version primarily applies to those with assets over $250 million. The decision aims to alleviate concerns from banks about the potential impact the requirement would have on their lending capacity. However, there are concerns that relaxed rules could leave the door open for another financial crisis.
• That said, concerns persist about the outlook for financial firms. JP Morgan Chase has cautioned that anticipated earnings may be overly optimistic and cited the Federal Reserve’s expected interest rate cuts as a significant threat to net interest income, a key driver of its recent success. Meanwhile, auto lender Ally Financial has reported higher-than-expected car loan delinquency rates, raising concerns about its ability to deliver strong returns. This weaker outlook coincides with growing fears of consumer backlash as households grapple with rising prices and a deteriorating labor market.

• Despite expectations that the Federal Reserve will ease monetary policy in the near future, the impact on banks remains uncertain. While lower interest rates generally encourage lending in a strong economy, banks may now be reluctant to extend credit due to concerns about future default risk. Moreover, the recent Senior Loan Officer Opinion Survey (SLOOS) suggests that financial institutions are already tightening their lending standards. If this trend persists, we anticipate a moderation in economic growth but not a recession.

Oil Gets Cheap: Concerns about insufficient demand have pushed oil prices to their lowest level in nearly three years.

• Brent crude futures fell below $70 on Tuesday, driven by mounting global economic concerns. Weak economic data from China and a second downward revision within two months by OPEC to its demand forecast contributed to the drop. The oil-producing group now projects daily demand growth of around two million barrels, reducing its previous estimate by 80,000 barrels. This adjustment comes in the wake of reports indicating that Chinese imports increased by just 0.5% from the previous year, falling short of the anticipated 2% growth predicted by analysts.
• Declining oil prices could negatively impact the US dollar. In recent years, the United States has become a major exporter of natural gas and crude oil, a trend that accelerated after the war in Ukraine led to increased demand for alternatives to Russian oil. This shift has altered the US terms of trade, which measure the relative change in import to export prices, as the country transitioned from a net oil importer to a net exporter. As a result, the US dollar and oil prices have flipped from a negative to a positive correlation.

• Nevertheless, the 2024 oil market has been characterized by a significant supply-demand imbalance. Lackluster GDP growth in China and Europe, coupled with slowing economic momentum in the United States, has reduced global oil demand. While OPEC has reduced production to bolster price levels, increased output from Brazil, Canada, Guyana, and the United States has offset much of the supply cuts. Consequently, the combination of robust production and weakening demand has led to a surplus of fuel inventories that has kept a lid on prices, which should weigh on the dollar.

Fireworks But No Substance: Republican and Democratic presidential candidates Donald Trump and Kamala Harris debated on Tuesday but offered few insights into their planned direction for the country.

• During the debate, neither candidate was willing to delve into the specifics of their plans for the country. Harris emphasized her intention to offer tax cuts for small businesses and provide a credit to first-time homebuyers to help them purchase their first home. Meanwhile, Trump reminded Americans of his plan to significantly strengthen border security to address the immigration surge. Beyond these points, the leaders engaged in a heated exchange of insults regarding their respective records in office, which was somewhat entertaining but ultimately unproductive.
• Despite both candidates’ enthusiasm for outlining their spending plans, neither has provided a clear explanation of how they intend to finance these initiatives. Trump has proposed extending previous tax cuts, exempting Social Security and tips from taxation, and lowering corporate tax rates. In contrast, Harris has pushed for a $25,000 tax credit for first-time homebuyers, an extension of childcare tax credits, a $6,000 bonus for newborns, and the elimination of taxes on tips. While both candidates claim to have deficit-reduction plans, neither was willing to discuss these strategies during the debate.

• While Trump previously secured a decisive victory over President Joe Biden in the first debate, early assessments suggest that Harris may have gained the upper hand in the second contest. The next debate is set to take place in three weeks between Ohio Senator JD Vance and Minnesota Governor Tim Walz. Meanwhile, the Harris and Trump campaigns are discussing the possibility of another debate. Current betting odds indicate that the race remains relatively close, with Harris receiving a small bump following last night’s performance.

In Other News: The US, for the first time, accused China of directly supporting Russia’s invasion of Ukraine. This decision reflects Washington’s increasing efforts to rally European support for its isolation of China. Meanwhile, lithium share prices have surged following the closure of two Chinese mines by CATL. This event serves as a stark reminder of the volatile nature of commodity prices in a world that is becoming increasingly disconnected. Automaker Volkswagen has decided to end its job security agreement as it looks to chart a more profitable path forward.

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