by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are focused squarely on Middle East tensions. Today’s Comment analyzes the market impact of the Israel-Iran conflict, explores why recent inflation trends have bolstered calls from the president for rate cuts, and highlights other key developments moving global markets. We’ll wrap up with our regular overview of today’s most important international and domestic economic data releases.

Israel Strikes Iran: As expected, Israel has launched a military attack on sites in Iran as it looks to prevent the country from producing a nuclear weapon.

• The strikes targeted Tehran, with Israel destroying key military installations and killing two of Iran’s senior commanders. The operation aimed to cripple the heart of Iran’s nuclear program, with the campaign expected to continue for two weeks. Meanwhile, the US denied any involvement in the attacks. Still, it urged Iranian officials to proceed with scheduled nuclear talks on Sunday, seeking to prevent an all-out war from spreading into other parts of the Middle East.
• Iran appears to be in disarray as it scrambles to formulate an effective response. The regime launched over 100 drones in retaliation, many of which were intercepted by Israeli defenses. Meanwhile, reports suggested that the replacement of top military leaders were later retracted, highlighting Tehran’s leadership crisis following the attacks. Despite this turmoil, Iran and its proxy forces are planning retaliatory strikes, along with potential blockades of critical shipping lanes in the Red Sea and Strait of Hormuz.

• The escalating conflict in the Middle East threatens to disrupt global trade, with Brent crude prices surging 10% in just five days amid mounting supply concerns. Shipping routes are being redrawn as vessels divert from contested waters, driving freight costs higher. This comes on top of existing supply chain pressures, as global shipping rates had already jumped 52% last week, and companies are racing to stockpile goods before the expiration of the 90-day tariff pause.
• The potential for this conflict to trigger significant global spillover effects hinges primarily on Israel’s strategic objectives. If its sole aim is to dismantle Iran’s nuclear program, market disruptions may prove temporary. However, should Israel expand its goals to include regime change, the resulting escalation could unleash sustained market volatility as a wider regional conflict would become increasingly likely.
• Current evidence suggests Israel is pursuing the more limited objective, having carefully targeted only key nuclear facilities. However, this restrained approach could shift if Iran refuses to back down despite the attacks. Should tensions escalate further, commodities would likely emerge as safe haven assets, poised to rally amid heightened geopolitical uncertainty.

 Trump Fed Pressure: Softer inflation data has led the president to add further pressure on the Federal Reserve to implement rate cuts at its next meeting.

• Supply-side inflation remained subdued in May. The overall Producer Price Index (PPI) rose 2.6% year-over-year, narrowly exceeding estimates of 2.5%, while core inflation edged down from 3.2% to 3.0%. Moreover, key components feeding into the Federal Reserve’s preferred inflation gauge — the PCE price index — showed muted growth, indicating that the May reading will likely reflect further progress toward the central bank’s 2% target.
• The subdued inflation figures marked the second consecutive report this month showing progress toward the Fed’s inflation target, even as new tariffs took effect. The president has seized on these numbers to demand an aggressive 100 basis point rate cut at the Fed’s upcoming meeting. While he has stopped short of threatening to dismiss Chair Powell, he has hinted that the administration may have to “force something” if the central bank doesn’t act.
• The Federal Reserve has pointed to persistent uncertainty around inflation’s path as the primary reason for holding rates steady. Policymakers are split on whether businesses will fully pass through tariff-driven cost increases to consumers or partially absorb them, prompting the central bank to adopt a wait-and-see approach. Fed officials have emphasized the need for more time to assess the tariffs’ broader economic effects before considering any policy adjustments.

• Recent PPI inflation data suggests businesses have so far resisted passing on higher costs to consumers, instead absorbing the impact of tariffs. Trade services margins, which track wholesaler-to-retailer pricing, indicate firms are currently bearing these additional costs. However, this absorption capacity may stem from inventory stockpiles accumulated before the new tariffs took effect. Consequently, it remains uncertain whether companies can sustain this pricing restraint in coming months as inventories dwindle.

The Golden Share: The proposed acquisition of US Steel by Nippon Steel remains under review as the White House and the Japanese steelmaker continue negotiations.

• On Thursday, the president announced that the proposed Nippon Steel acquisition of US Steel would give the US government veto power over key corporate decisions, though he provided no further details. Nippon Steel swiftly pushed back, insisting it would not accept any deal that compromises its management control. With just days remaining before the June 18 deadline, the standoff underscores the significant gap between the two sides.
• Despite the disagreements, the two sides appear to have reached consensus on key provisions that would grant the US government certain oversight powers. As part of the deal, Nippon Steel is expected to sign a binding national security agreement requiring it to maintain US Steel’s headquarters domestically, with severe penalties for non-compliance. The Japanese firm has also committed to providing employee bonuses upon deal completion and investing billions to modernize American steel production.
• Despite ongoing negotiations, optimism remains high that a deal will be reached. The Trump administration has argued that the acquisition could help revitalize America’s steel industry, which has struggled against foreign competition in recent years. Meanwhile, Japan views US Steel as a strategic opportunity to diversify its holdings and gain stronger access to North American markets.
• The potential Nippon Steel-US Steel deal may establish important precedents for how the US handles foreign mergers amid rising trade protections. This acquisition could demonstrate whether partnerships and mergers will become viable strategies for foreign firms to navigate America’s tariff regime. The terms of this deal may ultimately shape how Washington regulates foreign investment in other strategic domestic industries.

New Tariffs: The president announced new tariffs as he looks to drive more manufacturing back to the US.

• The Trump administration announced that it would expand tariffs to include not only steel products but also steel derivative products, effective June 23. The new tariffs — set at 50% — will apply to goods such as home appliances. This move comes just a week after Trump declared he would increase steel tariffs, aiming to shield American manufacturers from foreign competition by discouraging imports of cheaper steel-based goods.
• The new tariffs are likely to raise concerns, as trade restrictions could force firms to either accept lower profit margins or pass costs on to consumers through higher prices. Additionally, the move suggests that the president may consider additional tariffs in the future. So far, these measures have not disrupted supply chains, and if this stability continues, it should help maintain economic resilience.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market’s attention is firmly on the latest Producer Price Index data. In today’s Comment, we’ll analyze the implications of the recent inflation figures, discuss new developments in Trump-era trade policies, and cover other key market-moving stories. As always, we’ll also provide a concise summary of today’s domestic and international economic data releases.

CPI Cool Streak: Inflation continues to trend lower, as many tariffs have yet to fully impact consumer prices.

• According to the BLS, consumer price growth in May fell short of expectations, signaling ongoing caution among businesses in raising prices. While many had forecast an uptick in inflation, both headline and core inflation slowed month-over-month, declining from 0.2% to 0.1%. The modest increase pushed the annual inflation rate up slightly, from 2.3% to 2.4%. Meanwhile, core inflation held steady at 2.8% year-over-year, unchanged from the previous month.
• The subdued price pressures were primarily driven by ongoing moderation in services inflation. Shelter prices, which account for over a third of the index, continued to normalize, having fallen to fresh post-pandemic lows. Meanwhile, energy prices remained a downward force on overall inflation as consumers benefited from lower gasoline prices.

• While most of the inflation report was positive, there were some signs of emerging price pressures. The month-over-month percentage changes compared to the previous year suggest inflation momentum may be building. Although January saw an acceleration driven by rising insurance costs, inflation had largely stabilized at pre-pandemic levels before the tariff announcement. Since then, however, inflation appears to have accelerated to match last year’s pace.
• The continued moderation of the rise in inflation remains a welcome surprise, though it may be too early to tell whether this trend will persist. As noted in previous reports, much of the recent moderation appears attributable to inventory accumulation ahead of tariff implementations. While we expect this effect may soon fade, we believe a structural downward trend in services inflation should help prevent a return to the peak seen following the pandemic.

Trump’s Trade Tactics: The president’s trade truce with China eased fears of resource shortages but sparked speculation about potential new tariffs.

• During yesterday’s briefing, the president has confirmed a trade truce that will enable China to resume shipping critical rare earths and magnets for another six months. This agreement, however, requires the final go-ahead from Chinese President Xi Jinping. Although the precise concessions made by the US haven’t been fully disclosed, the president indicated that reinstating student visas for Chinese nationals attending American universities might have been a component of the deal.
• While markets welcomed signs of easing tensions between the US and its largest trading partner, the president reaffirmed his commitment to maintaining tariffs regardless of any new arrangements. After announcing what he called a “done deal” with China, he suggested that Chinese imports could still face total tariffs of 55% — a combination of the 30% imposed under the new agreement and the existing 25% from before his term.

• The president’s economic strategy of consistently leveraging tariffs as a dual-purpose tool to influence trade policy and generate revenue for deficit reduction may be paying off. A record $23 billion in tariff revenue last month played a significant role in narrowing the budget deficit from $341 billion to $316 billion, representing a 17% year-over-year decrease. This substantial increase in government receipts was primarily the result of tariffs enacted in April, showing that tariffs are a legitimate revenue tool.
• That said, the president is preparing to issue unilateral tariff notices to multiple trading partners within the next one to two weeks, reinforcing his stance against complacency in trade negotiations. This move echoes his mid-May ultimatum that yielded only partial progress, and critical disagreements are still blocking deals with Japan and the EU.
• With the trade deadline approaching, we anticipate the president will escalate his rhetoric to strengthen his negotiating position. Thus far, markets appear confident that the worst of the trade war has passed, with investors pricing in expectations that tariffs will remain at current levels or decrease. However, should this sentiment shift, we could see a rapid reduction in risk exposure from market participants.

Iran Defies Calls: The Islamic republic appears poised to advance its nuclear expansion plans, disregarding renewed diplomatic pressure and raising the prospect of war with Israel.

• Tehran has announced plans to establish a new uranium enrichment facility following its censure by the International Atomic Energy Agency (IAEA) for noncompliance with nuclear safeguards. The covert site will operate alongside the ongoing modernization of centrifuges at the Fordow nuclear plant. This development, particularly the refusal to disclose the facility’s location, constitutes a further violation of Iran’s nonproliferation obligations.
• Iran’s move to accelerate its nuclear program comes amid a collapse in diplomatic efforts to address its nuclear activities. Although Washington and Tehran maintain open channels for dialogue, negotiations have stalled without meaningful breakthroughs. The prospects for Sunday’s planned talks now appear uncertain after President Trump denounced Iran’s negotiating stance as “unacceptable,” casting doubt on whether discussions can proceed productively.
• The lack of diplomatic progress has led to concerns that Israel may launch an attack on Iran in the near future. In response, Iran has warned it could retaliate by targeting US military assets across the Middle East. These escalating tensions prompted Washington to order partial evacuations at its Baghdad embassy amid security concerns. Israel’s resolve was further demonstrated by parliamentary proceedings following the controversial elimination of military conscription exemptions, a move that nearly triggered the government’s collapse.
• The risk of conflict over Iran’s nuclear program has risen significantly, and will more so if Israel launches a full-scale attack. A major regional war would likely spill over into global markets, driving up commodity prices. A key factor will be Iran’s response. If Tehran adopts a “now or never” approach, the conflict could escalate dramatically, potentially drawing in neighboring countries.

Boeing Problems: The aircraft manufacturer is likely to face renewed scrutiny after one of its planes crashed in India.

• An Air India Boeing Dreamliner crashed shortly after takeoff, killing an unknown number of people. The aircraft was carrying 242 passengers and plunged into a residential area, raising fears of a high death toll. The incident is likely to fuel further skepticism about aviation safety, particularly Boeing’s aircraft quality, following a series of mishaps over the past six years — most notably the 737 Max crisis in 2019.
• Boeing aircraft are among the most valuable US exports, and orders for these planes have often been leveraged in trade negotiations to secure favorable terms. However, the public relations fallout from this incident could have far-reaching consequences if countries grow hesitant to purchase Boeing jets due to mounting safety concerns.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning. The market’s primary focus today is the latest Consumer Price Index release. Today’s Comment will delve into a new contender that President Trump might consider to succeed Federal Reserve Chair Jerome Powell, discuss signs of progress in US trade negotiations, and review other key market-related news. As always, we will conclude with a summary of today’s domestic and international economic data releases.

Bessent Fed Chair? While the Trump administration has abandoned the idea of ousting the Fed chair, it has not stopped its attempt at influencing monetary policy decisions.

• Treasury Secretary Scott Bessent has emerged as a potential nominee to succeed Fed Chair Powell when his term expires in 2026. The administration has reportedly begun considering candidates well in advance, aiming to shape market expectations for future policy rates. This move comes amid the Fed’s reluctance to cut rates in 2025, following a 100-basis-point reduction the previous year.
• Bessent has long been one of the most trusted and loyal figures in the Trump administration. While investors have viewed him as a steady hand, his potential nomination as Fed chair could face skepticism given his proximity to the president. Although Bessent has publicly downplayed interest in the role, he was reportedly the architect of the so-called “shadow Fed” strategy.

• Since the start of the year, the 10-year Treasury yield has been highly sensitive to shifting expectations around Fed rate cuts. The yield has largely fluctuated within a range of 4.20% to 4.50% as investors attempt to gauge the Fed’s next moves. When economic data signals weakness, markets price in more aggressive rate cuts, pushing the yield lower. Conversely, signs of resilience have led traders to scale back rate-cut bets, driving the yield higher.
• That said, it would be disingenuous to claim that the Fed is the only factor influencing the 10-year yield. Concerns over the national debt and shifting expectations around US Treasury demand have also played a role. For instance, even after the Fed cut rates by 100 bps last year, the 10-year yield reached peaks higher than any level seen in 2024, and unlike last September, it has yet to dip comfortably below 4%.
• The potential nomination of Bessent — or, as we’ve previously noted, former Fed Governor Kevin Warsh — to Fed chair could raise concerns about the central bank’s independence. While this might clear the path for lower short-term rates, we believe it could also increase volatility in long-term rates. Ultimately, the push to appoint a new Fed chair may lead to more accommodative monetary policy but at the cost of heightened bond market instability.

Trade Progress: The Trump administration has advanced trade framework negotiations to de-escalate tensions before the critical July 9 deadline.

• China and the US have reached a tentative agreement aimed at easing bilateral trade tensions amid a row over compliance with the “Geneva Deal.” While details have not been released, trade talks seem to focus on export restrictions as opposed to import tariffs. Particularly, the Trump administration has agreed to relax some technology export controls in return for accelerated shipments of critical rare earth minerals from China.
• Building on its China negotiations, the administration has achieved parallel breakthroughs in other trade talks. Most notably, US-Mexico negotiations have yielded a proposed steel agreement establishing duty-free access within defined limits on imports. Additionally, the US and India are close to a “phased trade deal,” which will include market access in India and reduced non-trade barriers such as quality control.
• However, mounting evidence suggests several key trading partners may fail to meet the administration’s July deadline. European negotiators are currently advocating for an interim agreement to maintain negotiations beyond the cutoff date, while preserving ongoing dialogue. This follows South Korea’s formal request earlier this month for an extension to its bilateral trade terms.

• While the president is focused on long-term trade deals, he is also securing short-term economic boosts. For instance, recent Boeing sales solidified during his trip to the Middle East are expected to further stimulate growth. In May, Boeing secured 303 new bookings and delivered 38 new 737 MAX jets, marking its sixth-highest monthly order tally in company history. As one of the nation’s largest exporters, Boeing’s performance can have a significant impact on overall economic growth.

Gold Climbing: Central banks are accumulating gold at a pace not witnessed since the post-war Bretton Woods era.

• A significant shift in global reserve holdings has occurred, with gold now officially ranking as the second most important reserve asset for central banks, surpassing the euro. This increased accumulation of gold is a strategic move by central banks to diversify their portfolios, given the perceived heightened risk of dollar-denominated assets due to recent US trade and political measures.
• According to the report, gold currently comprises 20% of global official reserves, significantly exceeding the euro’s 16% share but still well below the US dollar’s dominant 46%. In 2024, central banks collectively acquired over 1,000 tons of gold for the third consecutive year, representing approximately one-fifth of total global production. This accumulation has increased global gold reserves to 36,000 tons, nearing the record 38,000-ton peak last seen in the mid-1960s.
• Notably, the largest gold buyers included India, Poland, Turkey, and China — countries that have often faced US and EU sanctions or penalties, particularly in response to alleged human rights abuses. We suspect this surge in gold acquisition is largely driven by the dollar’s weaponization against Russia post-Ukraine invasion, alongside a broader ambition to diminish trade dependence.
• The accumulation of gold by central banks likely signals potential weakening for the dollar. While strong indicators suggest the US will maintain its role as the dominant reserve currency, supported by its robust, diverse economy and deep, liquid markets, it is evident that markets may begin exploring alternative options. Although it is premature to predict a dollar bear market, this trend clearly suggests a potential softening of demand.

Netanyahu in Trouble? The Israeli parliament may dissolve over disagreements about military exemptions.

• A vote is scheduled for Wednesday regarding the exemption for religious students from military service. An ultra-Orthodox party, allied with Prime Minister Netanyahu’s Likud Party, has threatened to dissolve parliament if the measure fails. This development risks exacerbating political uncertainty as the nation simultaneously navigates tensions with its territorial rivals.
• It appears that lawmakers are seeking to postpone any final vote until after the parliamentary session concludes in July. However, it is widely believed that a new vote could significantly complicate PM Netanyahu’s efforts to establish a governing coalition. This political uncertainty could, in turn, hinder efforts to reach a resolution in the two ongoing conflicts in which the country is involved.

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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 in the high-level, high-stakes trade talks going on in London between the US and China. We next review several other international and US developments with the potential to affect the financial markets today, including unrequited efforts by Beijing to curry favor with the European Union by offering trade concessions and news that the Trump administration’s immigration crackdowns could be costing it the political support of union workers and Hispanics.

United States-China: High-level officials from the US and China continue their trade talks in London today, with initial reports suggesting that the two sides aren’t coming to agreements easily. US Commerce Secretary Lutnick today said the talks are “going well,” but President Trump has suggested that the Chinese are taking a tough stance. If incoming reports point to further hurdles, global stock markets could falter later today or in the coming days.

• Separately, the Chinese government said it will extend its antidumping probe into European Union pork exports for another six months, until mid-December. The probe into EU pork was launched in June to retaliate for the EU slapping antidumping tariffs on Chinese electric vehicles.
• As with Beijing’s hint yesterday that it will favor the EU as it relaxes its embargo on rare-earth exports, the extension of the pork probe likely aims to discourage the EU from coordinating with the US on its tough trade policies against China.

European Union-China: Despite Beijing’s effort to curry favor with the EU and preclude any further US-style barriers, the European Commission today said it will impose anti-dumping tariffs of up to 62.4% against Chinese plywood imports. According to the Commission, the new duties are in response to a three-year surge in hardwood plywood imports that has damaged domestic producers. Brussels is also reportedly monitoring imports of Chinese softwood plywood for further antidumping duties.

Germany: Lawmakers in Chancellor Merz’s center-right CDU party said Germany may need to re-institute conscription to raise the troops needed to counter Russian aggression. According to the lawmakers, Germany’s current measures to incentivize voluntary enlistment are falling short. The possibility of a renewed draft in Germany underscores the urgency with which some European countries are trying to rebuild their armed forces amid the threat from Russia and the Trump administration’s desire to cut the US commitment to Europe’s defense.

Italy: A referendum aimed at granting faster citizenship to immigrants failed yesterday due to low turnout, apparently as voters heeded right-wing Prime Minister Giorgia Meloni’s call to boycott the ballot. On its face, the result seems to reflect the growing nationalist populism and anti-immigrant sentiment in Europe, but the details were contradictory. Of those who voted, more than 65% cast their ballot to cut the residency requirement to five years from 10. However, total turnout was only 30% of registered voters, far below the 50% required to be valid.

Syria: In an interview with the Financial Times, central bank chief Abdulkader Husrieh said the country will be re-connected to the SWIFT international payments system in the coming weeks. The move would come after 14 years of war and Western sanctions cut Syria off from the world economy as a pariah state under former President al-Assad. The move could portend a return to foreign investment in Syria (but it’s probably way too soon to start thinking about buying Syrian stocks!).

Australia: The Australian Securities and Investments Commission today said it will take steps to ease initial public offerings of stock, after new listings slumped to their lowest level in more than a decade. The Australian market has also suffered a number of big de-listings in response to merger activity. All the same, it’s too early to know whether the steps will be enough to increase activity on the Australian stock exchange and maintain investor interest in the market.

Canada: Prime Minister Carney yesterday said his government will boost Canadian defense spending to 2% of gross domestic product in the current fiscal year, finally lifting the country’s defense burden to the agreed target for members of the North Atlantic Treaty Organization. Former Prime Minister Trudeau had also pledged that Canada would meet the NATO target, but only in 2032. Carney’s move could potentially help ease US-Canadian tensions over trade and other issues.

US Immigration Policy: As protests continue to flare up in Los Angeles against the Trump administration’s immigration crackdown, press reports suggest that local branches of top unions are increasingly siding with the protestors. In recent days, authorities arrested David Huerta, president of the state branch of the Service Employees International Union, for allegedly obstructing federal agents conducting an immigration raid. As of yesterday, local units of the Teamsters and the United Auto Workers have expressed their support for the SEIU.

• More union workers are also reportedly joining in the protests.
• The development may present a political problem for Trump and the Republicans, who until now have been unexpectedly successful in garnering support among union workers and Hispanics.

US Solar Energy Industry: Sunnova Energy International, once one of the US’s top installers of rooftop-solar systems, filed for bankruptcy yesterday and said it plans to sell or wind down all its assets. The bankruptcy follows Friday’s bankruptcy of Solar Mosaic, which makes loans to homeowners for solar installations.

• Several other residential solar firms have recently gone out of business because of weak demand and rising interest rates. The latest wave of bankruptcies reportedly stems largely from the Trump administration’s plan to remove clean-energy subsidies and reduce prices for fossil-fuel energy.
• According to the bankruptcy filings of Sunnova and Solar Mosaic, uncertainty around the future of solar-related tax credits hurt their ability to refinance debt or attract new investment.

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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 in the US-China trade war, with a focus on an apparent effort by China to drive a wedge between the US and its allies. We next review several other international and US developments with the potential to affect the financial markets today, including further evidence that defense rebuilding is affecting the broader European Union economy and more pushback against the punitive foreign-investment taxes in President Trump’s budget bill.

China-European Union-United States: In a new sign that Beijing is trying to split the US from its traditional allies, the Chinese commerce ministry announced over the weekend that it is exploring a mechanism to accelerate the approval of rare-earth exports to the EU and some other countries. The move comes as Beijing has imposed strict licensing requirements for rare-earth exports to retaliate for the Trump administration’s tough tariff policies against China.

• The crimped supply of rare-earth materials continues to threaten the output of global auto makers and other firms, including US companies.
• One of Washington’s goals is to get US allies to present a tough, coordinated wall against Chinese exports. By potentially providing more rare-earth supplies to the EU, it appears that Beijing is trying to discourage the Europeans from taking that stance.
• If Beijing indeed favors EU countries as it releases more rare-earth materials, US auto makers and other firms could find themselves at a further disadvantage in the US-China trade war, putting their stocks at risk.
• Whether that happens could largely depend on the US-China trade talks opening in London today.

China-Russia: As a reminder of on-going tensions between Beijing and Moscow, despite the friendship professed by General Secretary Xi and President Putin, a new report shows Russian counterintelligence officials are increasingly worried about Chinese spying. According to a report in the New York Times, the Kremlin has even set up a dedicated counterintelligence cell to fight against the Chinese espionage. The report suggests that the US and its allies could potentially find ways to weaken Russia’s adherence to Chinese geopolitical and economic plans.

European Union: In an interview with the Financial Times, Chief Market Strategist Malin Norberg of Norway’s enormous and highly influential sovereign wealth fund has implored the EU to urgently reform its capital markets to boost the bloc’s economic competitiveness. According to Norberg, the key reforms would be to harmonize the EU’s tax, bankruptcy, and regulatory rules. She also said that the lack of those reforms has been one reason why the fund’s allocation to European equities has fallen from 26% to 15% in just the last decade.

• As we have noted in the past, fractured and shallow financial markets are a key impediment to the EU’s competitiveness.
• However, reform proposals such as Norberg’s have been made in the past, and there appears to be little significant new momentum toward achieving them.

France: Showing the rising importance of drone production for modern military operations, the French government announced it has asked automaker Renault to help a small French drone firm mass-produce drones for Ukraine. The “completely unprecedented partnership” would have Renault building defense equipment for the first time since World War II. Although a deal hasn’t been finalized, we think it is yet another example of the growing impact of defense rebuilding on the European economy.

United Kingdom: Ahead of her annual budget review today, Chancellor of the Exchequer Rachel Reeves announced she will restore the government’s winter fuel subsidy for all but the UK’s two million or so pensioners with incomes above 35,000 GPB ($47,500). The move is estimated to cost 1.25 billion GPB ($1.69 billion), marking a reversal from the Labour Party government’s original austerity effort. It will therefore further weaken the UK’s fiscal position and add to the pressure for higher taxes and/or spending cuts in other budget accounts.

India: State-owned energy champion Coal India has said it will reopen 32 shuttered mines and start five new ones to feed the country’s electricity generating plants as the renewables sector fails to keep up with rising demand. The news amounts to further evidence that the global coal sector is getting a new lease on life as policymakers and investors begin to back away from investing in renewable systems such as solar and wind.

Colombia: Conservative Senator Miguel Uribe Turbay was shot in the head at a campaign event on Saturday and was rushed to a hospital in critical condition. The shooting has sparked fears of renewed political violence in Colombia as leftist President Gustavo Petro tries to push through controversial labor market reforms amid strong resistance by conservatives. Uribe Turbay is the grandson of a former president and is likely to be a candidate in next year’s presidential election.

US Fiscal Policy: According to the Financial Times, executives from about 70 of the world’s biggest companies will travel to Washington this week to lobby Congress against Section 899 of President Trump’s “big, beautiful” tax and spending bill. That section would allow the federal government to impose punitive taxes on foreign-owned companies in the US if their home countries impose what the administration considers unfair taxes on US companies abroad.

• The foreign companies are arguing that Section 899 would disincentivize foreign investment in the US and could even lead to foreign-owned companies shutting down.
• However, it’s important to remember that reduced investment from abroad is the logical corollary to the administration’s drive to hike import tariffs and cut the US trade deficit. Indeed, some economists have long argued that the most efficient way to rebalance US trade would be to tax incoming foreign investment, including investments in US Treasury obligations. Probable downsides would be higher US interest rates and a weaker dollar.

US Immigration Policy: While most of the focus today will likely be on the big Los Angeles protests against President Trump’s immigration raids, we note that press reports show an increasing number of restaurant firms are worrying about a loss of workers. According to the National Restaurant Association, more than 20% of the US’s restaurant workers were born abroad, though most are legal citizens. Still, the immigration raids at food-service firms have made both legal and illegal restaurant workers reluctant to go to their jobs.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is closely watching the latest jobs data as a key driver of sentiment. Today’s Comment begins with an analysis of rising tensions within the Republican Party over the new tax legislation, explores why the ECB may have finished its rate-cutting cycle, and covers other key market developments. As always, the report will also include a summary of recent domestic and international data releases.

Budget Dispute: Divisions over the president’s Big, Beautiful Bill have erupted publicly as Republican lawmakers grapple with the legislation’s complex policy trade-offs.

• Much of the media coverage has centered on the highly publicized rift between President Trump and Tesla CEO Elon Musk, once dubbed his “Bro-in-Chief,” who has emerged as a vocal critic of the bill. Musk has denounced the legislation as fiscally irresponsible and urged Republican lawmakers to block its passage. His remarks coincided with the president’s meeting with the Senate Finance Committee where he attempted to rally support for the bill.
• In response to Musk’s criticism, the president threatened to terminate federal contracts with Musk’s companies, sparking an immediate sell-off in Tesla shares. The billionaire retaliated by floating the possibility of launching a third-party political movement as an alternative to the Republican Party. However, tensions have since eased following intervention by presidential aides, who arranged a conciliatory call between the two figures to resolve their differences.

• Behind the scenes, congressional Republicans may be moving toward significant concessions to advance their tax legislation after negotiations with President Trump. In closed-door meetings with GOP lawmakers, the president reportedly supported measures to achieve Medicare savings while indicating an openness to reducing the planned SALT deduction cap increase. 
• Nevertheless, the bill remains far from finalized, with several controversial provisions still under debate. Two lesser-discussed but significant items include a proposed 10-year moratorium on state-level AI regulation and making the 2017 corporate tax cuts permanent. These divisions threaten to complicate the bill’s path through the House following Senate revisions. Despite these headwinds, we maintain our projection that the legislation will ultimately pass within the next month.

A Hawkish Cut: The European Central Bank has cut rates but signaled that it is nearing the end of its easing cycle.

• The ECB cut its benchmark policy rate by 25 basis points to 2.00%, matching market expectations, as it steps up efforts to shield the eurozone economy from escalating US trade tensions. The move cements the ECB’s status as the most aggressive easing force among major central banks this year. The decision was not unanimous, however, with Governing Council member Robert Holzmann dissenting in favor of holding rates steady, citing lingering data uncertainties.
• The ECB’s decision to cut rates comes amid signs of economic recovery in the eurozone, with inflation finally easing from elevated levels. First-quarter GDP growth accelerated to 0.6%, doubling the previous quarter’s pace, and was driven primarily by stronger investment activity. While headline inflation in the region fell below 2% in May for the first time since 2021, underlying price pressures remain persistent, with services inflation still running significantly above pre-pandemic levels.

• During the press conference, ECB President Christine Lagarde described current monetary policy as being in a “good place,” while suggesting the central bank may be approaching the end of its easing cycle. These remarks triggered an immediate sell-off in global bond markets, as investors recalibrated expectations for long-term interest rates amid growing recognition that the ultra-low-rate environment of recent decades may not return.
• The ECB’s decision to halt further monetary easing appears partially driven by escalating US-EU trade tensions. Washington has repeatedly criticized accommodative policies by foreign central banks, accusing them of deliberately maintaining lower interest rates than the US to weaken their currencies and gain unfair trade advantages. This criticism intensified recently when the US Treasury explicitly urged the Bank of Japan to hike its policy rates to strengthen the yen in its semi-annual currency report.
• Global bond yields appear to be undergoing a structural shift, with markets increasingly pricing out any return to the historic lows seen following the 2008 financial crisis and the pandemic. This suggests the global economy may be entering a period of tighter financial conditions and more restrictive trade policies, potentially creating headwinds for economic growth. In this environment, we favor a quality bias, as financially stable firms are better positioned to weather these challenges than their more leveraged counterparts.

Trump and Xi Speak: Tensions between the two largest economies appear to be easing following a phone call between their leaders.

• After a period of escalating tensions, Chinese President Xi and President Trump have finally connected via phone to address their ongoing trade disputes. President Trump indicated that the productive conversation sets the stage for a new series of high-level trade negotiations between the two nations. This breakthrough follows mutual accusations of failing to honor the recent trade agreement made in Geneva.
• Trump’s decision to hold talks stemmed from his efforts to persuade Beijing to resume exports of rare earth minerals, following China’s move to tighten restrictions in retaliation for US limits on software sales. While there was no public discussion of either side easing their trade barriers, signs of potential concessions did emerge. China, for its part, suggested that the talks should facilitate the return of Chinese students to US universities.
• The talks come as both economies face mounting pressure from trade tensions. Recent factory data in China reveals that manufacturing activity contracted at its fastest pace since September 2022, driven largely by a sharp drop in export prices. Meanwhile, purchasing manager surveys indicate that manufacturers are grappling with rising input costs, which may force businesses to raise prices. Additionally, there are signs that the labor market may be showing signs of cooling.
• While talks between the two sides are a positive development for the market, lingering uncertainty over future trade policy will likely fuel further volatility. Both countries stand to lose significantly from a potential decoupling, yet they acknowledge that their relationship is unsustainable in its current form. We expect negotiations to drag on for months as both sides seek to mitigate the economic fallout of an eventual separation. That said, any meaningful breakthrough in talks could trigger a sharp equity rally.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market remains laser-focused on any signals that the US and China may resume trade talks. In today’s Comment, we’ll explore how a strong labor market could lead the Fed to postpone rate cuts, analyze why the new US steel tariffs represent a double-edged sword for global markets, and highlight other key, market-moving developments. As always, we’ll wrap up with a detailed breakdown of the latest domestic and international economic data releases.

Optimism Boost Hawks: The recent wave of positive economic data will likely keep the Fed from adjusting its monetary policy in the near term.

• The April Job Openings and Labor Turnover Survey (JOLTS) report pointed to stronger hiring activity, underscoring the labor market’s continued resilience. Job openings rose to 7.4 million, up from a revised 7.2 million. The rise was driven largely by increased demand in professional and business services as well as healthcare and social assistance sectors. Alongside the rise in vacancies, hiring also increased by 169,000. However, layoffs edged up by 191,000, signaling some offsetting pressures in the labor market.
• The strong job openings data is likely to discourage Fed officials from supporting interest rate cuts at their upcoming meeting. Atlanta Fed President Raphael Bostic recently emphasized that the central bank feels no urgency to lower rates as inflation remains above the 2% target. Meanwhile, Fed Governor Lisa Cook noted that recent tariffs are further complicating the Fed’s ability to ease monetary policy.

• While the Fed’s reluctance to cut rates has sparked considerable debate, emerging evidence may justify its cautious approach. The latest PCE report, showing inflation at its lowest level since 2021, provided positive signals, particularly regarding services inflation. However, this positive headline likely overshadowed subtle signs of accelerating prices on goods. Furthermore, it remains unclear how firms will manage pricing once they exhaust their existing inventory.
• The strong labor market is a key indicator for the Federal Reserve as it weighs the optimal timing for interest rate cuts. A major concern among Fed officials is the uncertain impact of tariffs on the economy. As a result, the central bank plans to wait until at least mid-summer before deciding on rate cuts. This delay should provide a clearer understanding of the economic effects from tariffs and more certainty regarding overall tariff policy.

Tariff Update: While the president’s steel tariffs aim to protect domestic industry, their global economic impact may be mixed — both beneficial and disruptive.

• Fifty percent tariffs on US steel officially went into effect on Wednesday under an executive order signed by the president. The new tariff rate effectively doubles the previous rate. The move follows the White House signaling its approval of the acquisition of US Steel by Japan’s Nippon Steel as the president seeks to demonstrate that the proposed merger will not weaken his commitment to bringing more manufacturing back to the US.
• Following these actions, the UK, which was the first to reach an initial agreement on future trade talks, has been granted an exemption from the tariff hike — keeping its rate at 25% — along with a new five-week deadline to finalize a deal. However, the accelerated timeline could complicate efforts for the country to secure favorable terms for the domestic metals industry, which British lawmakers worry is on the brink of collapse.

• Following the president’s announcement of steel tariffs, US and foreign steel prices have moved in opposite directions. Futures prices for US steel have surged, contrasting with a decline in foreign steel prices. This disparity exemplifies the significant influence tariffs can exert on particular commodities. In essence, such tariffs contribute to domestic inflationary pressures, while simultaneously alleviating them in international markets.
• This inverse relationship will likely present both benefits and challenges for international markets. In the short term, it could facilitate other countries’ efforts to meet their inflation targets, given their probable increase in supply. However, in the long term, this dynamic is likely to contribute to higher unemployment in key sectors. Consequently, we suspect that international firms heavily reliant on raw materials could benefit from this deflation, while their suppliers might require additional government assistance to remain viable.

US and China Bickering: The two economic powerhouses remain at odds in trade negotiations, each determined to project strength rather than compromise.

• In a recent late-night post on his Truth Social account, President Donald Trump stated his belief that Chinese President Xi Jinping is “extremely hard to make a deal with.” This comment suggests Trump’s likely weariness regarding the prospects of a trade deal, especially given his efforts in recent days to secure face-to-face trade talks with his Chinese counterpart. The president’s remarks are likely to raise concerns about the fragility of the recent truce between the two sides in May.
• In another sign of heightening tensions between the two economic powers, China has announced plans to consider purchasing hundreds of Airbus aircraft during upcoming meetings with European leaders. While no final decision has been made, analysts suggest this move could target specific US companies — particularly Boeing — as strategic leverage in ongoing trade negotiations.
• Renewed tensions threaten to undermine confidence that the two sides will be able to avert a damaging trade war. Markets have largely priced in expectations that the administration will seek to roll back any trade measures that could negatively impact equities. This outlook has encouraged many investors to adopt a “buy the dip” mentality, anticipating that near-term disruptions may lead to favorable policy responses.
• This trend has helped push the market back to levels seen at the start of the year, though not enough to reach new highs. The true test will come ahead of the July 9 deadline, when the president announces whether he will: (1) maintain current tariff rates, (2) grant extensions to certain countries, or (3) implement the higher rates proposed on April 2. Market analysts anticipate the third option would likely trigger the most negative reaction from investors.

Russia Expands: Following its invasion of Ukraine, there is speculation that Russia may try to expand its influence in other countries.

• The Moldovan prime minister has accused Russia of attempting to interfere in Moldova’s elections, aiming to install a government more sympathetic to Moscow. He warned that Russia could exploit a pro-Moscow political party to legitimize the deployment of over 10,000 troops in the region. His remarks are a reminder that countries feel they could be a target after the conflict ends in Ukraine.
• Furthermore, the Kremlin appears to be actively working to undermine Bulgaria’s EU accession process. While Bulgaria is set to adopt the euro on January 1, 2026, a surging populist movement that is widely believed to be backed by Moscow is advocating for a referendum that could block the currency transition. Analysts suggest Russia aims to maintain Bulgaria within its sphere of influence through these efforts.
• The alleged interferences in Bulgaria and Moldova highlight Moscow’s potential strategy of shifting focus to other countries once it reaches a resolution in its war with Ukraine. Such actions are likely to prompt EU leaders to increase defense spending as they seek to counter Russia’s growing influence.

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