by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equities futures are off to a strong start as investors digest the latest ADP jobs data. In sports news, the US Women’s National Team (USWNT) delivered a convincing victory over South Korea in their pre-Olympics preparation. Today’s Comment will focus on why a slowdown in job openings may be good news for the market, why the regional banking system remains a point of concern, and why the UK Prime Minister debate wasn’t a clear win for either candidate. As usual, our report concludes with a roundup of international and domestic data releases.

Labor Cooling: Job openings have fallen in recent months in a sign that rising interest rates may finally be impacting the US economy.

• US job openings have plunged to a three-year low, according to the Bureau of Labor Statistics. April data shows that 8.06 million jobs are available, down from 8.35 million in the previous month, which pushed the job openings rate down to 4.8% from 5.0%. This marks the third straight month of decline and fuels speculation of an economic slowdown. The Atlanta Fed’s GDPNow forecast predicts second-quarter growth of just 1.8%, down from last week’s estimate of a 2.7% rise. This weak reading was seen as bullish for risk assets as it raised the possibility of the Federal Reserve cutting rates to prevent a recession.
• The recent jobs data offers a glimmer of hope for a soft landing. The ratio of job openings to unemployed workers is steadily declining and is now approaching pre-pandemic levels. This suggests employers are adjusting to wage pressures by scaling back on hiring, as opposed to reducing their workforce. This aligns with past comments from Fed Governor Christopher Waller. A few years ago, he suggested companies might freeze hiring rather than resorting to layoffs during an economic slowdown. This trend strengthens the case for potential rate cuts by the Fed in the latter half of the year.

• A Goldilocks scenario seems likely for the economy, with growth potentially slowing enough to tame inflation without tipping into recession. Friday’s jobs report is a crucial test for this forecast. The expected gain of 190,000 jobs would be considered modest. A significantly weaker number could fuel expectations of a rate cut, possibly as early as September. If our forecast holds true, this could lead to a rise in stock prices, with small-cap and mid-cap stocks potentially outperforming their larger counterparts as investors embrace riskier assets. Additionally, US government bonds should also rally as investors look to get ahead of the Fed.

Bank Troubles: Even though some indicators suggest financial conditions are still relatively stable, regulators remain concerned about potential trouble for banks.

• The Federal Deposit Insurance Corporation (FDIC) identified an increase in bank vulnerability, with 63 banks now considered at risk. This marks a rise from 52 in the fourth quarter of 2023. The US banking system faces a growing burden of unrealized losses totaling $517 billion. This represents an 8.2% increase from the previous quarter. Residential mortgage-backed securities are the primary culprit, accounting for 95% of the recent rise in losses. Additionally, there is an upward trend in the volume of past due and nonaccruals (PDNA), with most of the increase coming from the largest banks.
• Despite signs of vulnerability in some banks, broader financial conditions remain easy. The Chicago Fed National Financial Conditions Index reflects this disconnect, with 101 out of 105 indicators signaling looser-than-average conditions. As a result, hawkish voices within the Fed are rising. Last week, Dallas Fed President Lorie Logan, a non-voting FOMC member, emphasized the need to keep rate hikes on the table in order to prevent reigniting inflation through premature easing. She finds support from Atlanta Fed President Raphael Bostic, Minneapolis Fed President Neel Kashkari, and Fed Governor Michelle Bowman, who have also signaled openness to further tightening.

• A recent increase in banks identified as potential problems by the FDIC raises concerns. However, with only 1.2% of the system flagged, the overall health of the banking industry remains strong. This will be a key factor for policymakers as they navigate next week’s rate decision. While recent economic data is unlikely to completely derail rate cuts, rising inflation concerns may prompt the Fed to scale back its plans. Instead of the previously anticipated three cuts, the Fed might opt for a more measured approach with just two reductions. Additionally, policymakers may choose to monitor the effects of slowing the balance sheet reduction before resorting to more aggressive measures to safeguard the banking system.

UK Showdown: Prime Minister Rishi Sunak clashed with his Labour counterpart Keir Starmer as he attempted to boost support for his re-election campaign.

• The debate opened with a fiery exchange, as Sunak launched a direct attack by accusing Starmer of proposing a £2,000 tax increase (roughly $2,550). Starmer countered, insisting the figure was grossly inflated and based on flawed assumptions about his policies. However, despite his pushback, Starmer struggled to deflect concerns about potential tax hikes, leaving him on the defensive throughout most of the verbal sparring. That said, Sunak struggled to defend his party’s 14-year record in power, likely damaging his overall likeability rating.
• Although polls showed that Sunak was the victor of the debate, his party is still heavily favored to lose the election that is set to take place on July 4. Two of the most pressing concerns for the British are the rising cost of living and immigration. While inflation has come down from its peak, prices in the UK are still rising faster than in the eurozone. Additionally, many voters are concerned that immigration is placing a strain on housing affordability and public services. Although the country has implemented stricter immigration policies, there is still a push for lawmakers to go further.

• Despite exiting the European Union more than four years ago, the UK continues to search for a clear national identity. If polls hold true, the country could be on its fourth prime minister in that timeframe. This persistent leadership change is likely to complicate efforts to predict the future course of policy, as the UK grapples with ongoing challenges. One key issue in the coming months will be the country’s ability to manage its debt in order to achieve economic stability. A successful approach could attract investment, but failure could lead to investor hesitancy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with shipping data that points to strong global demand and high freight rates worldwide. We next review several other international and US developments with the potential to affect the financial markets today, including a testing scandal in the Japanese auto industry, surprise results in India’s official vote counting, and a preview of new immigration policies expected to be announced in the US today.

Global Shipping Industry: Shipping giant A.P. Møller-Mærsk yesterday raised its full-year earnings guidance for the second time in barely over a month. The upward revisions illustrate how shipping rates have increased amid strong global demand and disruptions in the Red Sea related to the Israel-Hamas conflict. While increased freight rates are positive for ship owners and operators, they also could buoy price inflation and help keep global interest rates high.

Japan:  An investigation by the Transportation Ministry has discovered multiple cases of erroneous vehicle certification tests by Toyota, Honda, and other top producers. The faulty tests reportedly don’t relate to safety or emissions, but they have been deemed serious enough for the government to suspend some vehicle shipments within Japan. As a result, Japanese auto-industry stocks took a hit yesterday, with top producer Toyota’s stock price falling 2.5%.

India: Contrary to what exit polls had shown during the weekend, official vote counts suggest the coalition led by Prime Minister Modi’s Hindu-nationalist Bharatiya Janata Party won only a narrow parliamentary majority in the recent elections. Vote counting continues, but the results so far point to a Modi who is politically weaker than expected. Amid worries that Modi will be limited in his ability to push through more of his business-friendly policies, India’s benchmark Sensex stock index fell 5.7% today, reversing Monday’s 3.4% gain.

Australia-China: In a new poll by the Lowry Institute, nearly 75% of respondents thought China would become a military threat to Australia within the next two decades. Consistent with that, 65% of respondents expressed support for the AUKUS alliance, in which Australia will buy nuclear-powered attack submarines from the US and the UK. The findings show how rising geopolitical threats from authoritarian leaders have drawn Western countries even closer to the US — not just in military terms, but potentially in economic and financial terms as well.

• Only 17% of respondents trusted China “a great deal” or “somewhat” to act responsibly in international relations.
• Only 12% said they were confident that Chinese President Xi Jinping would “do the right thing regarding world affairs,” although that was higher than the number who trusted Russian President Putin or North Korean Paramount Leader Kim.

China: Of course, China is already seen as an economic threat in the developed West, especially now that General Secretary Xi is pushing more investment in “new quality productive forces” such as electric vehicles and solar panels. The Wall Street Journal today carries a useful chart book explaining how this new investment has led to excess capacity and why it threatens to unleash a wave of cheap exports that could harm Western producers.

• Exemplifying the challenge, new data from Schmidt Automotive Research shows European registrations of Chinese-made EVs in January through April were 23% higher than in the same period one year earlier.
• As a result, Chinese-made EVs had a market share of about 20% in the period, pointing to strong competition for Europe’s domestic automakers and auto industry workers.
• The rapid growth in China’s market share goes far toward explaining why the European Union has launched an anti-dumping investigation into Chinese EVs. The results of that investigation are expected to be released next week, leading to the imposition of significant new tariffs against the Chinese vehicles.

Canada: The government and the union representing its 9,000 border agents are racing today to agree on a new labor contract to avoid a “work to rule” strike set to start on Thursday. If the negotiations fail and the Public Service Alliance of Canada members begin working strictly to existing contract rules, the loss of productivity could greatly slow US-Canadian truck and tourist crossings, with potentially significant negative impacts on US and Canadian economic activity.

US Immigration Policy:  President Biden is expected to announce today that he is signing an executive order that would restrict migrants’ ability to request asylum if they have crossed the US border illegally. The move comes as more voters complain about the surge in illegal migration across the southern border, making it a major issue in the November election. However, the order may not withstand scrutiny by the courts, since it is similar to an order by then-President Trump that was later ruled illegal.

• As we noted in our Bi-Weekly Geopolitical Report of May 20, many of today’s illegal entrants and asylum seekers are probably helping to fill the shortage of lower-skilled workers left over by the coronavirus pandemic.
• Given the low level of US births and shrinking numbers of high school graduates, immigrants will likely be an essential part of any future growth in the labor force, especially if today’s anti-immigration sentiment dissipates.

US Economy: This year’s Fortune 500 list of the largest US companies by revenue has been published today, with Walmart taking the top spot, followed by Amazon, Apple, and UnitedHealth Group. For the first time since 2013, California is the state with the most firms on the list, clocking in with 57 of the companies. Texas and New York tied for second place, with 52 of the companies each.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with notes on the global energy market. We next review several other international and US developments with the potential to affect the financial markets today, including a cut to France’s sovereign debt rating, election results in several key emerging markets, and another Federal Reserve policymaker’s statement suggesting US interest rates will remain high for an extended period.

Global Energy Market: The Organization of the Petroleum Exporting Countries and its Russian-led allies agreed to keep most of their current output cuts in place until late 2025, as they try to boost prices in the face of weak global demand and rising non-OPEC production. The cuts that will remain in place amount to more than three million barrels per day of potential output. With little change in production for now, the announcement has had almost no impact on the oil markets. So far today, Brent crude is trading virtually unchanged at $78.91 per barrel.

• Separately, European natural gas prices have surged some 13% so far today, following an outage at a Norwegian gas processing facility. Sources say the outage could eventually reduce Norway’s gas exports to Europe by about one-fifth.
• The outage is important because Norway has now become the single-largest supplier of gas to Europe, accounting for about 30% of the Continent’s total supply. The outage compounds other recent problems driving up European gas prices, such as a court ruling that could cut the remaining supplies of Russian gas through Austria and hot weather and high demand in Asia, which have diverted global supplies there.

France: On Friday, S&P cut France’s long-term sovereign credit rating from AA to AA-, with a stable outlook. According to S&P, the country’s weak economic growth is a key reason why it will be hard to cut its debt/GDP ratio in the coming years. The firm warned that political polarization will likely preclude passing economic reforms that could boost growth and/or reduce the budget deficit.

China-Australia: Based on national security concerns identified by its Foreign Investment Review Board, Canberra has ordered funds linked to a Chinese businessman to divest or cut their stakes in an Australian rare-earths miner. The move illustrates how growing frictions between China and the West continue to sever trade, capital, and technology flows around the world. The move could also anger Beijing and reverse the recent improvement in Chinese-Australian relations.

China: The private Caixin/S&P Global purchasing managers’ index for manufacturing rose to a seasonally adjusted 51.7 in May from 51.4 in April. That’s in contrast with the official PMI last week, which dropped to 49.5 from 50.4. Like most major PMIs, both these are designed so that readings over 50 indicate expanding activity. Since the index from Caixin/S&P Global puts a higher weight on smaller firms, its outperformance suggests that China’s smaller companies are now doing better than its bigger enterprises.

India:  With official election results due out tomorrow, exit polls over the weekend showed the coalition led by Prime Minister Modi’s Hindu-nationalist Bharatiya Janata Party is on track to control at least 353 of the 543 seats in the lower house of parliament. If confirmed, the results would put Modi in a position to win a third consecutive term as the nation’s leader and continue his business-friendly economic policies, including strong infrastructure spending. That prospect has driven India’s stock market indexes up some 3.5% so far today.

South Africa: Official results from last week’s elections show the African National Congress has failed to garner a majority of votes for the first time since the end of apartheid in 1994. According to the results, the party won only about 40% of the votes, down from 58% in the 2019 elections, reflecting perceptions that it has become corrupt and arrogant. The ANC will therefore have less than a majority in parliament, forcing it to form a coalition with opposition lawmakers to form a government and potentially scaring off investors concerned about political stability.

Mexico: In elections yesterday, former Mexico City mayor and environmental scientist Claudia Sheinbaum of the ruling Morena party won the presidency with about 60% of the vote, although the final count isn’t expected until later today. It appears Morena will also have a two-thirds majority in the legislature, which would allow it to push through unfinished constitutional changes favored by outgoing President Andrés Manuel López Obrador.

• Those changes include moves to increase state control over the energy industry and weaken the electoral oversight agency.
• Faced with the prospect of continued leftist policies in Mexico, investors have driven down the value of Mexican stocks and the Mexican currency. So far today, the peso (MXN) is 2.4% weaker, trading at 17.4205 per dollar ($0.0574).

US Monetary Policy: In a podcast released today, Minneapolis FRB President Kashkari said the Fed should keep interest rates high for an “extended” period, given the current strength in the economy and Americans’ “visceral” aversion to consumer price inflation. The statement fits with many other recent statements by Fed policymakers indicating they are inclined to keep interest rates high for much longer than investors initially expected.

US Artificial Intelligence Industry: In a surprise move yesterday, Nvidia announced the next generation of its market leading AI processors, codenamed “Rubin,” just three months after announcing its previous generation, known as “Blackwell.” Amid concern about the energy consumed by Nvidia’s chips, the company noted that the Rubin processors have been designed to increase energy efficiency. Nvidia’s aggressive move and apparent success in innovating reduced energy consumption could well boost its stock price and the overall market today.

US Postal Service: The Postal Regulatory Commission late last week approved a five-cent hike in the price of a first-class stamp. Starting July 14, sending a first-class letter will cost $0.73, or 7.8% more than the current price. The price increase is the nineteenth since the year 2000, and the fifth in the last two years.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equity futures are trading higher after the PCE price index showed that inflation continues to stay in line with expectations. In sports news, the Dallas Mavericks defeated the Minnesota Timberwolves, setting up a final’s matchup with the Boston Celtics. Today’s Comment dives deep into Thursday’s GDP report and explores reasons for our continued economic optimism. We’ll also analyze the West’s further crackdown on chip exports and offer a primer on the upcoming elections in Mexico this weekend. As usual, our report concludes with a round-up of domestic and international data releases.

GDP Breakdown: While GDP revisions confirmed a first-quarter slowdown, uncertainty lingers about whether it’s a temporary dip or a sign of more significant trouble.

• US economic growth in the first quarter was weaker than initially estimated. GDP was revised downward to an annualized rate of 1.3%, down from 1.6%. Both consumer spending and inflation were lower than previously reported, with consumer spending growth revised down to 2.0% from 2.5% and the PCE price index for the quarter coming in at 3.6%, down from the initial estimate of 3.7%. While underlying fundamentals suggest the economy isn’t in immediate danger of recession, there are signs of waning economic momentum.
• Gross Domestic Income (GDI), released only after the second GDP estimate, confirmed potential weakness in economic output. The report showed that growth slowed from an annualized growth rate of 3.6% in Q4 2024 to 1.5% the following quarter. While both reports should theoretically reflect similar trends, they can actually tell different stories. The GDP report, which is focused on production activity, reveals a drag from declining inventories and rising imports. In contrast, GDI, which measures income earned by residents, suggests corporate profits also took a hit, contracting 1.7% in the first three months of the year, down from the previous quarter’s rise of 3.9%.

• While recent data suggests slowing growth, it’s important to consider the historical context. The past four recessions were all triggered by unforeseen events: the 2020 pandemic, the 2008 Lehman Brothers collapse, the 9/11 attacks in 2001, and the Gulf War in 1990. Hence, a slowdown doesn’t necessarily foreshadow an immediate downturn. While the economy faces challenges, we remain cautiously optimistic that it can weather these headwinds, absent any major disruptions such as a mass mobilization war, commodity supply shock, or pandemic. That said, a period of subpar growth is still a possibility for 2024.

More Export Controls on Chips: The West’s crackdown on semiconductor sales to its adversaries has been extended to the Middle East, reflecting concerns about potential leaks.

• US regulators are scrutinizing the national security implications of artificial intelligence (AI) development. As a precaution, they’ve tightened export controls on AI accelerator chips specifically for certain Middle Eastern countries. These chips are in high demand because they excel at processing large datasets while consuming less energy. The technology has become crucial for companies and governments looking to build out their AI infrastructure. Companies like Nvidia, AMD, and Intel Corp have been waiting on the sideline for approval to sell these chips to countries such as Saudi Arabia, Qatar, and the United Arab Emirates.
• This national security scrutiny comes amid a surge in AI stocks. For instance, Nvidia, the third-largest chipmaker by revenue, has fueled more than 30% of the S&P 500’s total returns this year, highlighting the booming AI market. Bloomberg analysis suggests that this is the largest share of a market leader at this point of the year in at least a decade. This dominance highlights the tech sector’s increasing concentration within the index. While concentration isn’t new, the current level is unprecedented. The “Magnificent Seven” tech companies now account for over 30% of the S&P 500, a significant jump from 20% in 2020.

• The tech industry faces heightened scrutiny due to growing geopolitical tensions, which is why we closely monitor the landscape. As countries form blocs, trade restrictions could disproportionately impact the revenue of large tech companies heavily reliant on foreign markets, particularly those with significant exposure to China. While these companies aren’t facing immediate risks, the future holds uncertainty due to geopolitical tensions. To mitigate portfolio risk, investors might consider small and mid-cap companies, which generally have attractive valuations relative to their large cap counterparts but also tend to have a more domestic focus that can make them less vulnerable to shifting trade patterns.

Mexican Elections: Elections in Mexico are set to take place over the weekend as the country looks to replace its controversial but fiscally prudent leader.

• Current polls indicate that Claudia Sheinbaum, the chosen successor of President Andrés Manuel López Obrador (AMLO), is heavily favored to win the election. Sheinbaum is leading her opponents, Xóchitl Gálvez and Jorge Álvarez Máynez, by a wide margin. The latest data suggests that she is poised to secure more than half of the vote, with Gálvez projected to receive around a third and Máynez anticipated to garner the remainder. Despite her lead, there have been talks that high voter turnout for the opposition may lead to an upset, as her popularity has shown signs of waning during the run-up to the election.
• Sheinbaum is expected to carry on the legacy of her predecessor, AMLO. Under his administration, the country’s inflation rate has stabilized, returning to its long-term average in a relatively short time. Additionally, the government exhibited fiscal prudence during the pandemic’s onset, incurring smaller deficits than most Latin American nations. This fiscal responsibility, coupled with an increase in foreign investment, has benefited the Mexican peso (MXN), which has largely outperformed its peer currencies. However, the next administration will face challenges, including rising gang violence, a sluggish economy, and concerns about border security.

• The success of the next administration will likely hinge on how the next president handles relations with their northern counterpart. Despite border security disputes, AMLO maintained relatively good relationships with both former President Donald Trump and current President Joe Biden. However, concerns are growing that Mexico has become too close to the United States’ rival, China. Several Chinese automakers are exploring the possibility of building factories in Mexico. These facilities would strategically position them to sell electric vehicles in the US market, bypassing hefty tariffs. Should this come to fruition, the US might seek to update or renegotiate the USMCA trade agreement.

In Other News: Former President Trump was found guilty in the hush money trial. Although his conviction does not impact his eligibility to run for office, it may damage his perception among voters. Meanwhile, President Biden has permitted Ukraine to use US-made weapons to strike military targets in Russia; this marks a significant escalation in tension and could pave the way for a broader war.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Equity futures, though down overall, edged higher ahead of the opening bell as downward revisions to GDP data fueled optimism about a potential policy shift by the Federal Reserve. In sports news, the Edmonton Oilers were able to keep their NHL championship hopes alive by defeating the Dallas Stars on Wednesday. Today’s Comment will discuss the latest Beige Book and how it might impact Fed policy, why housing markets are showing early signs of troubles, and our opinion about elections in South Africa. As usual, our report will conclude with a roundup of domestic and international data releases.

Bad News on the Ground: The Federal Reserve’s latest survey of its 12 districts points to a slowing economy.

• The U.S. economy saw continued slow growth in early April to mid-May according to the Federal Reserve’s Beige Book. While most regions reported slight to modest expansion, some sectors showed signs of weakness. Auto sales were a particular concern, with dealerships resorting to adding more incentives to move cars. Additionally, there was a notable slowdown in hiring with the survey showing a modest increase in employment and firms reporting that they are finding it easier to fill positions. This suggests that demand is slowing, and the labor market is cooling down.
• This report is unlikely to sway policymakers to cut rates, but it should dissuade members from pushing for a rate hike. Economic data continues to show that the economy is growing at a stable pace. The latest consumer confidence report rebounded from April as households expressed more optimism about the economy, even as they worry more about rising prices. Similarly, the May Purchasing Manager Index (PMI) by S&P Global showed that output picked up in May, with services activity experiencing its best month in a year. However, the Beige Book suggests the recent slowdown in hiring and the weak Q1 GDP number might not be temporary.

• This Friday’s PCE price index, the Fed’s preferred inflation gauge, is a critical indicator of progress towards its 2% target. Markets anticipate that the core index will hold steady at 0.3% growth from March and 2.8% year-over-year. A higher-than-expected reading could push back investor hopes for a rate cut to September or later. Conversely, a softer inflation reading could keep a July rate cut on the table. While we remain optimistic about one to two rate cuts this year if inflation meets the Fed’s 2.6% year-end projection, the possibility of no cuts is becoming increasingly likely.

A Cool Summer: The supply of homes is starting to increase, but it appears that potential buyers are reluctant to purchase.

• Redfin data reveals a sharp increase in the number of US home sellers slashing prices to attract buyers. Nearly 6% of listings have undergone price cuts within just 12 weeks of hitting the market, a significant rise heading into the traditionally hot summer season — a time typically known for a surge in buyer demand. This data adds to growing evidence that the housing market may be losing momentum. Last week, the National Association of Realtors reported that existing home sales in April fell 1.9% year-over-year, despite expectations of a slight increase and an uptick in supply.
• Rising interest rates appear to be finally hitting the residential real estate market, as evidenced by the recent slowdown in demand. Homeowners, who locked in historically low rates during the pandemic, have been reluctant to sell. However, this trend may shift as new buyers face significantly higher borrowing costs. This could be especially impactful for a small group of homeowners who chose adjustable-rate mortgages during that period. According to a Bloomberg report, these homeowners could see a sharp rise in their monthly payments in the coming months, potentially contributing to current market headwinds.

• The surge in home-price drops presents a double-edged sword for the economy. While it’s welcome news for potential buyers and could lead to lower shelter price inflation (particularly rents and owner-equivalent rent), it might also dampen consumer confidence. Homeownership often represents a significant portion of a household’s wealth. Falling home prices could erode this wealth, especially for those without a diversified investment portfolio. As a result of this wealth effect, consumers may start to delay major purchases like cars or appliances and look to rebuild their savings first instead.

South African Sea Change: This week’s election is expected to see the ruling African National Congress (ANC) party lose its majority for the first time in 30 years.

• While the party is still expected to win the most seats, early results show that the ANC is slated to receive 42.5% of the vote. The opposition Democratic Alliance (DA) party should receive 26% of vote and the far-left Economic Freedom Fighters (EFF) will collect 8.4%. The official results won’t be known for several days but must be released within a week by law. If confirmed, the ANC will be forced to form a coalition government in order to maintain control, potentially requiring them to make compromises to their platform, which could lead to political infighting.
• This year’s election saw a large turnout, as voters looked to register their displeasure with the status quo. The country’s job market faces a significant challenge, with unemployment rising to 32.8% in the first quarter. While this is an improvement from the pandemic peak of 35%, it remains considerably higher than the pre-COVID level of 28%. Adding to the economic woes, the country is grappling with persistent power outages due to insufficient supply of electricity. To manage the strain on the power grid, the government has implemented load shedding. While this measure has been effective in reducing the load, it has also negatively impacted economic activity.

• Despite the ANC maintaining a strong plurality of seats following the election, there is still much political uncertainty. If the results hover around 40% of the vote, party members might seek to replace President Cyril Ramaphosa. Additionally, the rise of the controversial EFF could pose problems for investors. The party’s leader, Julius Malema, might leverage his influence for a greater role in government. In the past, he has advocated for the nationalization of the country’s gold and platinum mines and the seizure of land from white farmers.

In Other News: Goldman Sachs continues to supply talent to the Federal Reserve System, with Beth Hammack set to replace Loretta Mester as the President of the Cleveland Fed. Other notable Goldman alumni include former New York Fed President William Dudley and current Minneapolis Fed President Neel Kashkari. A report revealed that NATO only has 5% of the defenses needed to protect its eastern flank, a sign that Western governments are likely to ramp up spending on security.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Our Comment today opens with a discussion of how right-wing parties have finally consolidated power in the Netherlands. We next review several other international and US developments with the potential to affect the financial markets today, including increased signs that the Bank of England may be inadvertently laying the groundwork for new financial instability and a discussion of US polling trends as the nation begins to focus more on the November elections.

Netherlands:  After months of post-election horse trading, a right-wing coalition has nominated career civil servant Dick Schoof to be prime minister. Formerly, Schoof was chief of the Dutch intelligence agency, the top civilian in the ministry of justice, and the head of the national immigration service. That made Schoof especially attractive to Geert Wilders, the anti-immigrant firebrand whose far-right Freedom Party won the most votes in the November election. Wilders was forced to abandon his goal of becoming prime minister to secure a right-wing coalition.

• With Schoof in place as prime minister, the Freedom Party will rule in coalition with the conservative New Social Contract, the populist Farmer-Citizen Movement, and the conservative liberal VVD party of outgoing Prime Minister Mark Rutte (who is expected to become the new head of the North Atlantic Treaty Organization).
• Among its chief aims, the new government plans to cut immigration, reduce foreign development aid, freeze government salaries, and roll back some environmental policies.

United Kingdom: Upward pressure on short-term interest rates has raised concern that the Bank of England is being too aggressive in its quantitative tightening program. Unlike most other major central banks, the BOE isn’t just letting its government bond holdings run off as they mature, but it is also selling them outright. The volatile, surging short-term rates are a concern because they could portend a broader financial crisis at some point.

Russia-Ukraine War: French President Macron said he will approve Ukraine’s use of its French-supplied Scalp cruise missiles to strike targets in Russia, so long as they are used against sites that have launched attacks on Ukraine. The move by Macron, who has also supported sending North Atlantic Treaty Organization troops to Ukraine, is another small step raising the risk of an eventual direct clash between NATO and Russia. Steps on the Russian side include increasingly aggressive sabotage and influence operations by Russian intelligence agencies.

• In the latest case of Russian activity, French and Belgian police today searched the offices of an employee of the European Parliament on suspicion that he has been working for the Russians.
• In any case, President Biden and other NATO leaders continue to impose tough restrictions on the weapons they have provided to Ukraine in order to limit the risk of escalation.

Taiwan: Despite popular protests, the opposition-controlled legislature has passed legislation giving it increased control over newly inaugurated President Lai and his government. The measures give the legislature extensive authority to investigate government policies and projects, including powers to summon military officials and review classified documents.

• The measures, passed by the relatively pro-Beijing Kuomintang and the Taiwan People’s Party, could heavily hamstring the independence-minded Lai as he seeks to strengthen Taiwan’s defenses against a potential Chinese invasion or blockade.
• Of course, it is highly possible that the opposition effort to tie Lai’s hands was supported by Beijing.

North Korea-South Korea: To retaliate for pro-democracy leaflets released over North Korea by activists in the south, Pyongyang has reportedly sent over 150 balloons carrying garbage and animal feces into South Korea. Of course, the North Koreans have much more dangerous weapons that they could send southward. Nevertheless, the incident illustrates how the relationship between North Korea and South Korea just keeps getting crappier (sorry).

US Politics:  A new slide deck by pollster Bruce Mehlman contains an interesting graphic showing the share of voters who think the US is “on the wrong track” has now reached a record high of 73%. Perhaps most interesting, the graphic shows that percentage has actually been climbing since 2002, albeit with a flat period during the Obama presidency.

• The 2002 date is significant because it is just about the time when the shock of China’s entry into the World Trade Organization began to be felt. That’s consistent with our view that the growing malaise and populism since then can be traced largely to the US effort to maintain global hegemony in the face of the Chinese onslaught.
• With the US trying to maintain hegemony by keeping its economy open to trade and providing the world’s reserve currency, the result was intense foreign competition for US producers, de-industrialization, and reduced opportunity for relatively less-skilled workers.
• To the extent that is true, we expect government policy in the US will likely remain populist in the coming years, no matter who wins the November election. For example, the US will likely see even more trade protectionism, industrial policy initiatives, near-shoring of production, and reindustrialization.

US Energy Industry: Oil giant ConocoPhillips has struck a deal to acquire Marathon Oil in an all-stock transaction valued at $17.1 billion. The takeover is the latest sign of sweeping consolidation in the nation’s oil and gas industry after years of capital discipline and good pricing have provided the financial resources to scrape together new assets for increased efficiency.

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