by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news of an impending Russian and North Korean attack to push the Ukrainians out of their small foothold in the Kursk region. We next review several other international and US developments with the potential to affect the financial markets today, including new details on China’s latest fiscal stimulus program and President-Elect Trump’s latest personnel and policy moves.

Russia-Ukraine Conflict: US and Ukrainian officials say Russia has massed some 50,000 troops, including North Koreans, around the small Kursk area currently held by Ukraine. The officials believe the Kremlin will launch a major attack on the Ukrainians in the coming days, hoping to finally eject them from their only substantial position in Russia proper. If such an offensive is successful, it would leave the Ukrainians without a key bargaining chip in the event that the new Trump administration forces them into negotiations with the Russians.

Russia: The Kremlin is reportedly exploring a plan to merge Russia’s three largest oil companies into one national champion. The plan would fuse state-owned firms Rosneft and Gazprom Neft with independently owned Lukoil, forming what would be the world’s second-largest oil company after Saudi Aramco. If it’s consummated, the merger would also give President Putin more control over the Russian energy sector and global oil prices.

Japan: The Diet today voted to keep Prime Minister Ishiba in power, even though his long-ruling coalition between the Liberal Democratic Party and Komeito lost its parliamentary majority in the October election. Ishiba won his victory only with the support of the newly popular, center-right Democratic Party for the People. Going forward, that means Ishiba will be one of Japan’s weakest prime ministers, crimping his ability to enact new economic or security measures.

Chinese Fiscal Policy: We now have more detail on the new local-government refinance plan from the National People’s Congress, which we flagged in our Comment on Friday. The program gives local governments new debt quotas and budget flexibility to refinance 10 trillion renminbi (about $1.4 trillion) in high-cost, risky debt currently hidden in off-budget financing vehicles. Spread over five years, the plan could help local governments replace most of their current high-cost hidden debt with lower-cost, on-budget debt approved by Beijing.

• As part of the announcement, the government said local governments currently have about 14.3 trillion RMB (about $2.0 trillion) in hidden debt. The program aims to cut the total to just 2.3 trillion RMB (about $320 billion) by 2028.
• By replacing local investors’ high-interest loans with lower-cost, on-budget loans, the program aims to ease local governments’ current fiscal squeeze, giving a modest boost to overall economic growth.
• All the same, the main impact of the program might be to reduce the risk of defaults and financial crises by local governments. In other words, the priority may have been fiscal stability more than spurring economic growth. We continue to think the program will only provide a modest boost to Chinese economic growth going forward, meaning China will probably not regain its position as a prime engine of global economic growth.

Chinese Price Inflation: Reflecting China’s weak economic growth, the October consumer price index was up just 0.3% from the same month one year earlier versus a 0.4% rise in the year to September. The October producer price index was down 2.9% on the year compared with an annual 28% fall in the previous month. The deflation at the wholesale level is consistent with Western criticism that China has over-invested in its manufacturing sector and is now dealing with excess production, much of which is being exported at fire-sale prices.

United States-Taiwan-China: According to confidential sources, Taiwan Semiconductor Manufacturing Company (TSM) has told its mainland China customers that it will no longer accept their orders for advanced artificial-intelligence semiconductors. The move comes after reports that Chinese telecom equipment giant Huawei apparently used front companies to buy such chips from TSM despite US rules blocking it from acquiring the technology. New reporting over the weekend said the US Commerce Department ordered TSM to take the action.

• The TSM move is yet another example of how technology flows between the US geopolitical bloc and the China bloc are being curtailed.
• TSM’s move to stop all advanced sales to China is extreme, but we suspect it will be followed up by similar moves in the future. In our view, global fracturing into relatively separate geopolitical and economic blocs will continue. These conditions will result in less efficient global supply chains, higher costs, higher inflation, and higher interest rates going forward.

United States-Taiwan: The Taiwanese government is reportedly considering a large purchase of US ships, jets, missiles, and other weapons systems to signal to the new Trump administration that it is serious about defending itself against China. Of course, the large purchase could also be a boon to US defense firms such as Lockheed Martin and Northrop Grumman. If completed, the purchase would help validate our view that geopolitical tensions will spur higher defense spending worldwide in the coming years, producing good returns for global defense firms.

US Politics: President-Elect Trump said on Saturday that his new administration would not include either Mike Pompeo, his former secretary of state and CIA director, or Nikki Haley, his former ambassador to the UN. It seems highly likely that the announcement was retribution for Pompeo’s and Haley’s past attacks on Trump’s policies. An early, highly public punishment against them would help signal that Trump will prioritize loyalty in his new administration.

• Nevertheless, it is notable that both Pompeo and Haley are strong hawks regarding the national security threat from China.
• It still seems certain that Trump will be tough on China when it comes to trade and other economic concerns, but now that he’s jettisoned Pompeo and Haley, we’ll be looking closely at future personnel and policy announcements to gauge how tough he’ll be against China’s military and geopolitical aggressiveness, especially in the Indo-Pacific.

US Fiscal Policy: The Wall Street Journal today carries a useful article on the challenges Republicans now face in deciding how much of an expansion in the federal budget deficit they will accept to advance their tax cuts in 2025. According to the article, Republican leaders are kicking around various figures for “The Number,” but the negotiations are only beginning, and a final proposal may not be ready until early next year. The decision is considered a test of strength between the party’s deficit hawks and its tax cutters.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Today, the market is closely watching to see if the Republicans can gain enough seats to take control of the House of Representatives. In sports news, the Baltimore Ravens made a remarkable comeback to defeat the Cincinnati Bengals. Today’s Comment will cover the latest FOMC meeting, Trump’s plans to refocus industrial policy, and the adjustments that the EU intends to make for a Trump presidency. As always, our report will also include a roundup of both international and domestic data releases.

Policy Path Uncertainty: The FOMC decided to lower its policy rate as expected but was very vague about the path of future cuts.

• The Federal Reserve lowered its benchmark interest rate by 25 basis points on Thursday, setting the target range at 4.50%-4.75%. This decision was influenced by recent economic indicators, including October’s inflation and employment data, which suggested a potential slowdown in economic activity. While Fed officials acknowledged the possibility of near-term inflationary pressures, they expressed optimism about a potential decline in January. However, they cautioned that uncertainty surrounding certain economic policy changes has complicated efforts to project cuts going into next year.
• The central bank’s reluctance to provide a clear interest rate path suggests a cautious stance, likely shaped by the recent election’s policy implications. In particular, concerns persist that the president-elect’s proposed tax cuts might intensify inflationary pressures. While Fed Chair Jerome Powell avoided directly commenting on fiscal policy proposals, he did describe the current deficit as being unsustainable. He further emphasized the central bank’s commitment to data-driven decision-making, stating that it “does not guess, does not speculate, and does not assume” about future policy shifts.

• Next month’s FOMC meeting will offer markets key insights into the Fed officials’ views on the inflationary impact of potential Trump administration policies. A more hawkish shift could set the Fed on a collision course with the incoming administration. Although there is speculation that Trump might seek to replace Fed officials with loyalists, such a move could backfire by sparking a sell-off in long-term bonds, which could drive up borrowing costs for the consumers he aims to support. A compromise is more probable, with Trump potentially making spending concessions in exchange for lower policy rates.

What’s Next for Build Back Better? Trump’s ascension into the White House will likely refocus but not fundamentally change the direction of policy.

• The president-elect is expected to shift US priorities from using stimulus to incentivize foreign investment in the US to relying on tariffs as the primary tool. Last month, Trump criticized the Biden administration’s spending on stimulus and tax incentives to attract foreign businesses, calling it too costly and suggesting tariffs as a more effective alternative. He has also pledged to cut much of the unspent funding for climate initiatives in the Inflation Reduction Act, aiming to reduce the deficit and refocus the country by expanding fossil fuel production.
• Despite his lack of interest in the two spending bills passed by the Biden administration, Trump is unlikely to reverse most of these changes. The domestic industrialization strategy has driven a sharp increase in spending, fueling a surge in the construction of chip facilities, data centers, and battery production sites. Additionally, the bill was designed to create jobs in key Republican strongholds, making it even more complex to dismantle these initiatives, which may explain why House Speaker Mike Johnson walked back plans to repeal the CHIPS act.

• We expect the next administration to let market forces shape the direction of clean energy initiatives, while largely leaving chip production efforts intact for now. The reluctance to aggressively reverse these policies stems from the Republican party’s need to prioritize its anticipated tax proposals, which will likely face significant scrutiny due to their budgetary impact. Following this, Republicans will also focus on advancing a tariff bill which should also meet some pushback. While some adjustments to the CHIPS and Inflation Reduction bills may occur, we do not expect these to be top priorities.

EU Faces Reality: European unity is poised to be severely tested as the US pursues a strategic realignment that could upend the longstanding relationship.

• European leaders are strategizing on how to approach President-elect Donald Trump while preserving unity within their coalitions. During his campaign, Trump pledged to scale back US support for NATO members that fall short of defense spending targets, pushed for a swift resolution to the Ukraine conflict, and threatened tariffs on all European goods. Although these threats are not new — Trump raised similar issues in his first term — the urgency to address these vulnerabilities has intensified, as they pose a further risk to the bloc’s growth prospects.
• A core challenge for the EU is reducing its dependence on the US for security and trade. Former ECB President Mario Draghi has proposed establishing a unified approach, which he estimates would require a public fund of 800 billion EUR ($861 billion) in additional annual investments. Meanwhile, French President Emmanuel Macron is advocating for the bloc to assert its sovereignty by boosting investment in its domestic defense industry, with a special focus on advancing technologies in artificial intelligence, quantum computing, space, biotechnology, and renewable energy.

• The EU’s ability to counterbalance a more assertive US will depend on its capacity for unity. By overcoming internal divisions and fostering deeper cooperation — potentially through a fiscal union — the EU could improve its access to capital markets through collective borrowing. This will not be an easy process, especially with individual countries struggling to meet deficit targets following the pandemic, but it is likely something the bloc will explore in the coming years. One potential approach could be the issuance of another joint EU bond to fund special projects.

In Other News: Israel is preparing to deepen its war efforts in Lebanon and Gaza in another sign that the conflict is unlikely to end until next year. The Trump team is considering ways to scale back some of the tax promises made during the campaign to facilitate the passage of legislation. Meanwhile, China approved a $1.4 trillion spending program on Thursday, which aims to help bail out local governments. However, there are concerns that this amount of spending may still be insufficient to effectively revive the economy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is refocusing its attention on the Fed’s rate decision later today. In sports news, the Golden State Warriors defeated the Boston Celtics. Today’s Comment will discuss why investors should not be overly focused on policy agenda. We will also take a deep dive into why small cap stocks have been outperforming the overall market and explore the possibility of snap elections in Germany. As usual, the report will conclude with a roundup of international and domestic data releases.

Red Wave: The S&P 500 had its best post-election rise in history as investors prepare for a Republican takeover of the executive and legislative branches of government.

• Republicans are projected to secure 53 Senate seats and possibly exceed the 218-seat threshold needed to control the House. This anticipated shift has caught investors’ attention, as control over both chambers of Congress means that lawmakers will face fewer obstacles in pushing through pro-growth measures such as tax cuts and the removal of regulations. Financials and Energy outperformed, as both sectors are expected to be big winners. Additionally, there is increasing optimism that AI will face less oversight, potentially boosting research and development in the tech space.
• While policy agendas can be influential, they don’t always drive market returns. As JP Morgan Global Market Strategist Meera Pandit highlights, during Trump’s first term, the S&P Global Clean Energy Index outperformed the S&P Energy Index, rising 275% compared to -40%, respectively. Conversely, under Biden, the overall energy index outperformed clean energy, returning 211% versus -54%, respectively. This happened despite Trump’s pro-fossil-fuel stance and Biden’s focus on clean energy. This contrast underscores the importance of looking beyond policy rhetoric to understand broader market forces.

• A key risk during this period of policy optimism is that unfavorable market conditions could undermine the effectiveness of certain policies. While tax cuts will help boost earnings and consumption, the effects of policy changes are less clear. In short, although Republican influence on policy decisions is noteworthy, external factors such as trade relations, economic trends, and geopolitical tensions are likely to have a greater impact on sector returns. Therefore, investors should exercise some caution before participating in the current rally.

The Small Cap Rise: The Russell 2000 surged ahead of its larger peers as markets anticipate pro-growth policies from Trump’s win.

• The day after Trump’s victory, the Russell 2000 index surged nearly 6%, marking its largest post-election gain since the index began in 1978. This strong performance was no anomaly; the second-largest gain followed Trump’s surprise win in 2016. The rally was fueled by expectations that Trump would push through tax cuts and remove restrictions that would help drive growth and boost corporate profits. Consequently, investors showed a heightened risk appetite, focusing on small cap Communication Services and Financials as the sectors are relatively cheap compared to its peers.
• A key difference between Trump’s initial term and now is the changing macroeconomic landscape. While recent indicators show improvement, small cap companies still face strong headwinds, including high labor and borrowing costs and persistent inflation — all of which have pressured earnings growth. Continued market confidence in small cap stocks will largely depend on the Fed’s ability to engineer a soft landing and achieve economic growth alongside declining inflation. This would likely boost revenues and reduce borrowing costs, thereby improving profitability.

• While some initial optimism may wane in the coming weeks as investors seek further clarity from the administration, the long-term outlook for small cap stocks appears to be improving. Assuming the administration avoids more extreme policy actions, such as challenging the Fed’s independence, the market is likely to view the election as a positive catalyst. This positive sentiment is expected to persist throughout much of 2025, as the Republican-led government is likely to hit the ground running by removing burdensome regulations and implementing tax cuts.

Germany on the Cusp: The German government teeters on the edge of collapse as the ruling coalition’s deep divisions are proving to be insurmountable.

• On Wednesday, German Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner over disagreements on spending and economic reforms. This decision effectively removes the fiscally conservative Free Democrat Party from the coalition and paves the way for a no-confidence vote scheduled for mid-January. If Scholz loses, which is highly probable, then there would likely be snap elections in March. Polls show that the right-wing Christian Democrats (CDU) and the anti-immigration Alternative for Germany (AfD) are the two most popular parties, with the Social Democratic Party (SPD) in third.
• The collapse of the coalition government coincides with a period of significant economic weakness. Industrial production has stagnated since 2017, and annual GDP growth is on track to fall for the second consecutive year. Factory activity has notably plummeted, with key sectors like automotive, chemical, and engineering experiencing sharp declines. These issues have been exacerbated by high energy costs, elevated labor expenses, and insufficient infrastructure investment. While consumer sentiment has improved due to easing inflationary pressures, it remains relatively low.

• New elections could boost right-wing parties, but their ability to form a government remains uncertain. The center-right CDU’s refusal to ally with the far-right AfD means it would need significant support and partnerships with smaller parties to secure a majority. Alternatively, a coalition could emerge between the Social Democratic Party and the rising left-wing alliance led by Sahra Wagenknecht. The composition of Germany’s next government will impact equities, with a CDU-led government generally viewed as the most market-friendly outcome.

In Other News: Mitch McConnell has expressed his belief that the filibuster will remain in place if the GOP takes control of both the House and the Senate. The Bank of England has cut its policy rate by 25 basis points but did not indicate any further rate changes for this year. In October, Chinese exports grew by 12.7% year-over-year, marking the fastest pace of growth since 2022.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently processing the election results. In sports news, Sporting Lisbon achieved a stunning upset by defeating Manchester, the defending champions, with a score of 4-1. Today’s Comment will discuss the election results, provide a preview of the upcoming FOMC meeting, and offer an update on the Iran-Israel conflict. As usual, the report will conclude with a roundup of both international and domestic data releases.

Election 2024: The Republican party appears to be on pace to sweep all three houses of government.

• Donald Trump secured another presidential term after successfully sweeping all of the swing states. He currently holds over 277 electoral votes and is expected to finish with around 312. His victory also lifted several down-ballot Republicans, including Bernie Moreno in Ohio, who unseated Democratic incumbent Sherrod Brown. The House remains closely contested, with Republicans gaining one seat and slightly increasing their majority, while swing seats are still in play for Democrats. Following Trump’s win, equities rallied, the dollar strengthened, and 10-year Treasury yields surged as investors doubled down on the so-called “Trump trade.”
• Trump’s return to power has sparked speculation about a possible growth shock. On the campaign trail, he proposed a series of stimulus measures that included lowering the capital gains tax, removing of the cap on SALT deductions, eliminating taxes on tips, and exempting firefighters, police officers, active-duty military, and veterans from paying taxes. Additionally, the decision to deregulate is also likely to help boost corporate profits. While campaign promises are likely to face some sort of adjustment to make them more palatable, it seems that the market is taking Trump at his word.

• Post-election optimism is expected to buoy equity markets in the coming weeks as investors speculate about the potential impact of the next presidency. A Republican president with a divided Congress often provides a balance that can temper more extreme policy shifts, potentially supporting equities and mitigating a rise in yields. Conversely, a Republican sweep could boost equities but also lead to increased bond yields. While Republicans currently hold a slight advantage, the final majority could be razor-thin, potentially as close as a single seat.

The Fed’s Next Move: The FOMC is set to start its two-day meeting on Wednesday as it looks to bring down policy rates and continue its easing cycle.

• Market sentiment strongly favors a 25 basis point interest rate cut by the Federal Reserve on Thursday, with the CME FedWatch Tool indicating a 97.5% probability. This expectation is fueled by recent economic data, which shows a cooling inflation and labor market. The Personal Consumption Expenditure (PCE) price index, the Fed’s preferred inflation gauge, declined to 2.1% in September, while core PCE remained steady at 2.7%. Additionally, the Bureau of Labor Statistics’ payroll report revealed a significant slowdown in job growth, with only 12,000 jobs added in October, which is well below the consensus estimate of 100,000.
• That said, investors will also seek clarification on the Fed’s future policy direction. While the previous dot plot indicated a median projection of a 50-basis-point cut for the federal funds rate, it was driven a single vote majority. This suggests that the November cut may be the last for the year. The Fed’s decision will likely hinge on whether it observes sufficient progress in reducing inflation over the next two months. For core PCE to decline below 2.7% in this timeframe, prices would need to remain essentially unchanged from October levels, which seems unlikely given current trends.

• The key focus of this week’s FOMC meeting will be the committee’s interpretation of recent economic data. If it dismisses the weak employment figures as an anomaly, it may become more cautious about further rate cuts. However, if it maintains its assessment of a cooling labor market, it could signal a more accommodative stance. Given the inconsistent nature of recent data, it’s difficult to draw definitive conclusions about the trajectory of inflation and the labor market. As such, we anticipate that the Fed will likely provide limited guidance, leading to relatively muted market reactions.

Israel Uncertainty: Prime Minister Benjamin Netanyahu has fired a member of his cabinet who was one of the strong proponents for a ceasefire in a sign that the conflict is not getting any closer to ending.

• Israeli Defense Minister Yoav Gallant was dismissed by Prime Minister Netanyahu amid ongoing disagreements over conflict strategy, with Netanyahu citing trust issues as the primary reason. Gallant, a strong advocate for a Gaza ceasefire to secure the release of hostages, is now absent from the cabinet, removing a prominent voice for negotiation. His removal has sparked nationwide protests, reflecting distrust with the handling of the war. This decision comes as Israel fights on two fronts against Iranian proxies Hezbollah in Lebanon and Hamas in Gaza, while bracing for possible retaliatory action from Iran.
• Israel’s deepening internal divisions are making it increasingly difficult for the US to prevent a wider regional conflict. On Tuesday, the US issued a stark warning to Iraq, demanding that it prevent Iran from launching attacks on Israel from its territory. According to US intelligence, the Islamic Revolutionary Guard Corps recently transferred ballistic missiles to Shia militias in Iraq, signaling preparations for imminent attacks. These heightened tensions have already caused oil prices to surge nearly 6% since Iran threatened retaliation for Israeli airstrikes.

• Gallant’s dismissal signals that a ceasefire may not be imminent, though the potential for further escalation remains uncertain. While Iran has expressed intent to retaliate for recent strikes, it remains vulnerable to counterattacks on its energy and nuclear facilities after Israeli forces recently weakened its air defenses. Meanwhile, ongoing protests within Israel reflect growing public discontent, suggesting limited tolerance for prolonged conflict. In the coming weeks, Netanyahu may face increasing pressure to pursue a ceasefire, which could clarify the conflict’s trajectory.

In Other News: EU regulators have fined Apple under the Digital Markets Act, signaling that the European Union is preparing to adopt a stricter approach toward US tech companies. Meanwhile, German Chancellor Olaf Scholz is expected to convene a meeting with his three coalition partners as he seeks to avert a potential breakup. Brazil’s central bank is expected to raise its benchmark rate by 50 basis points later today to combat rising inflation.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment on this Election Day opens with a few words on opinion polls. After all, those are all we’ll have to look at until actual voting results start to come in later this evening. We next review several other international and US developments with the potential to affect the financial markets today, including a potential reprieve for Germany’s fragile coalition government and an end to the machinists’ strike at Boeing.

US Politics: As the US holds its elections today, the latest FiveThirtyEight average of national polls shows Harris with 48.0% support and Trump with 46.8%, well within all the surveys’ margins of error. In the swing states, the support for each candidate is also evenly matched and within the margins of error. Since we’re all likely to hear a lot about polls today, we thought it might be useful to provide a quick reminder of how these polls work and what the margin of error really means:

• For whatever measure we’re interested in — say, the share of voters who support former President Trump — there is a certain, specific number within the population as a whole. Let’s say it’s 49.2%. The problem is that to find this actual number, you’d have to ask each and every person in the population. That would be expensive and probably impractical.
• As an alternative, polling firms select a random sample of individuals in the population and use that to develop an estimate of the actual population number. Under the laws of mathematics, and assuming the sample is designed correctly, it’s possible to estimate the number of individuals you need in the random sample to generate a reasonably accurate estimate of the actual number in the population. Polling is expensive, so pollsters don’t want to over-do it. This is why you often see samples sizes of just 1,000 to 3,000.
• Let’s say you conduct your survey, and 50.5% of the individuals in your random sample say they support Trump. This is higher than the actual population number of 49.2%, but you don’t know that. However, based on the size of the random sample and the characteristics of the population, it’s possible to calculate how certain you should be that the actual population number is within a certain distance of your calculated sample estimate. This is the margin of error.
• The margin of error basically says that if you used the same sampling methodology 100 times, you would expect some share of the 100 sample estimates to fall within a number x and a number y, at a specific level of certainty. A commonly used level of certainty is 95%. Based on mathematical laws, for example, you may estimate that in your hypothetical 100 samples, 95% of your calculated support numbers for Trump would fall between 49.0% and 52.0%.
• Indeed, rather than focusing on the specific point estimates of the various polls, it may be good to focus more on the range implied by the margin of error. Think of the polls as saying, “We think there is a 95% chance that the true population support level for Candidate Z is between x% and y%.” Maybe that’s another way of saying we should all be careful about relying too much on the polls!

Germany: Just days after Finance Minister Lindner of the liberal Free Democratic Party proposed spending reforms that threatened to end the coalition government, as we reported in our Comment yesterday, Deputy Chancellor Habeck of the Greens offered a budget compromise aimed at keeping the coalition together. However, it isn’t clear if Habeck’s proposal will keep the three-party coalition together. As a result, Germany is likely to face continued political and economic uncertainty in the coming months.

Russia-United States: In an in-depth article yesterday, the Wall Street Journal described an apparent effort by Russia’s intelligence services to start fires on passenger or cargo aircraft flying to the US. In an apparent test run of the plan, magnesium-based devices in packages shipped via DHL ignited at sorting facilities in the UK and Germany. We first saw reporting on the incidents several months ago, but only now has the story been picked up by the major media.

• US and European national security officials warn that the sabotage program marks an unusually aggressive and risky new approach for the Russian intelligence services. They warn that the services could even be acting outside of the control of the Kremlin.
• The risk for investors is that a successful attack could cause a catastrophic airliner crash that kills US citizens. Even though former President Trump is often seen as supportive of authoritarian leaders such as Russian President Putin, we also note that his foreign policy type is “Jacksonian.” If he is re-elected today, his instinct for isolationism could abruptly shift toward punching back hard if US honor is besmirched or if US citizens are killed by a foreign power, even if that power is Russia.

Australia: The Reserve Bank of Australia today held its benchmark short-term interest rate steady at 4.35%, meeting expectations and marking a full year at that level. In its policy statement, the RBA noted that while Australian economic growth has slowed markedly, core price inflation remains stubbornly high. The result is that the RBA is now a clear outlier among major central banks, most of which have been cutting rates.

China: The Caixin purchasing managers’ index for services rose to a seasonally adjusted 52.0 in October, up from 50.3 in September. Like most major PMIs, the private-sector Caixin gauge is designed so that readings over 50 indicate expanding activity. The Caixin services index has now been above that level for 22 straight months, illustrating how the current headwinds in China’s economic growth is in the manufacturing sector, which is saddled with excess capacity.

United States-China: Under pressure from Washington, top US semiconductor equipment makers Applied Materials and Lam Research have told their suppliers to stop using certain components from China or they will risk losing their status as vendors. The firms have also told their suppliers that they can’t have Chinese investors or shareholders.

• The warnings are the latest example of how the US and China are putting up barriers to the flow of technology between the two countries.
• As we have argued many times before, those barriers may enhance national security and resilience, but they could also raise costs and contribute to higher price inflation and interest rates going forward.

US Monetary Policy: As a reminder, the Fed holds its latest monetary policy meeting this week, with its decision due on Thursday at 2:00 PM ET. The policymakers are widely expected to cut the benchmark fed funds interest rate by 25 basis points to a range of 4.50% to 4.75%, and we agree with that assessment. However, because of the underlying strength in economic growth, relatively tight labor markets, and continued price pressures, we still think the pace and endpoint of future cuts could leave investors disappointed.

US Labor Market: Boeing’s 33,000 union machinists have finally ratified a new labor contract that will give them a 38% pay hike spread over four years and end their nearly two-month strike against the company. However, we note that the pay hike is more muted than workers gained in some other recent high-profile strikes. In part, that likely reflects Boeing’s idiosyncratic operational and financial challenges. However, it could also partly reflect the nation’s somewhat slower economic growth and cooler labor market.

US Residential Real Estate Market: According to data firm CoStar, the third-quarter apartment vacancy rate held steady at 7.9%, marking the first time in three years that the share of empty units didn’t increase. The figures suggest the recent slowdown in apartment construction and still rising demand will help reduce excess supply and lead to improved rental rates in the coming year.

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