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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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that the European Union is preparing to ratchet up its retaliation against the Trump administration’s tariffs. We next review several other international and US developments with the potential to affect the financial markets today, including the likely fall of the Dutch government and another interesting nuclear energy deal for artificial intelligence in the US.

European Union-United States: Just days after President Trump said he would raise the US import tariffs on steel and aluminum to 50% from their current 25%, an EU spokesman announced yesterday that the bloc is preparing an expanded list of countermeasures against US goods and services if the current US-EU trade negotiations falter. The statement is a reminder that the tariff war still has the potential to spiral out of control, despite the recent cooldown amid US trade talks with various economies.

European Union-China: The EU yesterday confirmed that it will use its new International Procurement Instrument to restrict imports of Chinese medical devices in retaliation for discriminating practices in China’s public procurement systems. Even though the EU and China have tried to increase trade cooperation recently to offset President Trump’s aggressive tariff policies against them, the EU’s announcement will likely set that effort back significantly.

Netherlands: Far-right firebrand Geert Wilders today said he will withdraw his Freedom Party from the governing coalition because of the other coalition parties’ failure to accept his plan to stem asylum applications. The three small parties remaining in the coalition don’t have a majority in parliament, so it appears that Prime Minister Schoof will have to call new elections, which would likely be held in September. The result could be months of political uncertainty in the Netherlands and a new test of strength for Europe’s far right.

United Kingdom: Prime Minister Starmer yesterday unveiled a Strategic Defense Review calling for a major program of defense rebuilding in the UK. Although Starmer refused to commit to specific defense spending targets, his plan envisions several major initiatives, including nearly doubling the UK’s fleet of destroyers and frigates, investing in 12 new nuclear-powered attack submarines, and modernizing the country’s nuclear arsenal. In response, key British defense stocks appreciated sharply yesterday.

Russia: Officials in Moscow last weekend installed an elaborate statue of dictator Josef Stalin in one of the subway system’s busiest stations, marking the government’s latest step to revive his legacy. President Putin, Russia’s current authoritarian leader, also recently signed a decree renaming Volgograd’s airport Stalingrad, as the city was known during World War II. The moves show that even long after Putin has consolidated his political position in Russia, he continues to develop the country’s authoritarian system.

South Korea: According to exit polls, Lee Jae-myung of the leftist Democratic Party is leading today’s presidential voting with about 51.7% of the vote. Lee’s main challenger, conservative former Labor Minister Kim Moon-soo is currently projected to get 39.3%. If Lee wins as expected, South Korean foreign policy could become somewhat more accommodating to China and North Korea, while relations with the US regarding trade and security could become more fraught. The result could be more challenging conditions for South Korean stocks.

US Nuclear Energy Industry: Meta Platforms has signed a 20-year purchase agreement for the electricity from one of Constellation Energy’s nuclear plants in Illinois, providing energy for Meta’s artificial-intelligence efforts and helping fund Constellation’s relicensing and upgrades to the plant. The deal echoes the contract last year in which Microsoft signed a long-term deal for AI energy from Constellation’s plant at Three Mile Island in Pennsylvania. Today’s agreement will likely help rekindle interest in nuclear power and help boost uranium prices again after a soft period.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with more evidence that geopolitical and economic tensions may be heating up again between the US and China. We next review several other international and US developments with the potential to affect the financial markets today, including a right-wing victory in Poland’s presidential run-off election and a Federal Reserve policymaker’s suggestion that any rise in price inflation because of President Trump’s tariffs could be short-lived enough to allow the central bank to resume cutting interest rates later this year.

United States-China-Asian Allies: At the Shangri-La Dialogue in Singapore on Saturday, Defense Secretary Hegseth warned that China “seeks to become a hegemonic power” in Asia and is now a real and potentially imminent threat to Taiwan and other US allies in the region. Hegseth pledged US support to help the allies counter China’s threat, but he also argued that they should boost their defense spending to 5% of gross domestic product, as many European countries are now aiming to do in response to the threat of aggression from Russia.

• Investors have naturally focused on trade policy over the last few months, but Hegseth’s statement is a reminder that the US — the reigning global hegemon — still faces a big geopolitical challenge from China.
• China continues to strengthen militarily, economically, and technologically, and we believe that it seeks to become the dominant power not only in Asia but probably globally. President Trump is sensitive to growing isolationist sentiment among many in his base, but some in his administration are still focused on defending US hegemony.
• We still believe that the US and China are in a spiral of increasing tensions. While investors rightly worry about the impact of Trump’s trade policies, they should also keep in mind the risk of geopolitical conflict and the many ways in which US-China tensions could increase, as shown in our US-China Escalation Ladder.

United States-China: Speaking of the US-China trade war, President Trump on Friday accused the Chinese government of violating the 90-day truce reached on May 12. Although Trump didn’t say how Beijing had violated the deal, US Trade Representative Greer later revealed that the violation involved moving too slow to reverse its ban on Chinese rare earth exports.

• In a previously unreleased letter from May 9, global auto firms representing the likes of General Motors, Ford, Toyota, Volkswagen, and Hyundai warned the administration that China’s rare-earths export ban could force the shutdown of auto factories within weeks. Other industries ranging from aerospace and defense to semiconductors would also be at risk.
• Further statements by administration officials confirm that last week’s new ban on sending US aerospace and semiconductor technology to China was to retaliate for China’s continued restriction on rare-earth exports, as was the administration’s vow to revoke the visas of Chinese students studying in the US.
• The Chinese government today accused the US of “seriously violating” the 90-day trade truce with its actions on technology and visas. It vowed to retaliate strongly, signaling a continued spiraling of tensions between Washington and Beijing.

United States-Taiwan: In a little-noticed statement to Congress recently, retired Navy Adm. Mark Montgomery revealed that the US now has about 500 military trainers in Taiwan, more than 10 times the number previously known. Although he didn’t say whether the trainers were active-duty troops, reservists, or civilian contractors, Montgomery argued the US should double the size of the team to help Taiwan develop “a true counter-intervention force” that could resist any attempt by China to take control of the island.

• Montgomery’s statement suggests the Trump administration has ramped up military support to Taiwan, just as it has for other allies in the region, such as the Philippines.
• To reiterate, US-China geopolitical frictions continue to worsen, even beyond the economic issues involved in their current trade war.

Poland: In the second and final round of the country’s presidential election yesterday, Karol Nawrocki of the right-wing nationalist Law and Justice Party narrowly won with 50.9% of the vote, beating the liberal mayor of Warsaw, Rafał Trzaskowski, with 49.1%. Poland’s president can veto legislation or refer it to the Constitutional Court, so Nawrocki’s win ensures that Law and Justice can keep blocking aspects of Prime Minister Tusk’s centrist agenda. Nawrocki’s win also points to continued gains by Europe’s right-wing parties.

Russia-Ukraine War: In a surprise drone attack on several key air bases across Russia’s territory over the weekend, Ukraine appears to have destroyed or damaged dozens of Russia’s 100 or so long-range Tupolev bombers. The attack apparently involved sneaking large numbers of drones into Russia by truck, hiding them in crates that doubled as launching platforms once they got close to the targeted bases.

• The loss of the bombers is expected to crimp both Russia’s ability to bomb Ukraine and its ability to project power beyond its borders.
• We also think the Ukrainian attack echoes aspects of Israel’s 2024 attack on hundreds of Hezbollah fighters using hidden explosives in their pagers. Kyiv’s tactic of hiding and launching the drones using crates carried by truck is a further sign that countries are now willing to compromise common, everyday products to deliver weapons for long-range, remote attacks outside their borders.

Global Oil Market: Saudi Arabia, Russia, and some other members of the OPEC+ grouping on Saturday said they would boost their collective oil output by 410,000 barrels per day, starting in July. That would mark the third straight month of increased production. The increase reflects pressure from President Trump, the Saudis’ intent to win back market share, and the group’s optimism about future global demand. However, if demand comes in softer than they anticipate, the production increase would likely help keep oil prices near their current modest levels.

US Monetary Policy: At a conference in South Korea today, Fed board member Christopher Waller said any rise in consumer price inflation because of the Trump administration’s new tariffs could be short-lived, given that there is less fiscal stimulus and the labor market isn’t as tight as in 2022. According to Waller, that could still allow the Fed to cut interest rates further in late 2025, not because of economic weakness but because of renewed disinflation.

US Fiscal Policy: In a television interview yesterday, Treasury Secretary Bessent insisted the US “is never going to default,” despite continuing large budget deficits putting it on track to hit its legal debt limit in August. Bessent’s comment was a response to JPMorgan CEO Dimon’s warning on Friday that the US bond market could buckle if the federal government doesn’t contain its debt soon.

• We believe Congress will raise the debt limit in time to avoid a default this summer. Still, Dimon’s statement helps underline the risk that growing federal debt could increasingly hamstring fiscal policy and potentially prompt investors to abandon US obligations.
• It is extremely difficult to predict when investors might decide to dump US debt. Nevertheless, rising long-term yields suggest at least some investors may be getting more concerned.

US Trade Policy: Visiting a United States Steel plant on Friday, President Trump said he would further hike the US tariff on steel and aluminum imports to 50% on June 4, compared with 25% currently. According to Trump, the higher tariff would help protect US steelworkers and support the expected “partnership” deal between Japan’s Nippon Steel and US Steel, in addition to helping the domestic aluminum industry.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The White House is once again using Friday to remind markets about its trade concerns. Today’s Comment will discuss how a provision in the tax bill could discourage foreign investment in the US, explain why the administration is crafting a backup plan for tariffs, and report on other latest market-moving developments. As always, we’ll also include a roundup of key domestic and international economic data.

Taxing Foreigners: A little-known provision within the tax bill has caused a stir on Wall Street due to its potential to hurt the US’s safe-haven status.

• Section 899 of the recently passed House legislation authorizes the US government to implement reciprocal tax measures against investors and corporations from countries found to maintain discriminatory tax practices targeting American entities. The provision’s broad scope could significantly affect both: (1) US-domiciled firms with substantial foreign ownership, and (2) multinational corporations maintaining operations or investment ties in the US.
• The measure appears primarily targeted at the European Union, which US officials have accused of maintaining discriminatory policies against American companies. The White House has repeatedly urged the EU to reform its Value-Added Tax (VAT) system, arguing it creates unfair trade advantages for member states. This tension has escalated as several EU countries (most recently Germany) have moved forward with proposed digital taxes that would disproportionately affect US tech giants like Meta and Google.

• However, the provision contains significant ambiguity regarding its application to US Treasury securities. While the legislation clearly subjects foreign holders of equities and corporate bonds to potential levies, it fails to clarify whether purchases of government debt — traditionally exempt from such taxation — would also become taxable. The lack of clarity could create an incentive for foreign investors to purchase even more US government bonds.
• This law essentially functions as a form of capital control. Its underlying rationale likely stems from a desire to pressure foreign elites into advocating for US interests, particularly regarding regulatory restrictions. By targeting influential individuals who comply with laws that disadvantage American companies, the US is effectively leveraging financial coercion. The potential impact is twofold: It could drive increased investment into US Treasurys, or it trigger capital outflows from equities.

Trade Developments: The Trump administration has received a reprieve from the courts on its tariffs but is already searching for a backup as it looks to regain leverage in trade talks.

• A US federal appeals court has lifted the hold on global tariffs, clearing the way for the White House to escalate the issue to the Supreme Court. This decision is expected to reinstate the president’s import tariffs, reinforcing his push to reshape US trade policy. However, the long-term viability of these levies remains uncertain. The reprieve came after two separate rulings deemed the administration’s approach as unlawful.
• As noted in yesterday’s comment, the president has options should the tariffs be deemed unconstitutional. The administration is exploring the use of the Trade Act of 1974, which permits temporary tariffs of up to 15% for 150 days to rectify trade imbalances. Additionally, the White House is preparing to leverage Section 301, which grants the US authority to investigate and retaliate against unfair trade practices. There have also been discussions about invoking the Smoot-Hawley Tariff Act of 1930 as a potential fallback.

• That said, the ruling has significantly impacted perceptions of the US’s capacity to negotiate effectively with its trading partners. While the US and the European Union have committed to ongoing dialogue in an effort to resolve their trade differences, discussions between the US and China have, by contrast, reportedly reached an impasse. Following the court’s decision, President Trump sharply criticized China for failing to meet its trade agreement commitments.
• The ongoing tariff dispute is likely to fuel further market uncertainty regarding future trade policy. Investors now face a dual challenge where they must not only assess whether new tariffs will be implemented, but also whether existing ones will remain in place. This persistent ambiguity will disproportionately pressure firms with significant trade exposure. Given these conditions, we maintain that the most compelling opportunities lie in companies with resilient earnings power and fortified supply chains.

Monetary Policy Dilemma: President Trump and Fed Chair Powell met this week for the first time since November 2019 to discuss the economy.

• During the meeting, President Trump pressed Chair Powell to cut interest rates at the upcoming FOMC meeting, arguing that the US should align with other central banks’ policies. However, the Fed chair avoided signaling any commitment to the president’s demands, instead emphasizing that the Fed’s decisions would remain data-dependent and based on economic developments.
• The challenge confronting the president and Federal Reserve officials is the impact of US tariffs on both the domestic and global economies. Tariffs, or import taxes, serve two main purposes: revenue generation and import restriction. The latter is arguably the more complex aspect. While US tariffs have the potential to inflate domestic prices by increasing the cost of imported goods or limiting supply, they can simultaneously lead to excess foreign capacity, thereby driving down prices abroad.
• This dynamic is likely to place the Federal Reserve at a disadvantage relative to its international peers. Assuming all other factors are constant, foreign central banks possess greater latitude to implement rate cuts because the decline in exports due to US tariffs has created a surplus of domestic supply, prompting them to stimulate demand. Conversely, the reduction in foreign imports means the Fed may need to maintain higher rates to prevent increased demand from exacerbating domestic supply chain constraints.
• The key uncertainty lies in how US businesses will adapt to tariffs. Some firms may attempt to pass through higher costs, which would reinforce the Fed’s current policy stance. Others may resort to workforce reductions to mitigate the financial impact. This divergence in responses makes unemployment the potential swing factor in the tariff policy calculus.
• We acknowledge the possibility of both higher inflation and higher unemployment, but we’re not convinced they’ll trend upward simultaneously. This phenomenon, known as stagflation, typically occurs during sharp increases in energy prices, which are currently trending downward. Given the hiring trends and the limited purchasing power of households since the pandemic, we believe a cooling labor market is the most likely scenario. Consequently, we think the Fed could still cut rates this year.

Demand Optimism: Despite recession concerns, there are still signs that households may not be changing their spending habits by much.

• Recent driving data indicates that Americans hit the road in greater numbers this holiday weekend. According to GasBuddy, gasoline consumption has increased by 2% compared to the previous year. This uptick suggests households may be shifting spending away from goods and toward services — a potential strategy to mitigate the impact of rising tariffs.
• The shift toward service-oriented spending is expected to bolster the economy amid ongoing uncertainty. This trend will likely persist, provided that businesses keep prices in check. As a result, an immediate recession seems unlikely.

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