by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a quick note on the aftermath of the attempted assassination of former President Trump, although we caution that it is still too early to really understand how the incident could affect US politics and policy. We next review several other international and US developments with the potential to affect the financial markets today, including more news about China’s worsening trade relations with the West and a note on the US apartment market.

US Politics: Law enforcement officials continue to investigate Saturday evening’s attempted assassination of former President Trump. At the same time, investors and commentators are trying to gauge the impact on November’s elections. At this early moment, a key consideration is whether the event will increase the probability of a Trump win in the presidential contest and the probability of Republican gains in the Senate and House of Representatives. Early signs suggest that the incident has, indeed, boosted support for Trump and the Republicans so far.

• For a time earlier this month, increased expectations for a Trump win prompted a clear “Trump trade” based on the idea that his policy proposals (such as less independence for the Federal Reserve, a dramatic hike in import tariffs, and tax cuts) would be inflationary. For example, those concerns temporarily pushed Treasury yields higher.
• Such concerns had diminished in the face of economic data pointing to moderating economic growth and lower inflation. Going forward, more such data could well continue to offset concerns about inflationary policies under a new Trump administration. All the same, we caution that these are early days in this crisis, and the full implications for investors are still to be seen.

China: New data today shows gross domestic product rose by a seasonally adjusted 0.7% in the second quarter, short of expectations and much weaker than the 1.5% gain in the first quarter. As a result, second-quarter GDP was up just 4.7% from the same period one year earlier, also short of expectations and weaker than the 5.3% increase in the year ended in the first quarter. Details in the data showed most of the growth in the second quarter came from new factory investment and exports, while weak consumer demand and residential investment pulled down growth.

• The expansion in factory investment and exports is consistent with the government’s plan to rekindle growth by supporting the production and foreign sales of advanced technology goods, such as electric vehicles and solar panels. However, a key problem with that strategy is that it is generating pushback and protectionist measures by countries fearful of having their domestic industries devastated by cheap Chinese goods.
• The continued weak economic data will keep alive hopes for added stimulus measures from the government.
• The weak figures will also likely inform the discussions at this week’s Third Plenum, in which top Communist Party officials will work on new long-range economic reforms.

China-Global Rare Earths Market: In one example of how excess Chinese production can drive down prices and undermine other countries’ producers, new data reveals that surging Chinese output has pushed the price of certain rare earth minerals down almost 20% this year. China already dominates the reserves, production, and refining of these minerals, which are important to the electrified economy of the future. A likely reason for China’s overproduction of them is to short-circuit the effort by Western countries to develop their own independent sources.

Canada-China: Canadian Deputy Prime Minister Freeland, who is also the country’s finance minister, warned for the first time that Ottawa may impose protectionist tariffs against a broad range of Chinese imports. Previewing the government’s upcoming consultation with businesses about potential tariffs on Chinese electric vehicles, Freeland forcefully argued that world leaders for too long have accepted the unfair trading advantages arising from China’s communist economy.

• Given Canada’s enormous trade relationship with the US, policymakers in Ottawa have a strong incentive to be aligned with US trading policies against China. The US is also likely pressuring Ottawa to ensure Chinese EVs don’t reach the US via Canada to skirt the new US tariffs against them.
• In any case, Freeland’s warning is another sign of how the US geopolitical and economic bloc is closing ranks and erecting broad new protectionist measures against Chinese exports. Of course, that will further worsen tensions between the West and China.

France: As politicians keep trying to form a government after no party gained a majority in the country’s recent parliamentary elections, the state financial watchdog Cour des Comptes has issued a report suggesting that continued big budget deficits and high debt have left the government “dangerously exposed” to a fresh economic crisis. The audit report warns that in the event of a new crisis, the government may not have the financial capacity to respond appropriately.

Italy: Prime Minister Meloni’s right-wing government said it will propose new legislation to bring small, modular nuclear reactors into the country’s energy mix, almost 35 years after Italy closed its last nuclear power plant. The new policy would complement Meloni’s moves to restrict the further development of solar power and other renewables. More broadly, the policy is another example of the increased interest in nuclear power around the world, which has driven up spot uranium prices.

US Apartment Industry: Although average renter eviction rates nationwide are now back down to their pre-pandemic levels, new data shows that the rates remain high in several cities in the Sunbelt and elsewhere that experienced a surge in population and rent rates. The high eviction rates suggest landlords may be coming to the end of their ability to keep hiking rents. If so, stabilizing rent rates could help hold down consumer price inflation in the coming months and quarters, helping convince the Federal Reserve to cut interest rates.

(Source: Wall Street Journal)

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Equities are relatively muted as investors await earnings reports. In sports news, the USMNT is looking to hire Jürgen Klopp as head coach. Today’s Comment will begin with a discussion of the latest CPI report, then will explore why small caps are showing signs of life, and we will wrap up with a look at the challenges Russia faces in navigating a smooth exit from the war. As always, our report will include a roundup of international and domestic data releases.

Inflation Inflection Point? The cooler-than-expected CPI report fueled market optimism for a potential Fed rate cut in September.

• June marked the first time in nearly four years that inflation has dipped. Consumer prices fell 0.1% month-over-month, according to the Bureau of Labor Statistics. This slowdown brought the annual inflation rate down to 3.0% in June, a decrease from 3.3% in May. While energy prices led the monthly decline, the slowdown was more widespread. Core inflation, which excludes volatile food and energy, held steady at 0.1% for the month. However, annual core inflation slipped to 3.3%, a slight improvement from the previous month’s increase of 3.4%.
• The recent slowdown in price increases is likely to be welcomed by Federal Reserve officials. However, it may not be sufficient to prompt a rate cut at their next meeting. St. Louis Fed President Alberto Musalem commented that while the CPI data is encouraging, more evidence is needed before the central bank decides to lower interest rates. Financial markets seem to agree, pricing in only a 7% chance of a cut this month, but a much higher 94% chance by September. This cautious stance reflects concerns about overreacting to a single month of positive data.

• The coming months are critical for the Fed to build confidence in delivering multiple rate cuts this year. As the chart above shows, inflation has expanded at a slower pace than it has in the previous two years, with the latest reading falling below levels that were normal even prior to the pandemic. We will be paying particular attention to the shelter component. If it holds steady at June’s 0.2% pace or declines further, inflation is likely to continue its downward trend. This could lead to two rate cuts, with a possibility of even three.

Small Cap Has Its Moment: Thursday’s inflation surprise triggered a risk-on mood among investors, fueled by renewed confidence in a soft landing.

• Investors initially sought refuge in the S&P 500 after inflation data emerged. However, the trading day witnessed a significant rotation towards mid- and small-cap stocks. The large-cap index climbed as high as 1.0% midday but ultimately closed down 0.8%. Meanwhile, the S&P MidCap 400 and S&P SmallCap 600 indexes surged, gaining 2.45% and 3.31% respectively. Their strong outperformance relative to large cap was driven by investors looking for bargains as they prepare for the possibility of rate cuts.
• Our latest Bi-Weekly Asset Allocation Report underscores the potential for small-cap stocks to outperform in a scenario where interest rates are cut. This optimistic outlook hinges on two key factors. First, small-cap companies tend to hold a greater share of floating-rate debt, making them more responsive to interest rate reductions that directly translate to improved profitability. Second, the valuation gap between small and large caps has widened to near-historic levels. Historically, such a spread has triggered mean reversion, where undervalued assets experience a surge to close the gap.

• Momentum undeniably fueled returns in 2024, but value investing holds a proven track record for long-term outperformance. As the chart illustrates, value stocks recovered from an initial pandemic dip to become the strongest driver of returns compared to other factors. This trend should persist as long as the economy is not in recession, inflation approaches the 2% target, and the Fed implements multiple rate cuts over the next three years. While we’re confident in these conditions prevailing, a worsening geopolitical climate could disrupt this scenario.

Moscow’s Poker Face: While NATO continues to demonstrate its commitment to backing Ukraine’s war effort, Moscow may not be in a rush to end the conflict.

• NATO leaders solidified a united front at their summit on Thursday, emphasizing shared concerns over territorial disputes with China and Russia. The deepening Sino-Russian relations particularly alarmed the leaders, who viewed them as a potential challenge to the established international order. Discussions also addressed accusations of China’s covert support for Russia’s actions in Ukraine, despite Beijing’s claims of neutrality. Western leaders further warned China that its actions could force a choice between aligning with them or with Russia.
• Despite the West’s commitment to Ukraine, it appears that Moscow is in the fight for the long haul. Russia’s economy is performing well, as the country has mobilized to sustain its war efforts. The unemployment rate is at a 30-year low, and strong domestic consumption has pushed GDP growth, outpacing most countries within the eurozone. However, there does seem to be a problem under the surface. Russia’s historically heavy reliance on exporting commodities to Europe, now restricted by sanctions, could pose a significant long-term economic threat.

• While a desire to conclude the war might exist on both sides, ending the conflict in Ukraine appears immensely challenging. Rebuilding the country into a fully functioning state will be a long and arduous process, potentially taking decades. Even if Russia aimed to claim all or part of Ukraine, it’s unlikely they possess the resources or capacity to handle such a reconstruction alone. China’s own economic challenges also limit its ability to help in the transition. Faced with Western isolation and the immense challenges of rebuilding Ukraine, Russia is likely to adopt a more calculated approach in its search for an exit strategy.

Other news: President Biden failed to win over supporters after making several blunders during his speech at the NATO summit, raising the likelihood that he may be forced to drop out of the race. Also, US intelligence reportedly thwarted a Russian assassination attempt against the CEO of Rheinmetall, a major German arms supplier to Ukraine. This suggests Russia might be willing to escalate the conflict beyond Ukraine’s borders. Meanwhile, Saudi Arabia’s budget constraints have forced it to pause spending on some projects.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Please note: Due to the Fourth of July holiday, we will not publish a Daily Comment on Friday, July 5. We will resume publication on Monday, July 8. Have a Happy Fourth!

Our Comment today opens with some good news on the dangerous Chinese-Philippine tensions in the South China Sea. At last, the two sides have held talks aimed at diffusing the situation. We next review several other international and US developments with the potential to affect the financial markets today, including the latest on the French elections, a preview of tomorrow’s elections in the United Kingdom, and a new effort by the US government to block a proposed merger on competition concerns.

China-Philippines: Beijing and Manila yesterday held emergency talks aimed at reducing tensions over their conflicting territorial claims in the South China Sea. According to Philippine officials, the two sides made “substantial progress” in cooling the situation. However, the officials also stressed Manila’s intention to remain “relentless” in protecting its sovereignty over the disputed areas. With China emboldened by its recent activities in the area, that suggests to us that the situation remains dangerous.

European Union-China: According to insiders, the European Commission will soon propose scrapping its €150 threshold under which items can be imported duty free. The move will be aimed mostly at Chinese purveyors of cheap goods, such as Temu, AliExpress, and Shein. We suspect Beijing will see the move as another form of trade protectionism aimed against China, on top of the EU’s new tariffs against Chinese electric vehicles. As a result, the move could further worsen EU-China trade tensions.

• Cheap e-commerce imports into the EU below the duty-free threshold reportedly topped 2.3 billion items last year. They are on pace to double this year to about two deliveries per every household in the EU.
• Because of the EU’s subsidized postage rates, Chinese firms find it cost effective to export to the region, but the shipments impose a cost on the EU.

France: In their effort to deny the far-right National Rally (RN) a parliamentary majority in Sunday’s run-off elections, cooperating far-left and centrist parties pulled their weakest candidate from more than 200 constituencies where they otherwise would have split the anti-RN vote. In those districts, a single far-left or centrist candidate will now compete, increasing the odds of beating the RN candidate and keeping the far-right party from an outright majority.

• However, all signs suggest RN will still win the largest number of seats in parliament, which would give it unprecedented power in France.
• Besides, RN has now said it is open to forming a coalition government, which would help ensure it has increased influence in French government going forward.
• Another key risk is that France could end up with a “hung” parliament, in which no party or group of parties can form a majority. That would leave France in political limbo, potentially for a long time.

United Kingdom: In other European political news, Britain will hold parliamentary elections tomorrow, with the opposition Labour Party still looking set to win in a landslide. According to the latest polls, support for Labour remains about 20 percentage points above the support for the ruling Conservative Party.

• Even though Labour leader Sir Keir Starmer has managed to moderate the party’s past “tax, spend, and regulate” policies, investors are increasingly concerned about how they would be treated under a new government.
• Recent reports say rich Britons are already dumping stocks and real estate in anticipation that Labour will raise the capital gains tax.

Turkey: The June consumer price index was up 71.6% from the same month one year earlier. As bad as that was, the increase was less than expected, and it marked a welcome deceleration from the 75.5% rise in the year to May. The data also marked the first slowing in consumer price inflation in eight months, raising hopes that the government’s pivot away from President Erdogan’s unorthodox economic policies a year ago may finally be bearing fruit.

Jamaica: As noted in our weather section below, Hurricane Beryl continues to “barrel” through the Caribbean and is expected to hit or skirt Jamaica later this afternoon. After becoming the earliest-ever Category 5 storm, Beryl has now been downgraded to Category 4. Nevertheless, it has already caused extensive damage in Grenada and other Caribbean islands, and it could still cause extensive damage in Mexico later this week.

US Politics: Democratic lawmakers, party leaders, and donors are reportedly becoming increasingly angry at President Biden and the White House staff for not addressing their concerns about the president’s age and weak performance in his first debate against former President Trump in June. Now that several Democratic lawmakers have publicly called for Biden to give up his re-election bid, we see an increasing chance that the president could ultimately capitulate, prompting the Democrats to scramble to choose a replacement candidate.

• Ironically, Democratic leaders say the issue now is more about the White House stonewalling their demand for answers and lack of concern for the impact on congressional candidates, rather than the signs that Biden’s age is catching up to him.
• As we have noted previously, both Biden and Trump are old enough and have other issues that it would not be a surprise if either or both were not on the ballot by November. For now, the odds still seem to favor Trump in the election, but anything could still happen.

US Antitrust Policy: The Federal Trade Commission yesterday voted unanimously to file a lawsuit against mattress maker Tempur Sealy’s proposed acquisition of giant bedding retailer Mattress Firm. According to the FTC, the combination would allow Tempur Sealy to restrict rivals’ access to an important retail chain, allowing it to boost prices. The lawsuit shows how the FTC has become much more aggressive in challenging potentially anticompetitive behavior.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with news that China is continuing to build out its electronic spying facilities in Cuba, which will likely further exacerbate tensions with the US. We next review several other international and US developments with the potential to affect the financial markets today, including a further slowdown in consumer price inflation in the eurozone and a discussion of yesterday’s rout in the US bond market.

China-Cuba-United States: Commercial satellite imagery analyzed by the Center for Strategic and International Studies shows China is continuing to expand its electronic eavesdropping facilities in Cuba, including a newly discovered site just 70 miles from the US military base at Guantanamo Bay. The facilities appear to be aimed mainly at spying on the US. The report is likely to add to the many geopolitical and economic tensions between the US and China, which continue to present risks for investors.

Russia: Reports say former Deputy Defense Minister Tatyana Shevtsova has defected to France, just weeks after she resigned her position as chief of the Defense Ministry’s financial directorate.  Shevtsova reportedly helped investigate corruption among high-level generals after Andrei Belousov took over as defense minister in May, but it appears she also came under suspicion because of some extremely expensive real estate she owns. As the wife of Russia’s energy minister, she also reportedly owns interests in at least two coal companies.

• If Shevtsova has really defected, she will likely be interrogated by France and other NATO countries for insights into how the Kremlin is financing its invasion against Ukraine.
• If Shevtsova reveals or confirms that China is providing more direct support to Russia than previously known, tensions between the West and Beijing could worsen further.

Eurozone: The June consumer price index was up just 2.5% from June 2023, matching expectations and decelerating from the 2.6% rise in the year to May. However, the core CPI inflation (excluding food, energy, and tobacco) was unchanged at 2.9%, largely reflecting sticky service prices. The elevated core inflation and likely price pressures from this month’s Paris Olympic Games are expected to discourage the European Central Bank from matching last month’s interest-rate cut with another in July. The next cut is now expected late in the summer.

Germany: According to an article in today’s Financial Times, many German companies are abandoning their long-held reluctance to produce military goods as they see growing defense orders across Europe. At least some of the firms have seen a big jump in their stock price after announcing a shift to military production.

• That’s consistent to our often-stated view that rising defense budgets in the West will likely benefit not only traditional military contractors, but also technology firms and other producers of dual-use goods and services.
• The expansion into defense production may be especially pronounced in Europe, where sluggish economic activity, weak demographics, and cooling exports mean defense is one of the relatively few growth opportunities.

France: As far-left parties and President Macron’s centrists continue trying to coordinate to head off a far-right win in Sunday’s run-off parliamentary elections, Marine Le Pen of the far-right National Rally (RN) today said her party would try to form a coalition government if it fails to win an outright majority. Previously, the party’s candidate for prime minister, Jordan Bardella, had insisted he would not rely on allies to govern. RN’s new openness to leading a coalition government likely increases the chance that it will take power in the Sunday vote.

• In last Sunday’s first-round voting for the 577 seats in parliament, RN came in first with 33% of the vote. The far-left New Popular Front (NFP) came in second with 28% and Macron’s centrist alliance came in third with 20%.
• But RN only achieved an outright majority in a relatively small number of constituencies. This coming Sunday, it will have to slug it out in a run-off against another party in hundreds of constituencies.
• In constituencies where French election rules would have sent three parties to a run-off (usually RN, NFP, and Macron’s centrists), NFP and Macron aim to drop their weakest candidate, increasing the odds that their remaining candidate could beat RN and lock it out of a majority.

Netherlands: In another example of increased far-right power in Europe, a coalition government that includes Geert Wilders’ nationalist, anti-Islam Freedom Party took office today. The government will be headed by Prime Minister Dick Schoof, a political novice and former intelligence agency chief. The far-right Freedom Party will head five of the 15 ministries, including the ministries for migration and trade.

US Bond Market: Investors yesterday dumped government bonds, pushing the yield on the benchmark 10-Year Treasury up to 4.479% by market close, versus only about 4.325% late last week. The action reportedly reflected investor reactions to last week’s debate and yesterday’s Supreme Court decision granting broad immunity to former President Trump for his official acts while in office.

• Those developments have increased the probability that Trump will be re-elected and have the chance to implement inflationary economic policies. The inflationary policies expected from Trump include big, across-the-board tariffs on imports, extension of the 2017 tax cuts, and populist spending programs.
• More generally, investors have become more concerned that Republicans will gain control of both the White House and Congress. Investors fear that having one party in control of both the executive and the legislative branches of government will lead to higher budget deficits.

US Technology Regulation: Also among the Supreme Court’s end-of-session decisions, the justices yesterday refused to rule on the validity of state laws in Texas and Florida that attempt to police social-media firms’ content moderation policies. The action suggests those policies can be protected by the First Amendment, but the justices sent the challenges back to lower courts for further argument and analysis.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with new details on why Philippine President Marcos is pushing back so strongly against Chinese territorial aggression in the South China Sea. We next review several other international and US developments with the potential to affect the financial markets today, including a new move by China to potentially weaponize its rare earth resources, a win by the far right in France’s first-round parliamentary elections, and additional signs of a potential economic slowdown in the US.

China-Philippines: As Chinese-Philippine tensions continue to worsen, a new article in the South China Morning Post provides a useful historical view on how the relationship soured. The article notes the key issue is Beijing’s multi-decade effort to assert its sovereignty over parts of the South China Sea claimed by Manila, which successive Philippine leaders have tried to stop with legal suits, appeasement, military investment, and alliance building — all to no avail. However, the article also emphasizes that Philippine citizens have become incensed at Chinese “Pogo” firms.

• Approved by the previous Duterte administration under its appeasement policy, the Pogos are lightly regulated, Chinese-owned gambling venues that have spread throughout the Philippines. Not only have the Pogos brought criminality, corruption, and illegal Chinese immigration, but recent police probes suggest they have also been used by Beijing to infiltrate secret Chinese intelligence and military operatives.
• Spurred on by China’s aggressiveness in the South China Sea and the revelations of the Pogo industry, almost 75% of Philippine citizens now favor the use of military force to maintain the country’s sovereignty over the disputed territories.
• The strong domestic political pressure on current President Ferdinand Marcos Jr. to take a hard line against Beijing is one reason we see today’s Chinese-Philippine tensions as an especially dangerous source of potential conflict. Because of the US-Philippine mutual defense treaty, any such conflict could also draw the US into a direct conflict with China.

China-Southeast Asia: As widely expected, the new US and EU tariffs on Chinese electric vehicles are starting to prompt Chinese EV makers to shift toward Southeast Asian markets. BYD (which Warren Buffet’s Berkshire Hathaway has invested in) and other Chinese EV makers are reportedly now spending billions of dollars to ramp up their sales and output in Indonesia, Thailand, and other countries in the region.

• Given that those countries are relatively poor, the move is expected to force the Chinese firms to cut prices, potentially weighing on their profitability.
• Of course, the invasion of Chinese EVs and any new Chinese EV factories could spark disruption in the region’s auto markets, potentially raising tensions between Beijing and regional capitals.

China-Global Rare Earths Market: On Saturday, China issued a package of new rules aimed at protecting its supply of rare earths, a class of exotic minerals critical to modern electrified technologies. Although China and its geopolitical and economic bloc already dominate the world’s supply and smelting of rare earths, the new rules emphasize that rare earth resources belong to the state and that the government will control the industry’s development. Importantly, the rules also establish a rare earth traceability system that could aid in embargoing rare earths.

• Beijing introduced restrictions last year on the export of germanium and gallium, which are critical to the manufacturing of semiconductors. It had also already banned the export of technologies for refining rare earths and making them into magnets.
• Under the new traceability system, Chinese firms involved in the mining, refining, or export of rare earths must establish a detailed product flow record and submit the data to the government.
• Of course, having detailed information on the flow of rare earth products would allow the government to fine-tune any restrictions it might want to place on their export. That’s consistent with our view that Beijing will likely try to weaponize its dominance of key mineral commodities as tensions between the US bloc and the China/Russia bloc continue to rise.

European Union-United States: The European Commission today charged US social-media giant Meta Platforms with violating the EU’s new Digital Markets Act, just as it issued charges against Apple and Microsoft last month. At issue is how Meta requires EU users of Facebook and Instagram to either pay a subscription fee or allow the firm to use their data for targeted ads. If found guilty of the infraction, Meta could be fined 10% to 20% of its global revenue. The action highlights the rising regulatory risks faced by US tech firms in the EU market.

European Union: The far-right government of Hungarian Prime Minister Viktor Orbán today takes over the presidency of the Council of the European Union, giving the nationalist firebrand a megaphone and opportunity to steer EU policy initiatives over the coming six months. Our new Bi-Weekly Geopolitical Report, to be published later today, explains how the Council fits into the EU’s governance structure.

France: In the first round of parliamentary elections on Sunday, preliminary results suggest the far-right National Rally (RN) party came in first with 33.2% of the vote, followed by the far-left National Popular Front (NFP) with 28.0% and President Macron’s centrist liberal alliance with 22.4% of the vote. That puts the far-right in position to potentially win an absolute majority in the National Assembly after the second-round voting on July 7.

• In such a situation, the far right would be in position to name the prime minister and force an uncomfortable “cohabitation” government with President Macron.
• However, the far-left NFP and Macron’s centrists are reportedly in emergency talks today to coordinate and block RN from gaining a majority. The parties are negotiating a plan to withdraw the weaker of their candidates in hundreds of constituencies, with the goal of limiting how many seats RN can win. The effort has given a modest boost to French stocks and the euro so far this morning.
• In any case, the results point to a sharp shift to the right in French politics, potentially leading to populist fiscal policies and a crackdown on immigration.

Iran: In Friday’s first-round presidential election, Masoud Pezeshkian, a reformist former health minister, came in first with 42% of the vote, followed by Saeed Jalili, an arch-conservative, with 38%. Since neither candidate won an absolute majority, the two will now face each other in a run-off election this coming Friday. Although the true power in Iran’s government lies with conservative clerics, a win by Pezeshkian could help nudge Iran toward better relations with the West and less belligerence toward Israel and other rivals in the Middle East.

US Regulatory Policy: In a decision Friday, the Supreme Court overturned its 40-year old “Chevron deference” doctrine, under which courts hearing challenges to regulations deferred to agency legal interpretations when the statutory language passed by Congress was unclear, as long as the interpretation was reasonable. Originally seen as a bulwark against excessive regulation, the doctrine more recently had been seen as giving regulators too much power. Now that the doctrine is overturned, it should be easier for firms to challenge regulations.

• When first laid down in 1984, in Chevron v. Natural Resources Defense Council, the doctrine aimed to recognize the expertise that federal regulators typically have in their area of responsibility. The decision on Friday turned in large part on the fact that while agencies have a lot of technical and policy expertise, they don’t necessarily have more legal expertise than the courts.
• Going forward, the decision means that a court hearing a challenge to a regulation won’t necessarily defer to the agency’s understanding of what it can or can’t do. That should tip the scale back in favor of businesses or property owners challenging a regulation.
• The decision illustrates how the US is now in the midst of a court-driven de-regulation phase. A key question is how far that de-regulation trend will go, especially given that today’s geopolitical tensions and political populism should tend to increase government power and lead to tougher regulation in some areas of the economy.

US Personal Income: In a little-noticed aspect of Friday’s report on May personal income and spending, the year-over-year growth in inflation-adjusted, per-capita disposable personal income (income after taxes) has slowed dramatically every month this year. In May, it was only up 0.5% year-over-year. The slowdown largely reflects the unusual jump in disposable income in early 2023, when tax brackets were adjusted for the high consumer price inflation in 2022.

• Real per-capita personal consumption expenditures have held up better, with the figure for May up 1.9% year-over-year.
• Still, the drop in real after-tax income threatens to weigh more on personal spending in the coming months. If so, that could lead to a more material slowdown in economic growth and greater pressure on the Federal Reserve to cut interest rates.

US Lumber Market: Near lumber futures on Friday fell approximately 3% to $452.50 per thousand board feet, bringing their drop to 27% since mid-March. The unusual decline in the middle of the prime homebuilding season suggests today’s high interest rates are finally starting to weigh on home construction and remodeling, despite continued high demand for new homes.

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