by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are digesting the latest inflation data. In sports, Gonzaga clinched a victory over Saint Mary’s in the West Coast Conference Finals. Today’s Comment will cover key developments, including the ongoing US-Canada trade tensions, Ukraine’s proposed 30-day ceasefire, and other market-moving stories. As always, the report will also feature a summary of recent domestic and international economic data releases.

Tariff Uncertainty: US equities swung sharply on Tuesday amid fears of a US-Canada trade war. The S&P 500 briefly dipped into correction territory, rebounded, then fell again as trade concerns lingered, keeping markets on edge.

• Market volatility surged as tensions escalated between the US and Canada over retaliatory tariffs. The day began with President Trump imposing 50% tariffs on Canadian steel and aluminum products as a response to Ontario’s threat of a 25% surcharge on electricity exports to Michigan, Minnesota, and New York. The standoff eased after Ontario agreed to drop the surcharge in exchange for a meeting with the US Secretary of Commerce Howard Lutnick to discuss the USMCA trade agreement.
• Following the arrangement, President Trump scaled back the tariff on Canadian steel from 50% to 25%, alleviating some market concerns but failing to fully ease fears over ongoing trade uncertainty. While Ontario has withdrawn its electricity surcharges, Canada has opted to maintain its tariffs on US goods and has signaled that it will only reconsider once it believes the Trump administration is prepared to be respectful in its approach. The situation remains fluid, leaving markets wary of further developments.
• At midnight, universal tariffs on aluminum and steel products were imposed without exemptions, marking a significant escalation in trade policy. The European Union retaliated with its own tariffs that are expected to take place mid-April, while the UK is expected to maintain its current stance and refrain from immediate action. Meanwhile, Chinese tariffs on US agricultural products have also gone into effect.

• The ongoing trade war is expected to keep equities highly vulnerable to midday swings, as investors attempt to assess the potential economic impact of tariffs. While there have been preliminary signs of an economic slowdown — such as major airlines reporting weaker demand for both leisure and business travel — these indicators remain anecdotal. For now, there is no concrete evidence of a broader economic downturn, but the uncertainty continues to weigh on market sentiment.

Ukraine Peace Deal: US officials successfully persuaded Ukraine to back a ceasefire agreement with Russia. Although the deal still requires Putin’s approval, it includes provisions for the US to share military intelligence with Ukraine and restore military aid, underscoring the continued strong relationship between the two nations.

• The proposal outlines a 30-day ceasefire that would encompass the entire front line, expanding beyond the initially proposed restrictions on air and sea operations. This development comes at a critical juncture, as Ukraine’s recent territorial losses in Russia’s Kursk region have weakened its negotiating position, diminishing a key bargaining chip tied to territorial control. The agreement represents a potential shift in the conflict’s dynamics, though its broader implications remain uncertain.
• With Ukraine agreeing to the ceasefire, the focus now shifts to Moscow. Russian President Vladimir Putin has consistently justified the continuation of the war as a means to achieve the country’s long-term strategic goal of preventing NATO expansion near its borders. While the conflict has likely stalled Ukraine’s bid to join the military alliance, Russia has yet to secure full control of the Donbas region — a key objective that would mark a significant success in its campaign.

• That said, the ceasefire agreement signals a potentially positive development, suggesting that the Russian invasion may be nearing its conclusion. This would be a significant boost for risk assets, particularly in Europe, as the resolution of the conflict could pave the way for the return of Russian energy supplies to the global market. Such a scenario would likely accelerate Europe’s efforts to revitalize its industrial sector, with Germany standing to benefit considerably.

Shutdown Avoided: The House of Representatives has passed a bill to fund the government for the next seven months. The legislation is now headed to the Senate, where it is expected to pass with bipartisan support, as Democrats are likely to back the measure to ensure government operations continue uninterrupted.

• The proposed legislation, featuring a $6 billion boost to defense spending, additional funding for border security, and a $13 billion reduction in non-defense programs, has become a lightning rod for controversy. Republican lawmakers argue that the bill fails to adequately address government overspending, while Democrats express deep concern over the targeted cuts to crucial programs they are aiming to protect.
• While the bill ultimately passed, the vote was not without its share of drama, as there were defections in both the Republican and Democrat camps. Notably, conservative Kentucky Representative Thomas Massie, a staunch deficit hawk, voted against the measure, while Maine Democrat Jared Golden broke ranks with his party to support it. This lack of unity on both sides underscores emerging intraparty tensions, suggesting that ideological and strategic rifts may be deepening within each camp.
• The interparty divisions appear to be more pronounced within the Democratic Party, as lawmakers continue to grapple with the shifting political landscape following Trump’s victory. While many Senate Democrats view the stopgap bill as insufficient, they are reluctant to oppose it outright, fearing the potential fallout from a government shutdown.
• The passage of the budget resolution to fund the government through the rest of the year is likely to set the stage for a more contentious battle over the president’s tax bill. While Republicans have largely supported the measure, there is increasing pressure within the party to ensure the bill is as deficit neutral as possible. On the other side, Democrats remain united in their efforts to shield key programs from cuts, though it is evident that many are open to compromise. The passage of a tax bill this year seems highly likely.

Greenland Speaks: The center-right Demokraatit Party secured a surprising victory, as voters demonstrated strong support for the region’s independence. This outcome followed controversial overtures from Trump, who had previously expressed interest in acquiring the territory from Denmark.

• The Demokraatit Party was not the only pro-independence group to experience a surge in support, as the Naleraq Party also secured a strong second-place finish. Their successes underscore the depth of voter concern over the perceived threat of US annexation and highlight a growing desire among the electorate to have a greater say in shaping the region’s future.
• That said, it is important to note that the election results also revealed a preference among voters for a more gradual approach to independence, indicating that the population is not yet ready to fully sever ties with Denmark. While support for pro-independence parties has grown, the cautious pace advocated by some factions suggests a desire to balance aspirations for self-determination with the stability and benefits provided by the current relationship with Denmark.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a few words about yesterday’s steep sell-off in the US stock market. We next review several other international and US developments with the potential to affect the financial markets today, including increased investment in the European and Australian defense industries and the latest on the US stopgap spending bill to avoid a partial government shutdown starting at the weekend.

US Financial Markets: Futures trading so far today suggests that stock prices could stabilize or even rebound modestly after their steep declines yesterday, when the S&P 500 index fell 2.7%, and other indexes fell even more. Yesterday’s plunge appeared to stem largely from statements by President Trump and his administration suggesting that they are willing to tolerate short-term economic disruptions or even a recession for their longer-term goal of economic restructuring. Investors today will continue to digest those concerns.

• As we noted in our Bi-Weekly Geopolitical Report from January 27, the evolving Trump economic strategy is probably more consistent and coordinated than many observers realize. Many of the strategy’s components are classic pro-growth measures that investors should like. We think the key risks are in the administration’s effort to suddenly and sharply cut spending and push many of the costs of economic adjustment onto other countries, potentially sparking a trade war and shattering the US alliance system.
• Investors are likely to keep focusing on those risks in the coming days and weeks, especially if incoming economic data continues to soften. For example, since market close yesterday, both Delta Airlines and American Airlines have reported softening consumer and business demand. Similar reports could push stock prices lower again.
• From a technical perspective, we note that yesterday’s plunge pushed the S&P 500 below its 200-day simple moving average for the first time since October 2023. The share of the S&P 500 stocks trading above their 200-day SMA is now down to 46.8%, coming closer to the 30% or so that many traders consider a weak market. If the S&P 500 continues to fall, its next major support level is probably at about 5,433, at which point it would be in correction territory.

Japan: Revised figures showed that fourth-quarter gross domestic product expanded at an annualized rate of just 2.2%, far below the initial estimate of 2.8%. Nevertheless, the growth in the fourth quarter was an acceleration from the 0.6% rate in the previous quarter, and it marked the third straight period of expansion. The data will probably help prompt the Bank of Japan to keep raising interest rates after boosting its benchmark rate to 0.5% in January.

Australia: The government has unveiled a roughly $19-billion investment plan to upgrade the country’s defense industrial base so it can support future nuclear-powered submarines built through the AUKUS security pact with the US and the United Kingdom. The new investments in Australia’s industrial plant and workforce, coupled with regulatory reforms, show how rising defense spending around the world is likely to spur broader economic development and boost economic growth in the coming years.

North Korea: For the first time, state media over the weekend showed images of what it called “a nuclear-powered strategic guided missile submarine” under construction. South Korean analysts believe the sub would be able to carry about 10 nuclear missiles, potentially threatening the US mainland. The development has the potential to reignite tensions between Pyongyang and the governments of the US, Japan, and South Korea.

European Union: At the European Parliament today, European Commission President von der Leyen said the EU’s new 150-billion EUR ($164 billion) loan program for member states to boost their armed forces can only be used for purchases from European producers, including those in the UK, Norway, and Switzerland. According to von der Leyen, the rule aims to not only help EU nations rebuild their militaries, but also to strengthen Europe’s defense industry. The rule is likely to add even more fuel to European defense stocks and help boost Europe’s economy.

Denmark-Greenland-United States: Greenland today is holding parliamentary elections, the outcome of which could determine whether and when the territory will hold a referendum on independence and whether the US can acquire it, as President Trump wants. According to a January poll, about 85% of Greenlanders don’t want to be taken over by the US. In addition, the legislature has passed laws clamping down on foreign governments attempting to influence the island’s elections.

US Fiscal Policy: As the Friday deadline approaches for Congress to pass a stopgap spending bill to avoid a partial government shutdown, 21 House Republicans have signed a letter to their leadership opposing the elimination of clean-energy tax benefits in the Biden administration’s Inflation Reduction Act. The signatories have threatened to vote against any spending package that eliminates the IRA funding to help pay for President Trump’s tax-cut extension.

• As we’ve noted before, Biden’s signature IRA programs have ironically channeled billions of dollars of manufacturing subsidies and other funds into districts dominated by Republicans. The signatories to the letter all represent districts that have received significant funding from the IRA.
• The letter illustrates how the IRA has created a constituency for green-energy facilities even in Republican-dominated areas. Nevertheless, it isn’t clear whether their resistance will prevent planned cuts to the IRA funding or disrupt passage of the stopgap bill.

US Military: Even as the US Army appears to be reversing its recent recruitment crisis, new data shows that almost 25% of enlistees are washing out and leaving the service before their initial two-year contract is up. Army officials suggest much of the problem stems from a poor recruiting pool, with few young Americans able to meet the service’s stringent physical and educational standards. Today’s healthy labor market and rising civilian wages could also be pulling new recruits away. The data points to potential problems in US military readiness.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a new example of the possible repercussions from today’s reordering of the geopolitical landscape — a call by Poland’s prime minister for his country to consider building its own nuclear weapons. We next review several other foreign and US developments with the potential to affect the financial markets today, including an outright annual decline in China’s consumer price index and a statement by President Trump that he may be willing to spark a recession to restructure the US economy.

Poland: In a speech to parliament on Friday, Prime Minister Tusk said that Poland must respond to the US’s changing foreign policy by dramatically increasing the size of its armed forces and “boldly” considering the development of its own nuclear weapons. The statement illustrates an important potential risk as the Trump administration pushes US allies to take more responsibility for their own defense: Rather than simply spending more on their militaries, key countries could develop destabilizing capabilities.

• The administration continues to show signs that it may not live up to the commitments made in the US’s various mutual defense treaties, including the one underlying the North Atlantic Treaty Organization. That brings to mind the old proverb that the purpose of NATO was to “Keep the Americans in, the Germans down, and the Russians out.” If the US pulls back from NATO, keeping the Germans (and Poles) down will be much harder.
• By raising questions about its commitments, the US action is already spurring stronger defense spending by its allies, especially in Europe. As we have long predicted, that has been giving a significant boost to European defense stocks over the last year or so.
• However, if the allies believe they will be left to fend for themselves, there is no set limit to the capabilities they will want to develop. While the UK and France are currently the only NATO allies with nuclear arsenals, Germany, and now Poland, may build them as well. Other countries could also consider them, even if building or buying nukes may require them to break nuclear nonproliferation treaties.
• Without the ballast of the US to restrain them, these historical enemies at some point could fall into disputes and sharp disagreements, raising the risk of nuclear confrontation between them. Just as destabilizing, the Russians would also be alarmed if European countries on their doorstep began building independent nuclear arsenals.
• For investors, an important implication is that the demand for uranium will likely get a further boost, even beyond the bump it is expected to get from the increased use of nuclear power plants to generate electricity. As we’ve written in the past, China’s massive expansion in its nuclear arsenal is probably already supporting uranium prices. A potentially broader nuclear arms race should support uranium prices even further.

Germany: In a survey by the Financial Times, eurozone economists, on average, said Germany should be able to issue 1.9 trillion EUR ($2.1 trillion) in new debt over the next decade to fund increased defense spending and infrastructure investment. According to the economists, that’s the amount of new debt that Berlin could take on for those priorities without hurting its economic growth. As a result, German debt would rise to 86% of gross domestic product from 63% now. The figures suggest that Germany has plenty of fiscal space for stimulative spending and faster growth.

Syria: In other security-related news, a wave of sectarian killings arose in Syria’s coastal region over the last several days. The violence apparently started when insurgents supporting the deposed dictator Bashar al-Assad ambushed forces of the new government on Friday. Since then, government forces and their allies seem to be attacking perceived enemies, including the Alawite sect that had supported Assad. The violence raises the risk that Syria could devolve into broader sectarian violence rather than calming down under the new government.

China: The February consumer price index was down 0.7% from the same month one year earlier, coming in even weaker than expected and posting its first outright decline in 13 months. The government attributed the decline to an earlier-than-usual start to the Lunar New Year holiday, but even if that’s true, the lack of any inflation in China illustrates how weak price pressures have become as the country confronts a range of economic headwinds.

China-Canada: Beijing announced on Saturday that it will impose tariffs of up to 100% on canola, pork and other food products. According to the Chinese government, the tariffs are to retaliate for Canada’s decision last August to impose steep tariffs on Chinese electric vehicles, steel, and aluminum. However, the new duties are being widely seen as a warning to Ottawa not to cooperate with the US as it puts up tariffs and other trade barriers against Chinese imports.

Canada: Former central banker Mark Carney yesterday won the election to become the new leader of the center-left Liberal Party. Some 85.9% of party voters selected Carney, giving him a landslide win over former Finance Minister Chrystia Freeland. In coming days, Carney will be named prime minister, replacing Justin Trudeau, after which he will likely call national elections. Carney has signaled that his priorities will be to resist President Trump’s effort to annex Canada and shore up the Canadian economy’s resilience against US tariffs.

Mexico: President Sheinbaum yesterday held a giant fiesta in the capitol’s main square to celebrate a second month’s suspension of US tariffs proposed by President Trump. The fiesta, which included thousands of workers bussed in from all parts of the country, was originally planned for Sheinbaum to outline her retaliatory tariffs against the US. With the further suspension of many US tariffs last week, the party was repurposed into a show of national unity and Sheinbaum’s determination to resist US economic pressure.

US Economy: In an interview that aired yesterday, President Trump refused to rule out the chance that his tariffs and other economic policies could lead to a recession this year. He instead repeated his previous statements that due to the big changes he is trying to bring about, the economy will have to go through a “transition” period. Trump’s response suggests that investors shouldn’t necessarily expect Trump to pull his punches when or if the economic data starts to show softening growth, rising unemployment, or faltering asset prices.

• As of this writing, the administration plans to impose 25% tariffs on all imported steel and aluminum starting on Wednesday. The administration also plans to add “reciprocal” tariffs against any country that charges higher tariffs against the US than the US does against it, starting April 2.
• The president’s interview statements appear to be the key reason for a downdraft in US equity markets so far this morning. As of this writing, S&P 500 futures are trading down about 1.0%.

US Oil Industry: Following on Trump’s statement about a rough economic transition, the Financial Times today carries an interview with his energy secretary, Chris Wright, in which Wright says that Trump’s policies to boost US shale oil output will produce low prices, a wave of bankruptcies, and industry disruption. However, he insisted that the result will be a US oil industry that is more efficient and can produce at lower cost. Wright’s statement underscores the administration’s willingness to impose short-term economic costs for long-term benefits.

US Lumber Market: As Canadian export taxes and US import tariffs drive a widening price divergence between Canadian spruce, fir, and pine versus US southern yellow pine, CME Group has announced it will begin offering futures on the US lumber starting March 31. The new futures for southern yellow pine will trade under the ticker SYP. Please be careful that you don’t confuse it with SPY, the popular exchange-traded fund tracking the S&P 500 stock index!

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is currently digesting the latest jobs data. In sports news, Dave Roberts and the Los Angeles Dodgers are nearing a long-term contract agreement. Today’s Comment will cover the latest developments in the trade war, the reasons behind the differing views on the path of monetary policy by Fed officials, and other market-related news. As usual, the report will conclude with a summary of domestic and international data releases.

Trade War on Pause? For the second time this week, President Trump has delayed tariffs on goods. However, uncertainty remains widespread as businesses grapple with understanding the impact of trade policies on the economy.

• On Thursday, the Trump administration announced that goods covered under the 2020 North American trade agreement would be exempt from tariffs. This move comes a day after the president exempted auto goods from tariffs. The reversal appears to be a response to domestic backlash, as many US firms expressed concerns that the tariffs could severely disrupt their supply chains.
• Newly released data showed the US advanced trade deficit in goods deepened in January as imports surged. This increase was attributed to businesses stockpiling goods ahead of expected tariffs, a strategy likely aimed at mitigating the impact of the ongoing trade dispute. The significant rise in imports was a key factor in the Atlanta Fed’s GDPNow forecast, which currently indicates a potential contraction in the US economy.
• While tariffs targeting Canadian and Mexican goods have been put on hold, the aluminum and steel tariffs are expected to take effect on March 12. Additionally, reciprocal tariffs, designed to pressure countries into reducing their trade barriers, are set to be implemented on April 2. As a result, the recent U-turn on tariffs has created even greater uncertainty about what could unfold in the coming weeks.

• While the US has reduced some tariffs, other countries have maintained theirs, and Canada has increased certain measures. Ontario Premier Doug Ford announced plans to raise electricity tariffs on Michigan, Minnesota, and New York. Additionally, Canadian provinces have pushed to remove US-made alcohol from shelves, demonstrating that trade hostilities persist despite the brief reprieve.
• While the tariff reversal is likely to reduce some disruptions in the coming weeks, it will still have a major impact on economic data, particularly for those attempting to front-run the tariffs. As a result, this could weigh on US GDP growth in the future. That said, the possibility of a recession remains 50/50, as it is unclear whether consumers will absorb some of the tariff costs. In short, the trade war is far from over.

Monetary Policy Uncertainty: Less than a week before Federal Reserve officials are set to meet, there is still no clear direction on where they might set policy for the rest of the year. While several members have expressed concerns that tariffs could exacerbate inflation, others have remained optimistic.

• Fed Governor Christopher Waller suggested the possibility of two or three interest rate cuts this year. While he dismissed the likelihood of cutting rates at the upcoming meeting, Waller left the possibility open for a rate reduction in May. He emphasized that any decision to lower rates would be driven by sustained progress on inflation, rather than a reaction to economic weakness. Furthermore, he downplayed concerns about tariffs significantly impacting inflation, suggesting their effect would likely be limited.
• Waller’s comments appeared to diverge from the more cautious stance of many of his colleagues regarding the possibility of rate cuts. Later that day, Atlanta Fed President Raphael Bostic noted that uncertainty surrounding future policy makes it unlikely the Fed will move on interest rates before late spring or early summer. Earlier in the week, New York Fed President John Williams had also struck a more cautious tone, specifically highlighting tariffs as a potential risk to inflation.
• The divergence between Waller’s views and those of many of his colleagues comes at a time when market expectations for monetary policy have undergone a complete reversal. Before last Friday, markets had priced in no rate cuts for the year. However, sentiment shifted sharply following the release of the PCE price index, which showed a deceleration in price inflation, alongside weaker-than-expected economic data. Now the market is pricing in three or maybe four rate cuts this year.

• As highlighted in our previous reports, the Fed is likely to have the most success at the start of the year as opposed to the end of the year in bringing inflation down closer to target. This is supported by the latest Cleveland Fed Nowcast for Inflation, which projects the April PCE price index report will show overall inflation falling below 2.1%. That said, we continue to believe that, barring a recession, the Fed is likely to cut rates no more than twice this year.

Ukraine Update: Officials in the European Union, along with Congressional Republicans, are working to help repair relations between Ukrainian President Volodymyr Zelensky and US President Donald Trump.

• Despite their differences, it is widely anticipated that the two leaders will reach a minerals agreement, which could help pave the way for a potential peace deal with Russia. In a gesture of goodwill ahead of his meeting with US officials, Zelensky has called for an enforced “silence in the sky.” Meanwhile, US officials are scheduled to meet with their Ukrainian counterparts to facilitate peace negotiations.
• While President Trump has shown no signs of softening his stance, members within his own party are actively pushing for a change in approach. Several GOP senators have urged the president to resume intelligence sharing and provide renewed aid to Ukraine. Their insistence stems from concerns among many Republicans that Ukraine may be losing leverage in negotiations with Russia to end the war.
• Since the controversial meeting between Zelensky and Trump last week, Russia has seized the opportunity to intensify its attacks, aiming to strengthen its position in future negotiations. Putin has made it clear that he has no intention of retreating from territorial gains unless he secures guarantees for Russia’s long-term security.
• While tensions between the US and Ukraine persist, there appears to be a potential pathway toward ending the Russian invasion. A resolution to the conflict could ease pressure on oil prices and provide a boost to European equities.

China’s Annoyance: While President Trump offered some tariff concessions to North American counterparts, the levies on Chinese goods remained unchanged. Compounding the situation are indications that the Trump administration may be exploring the formation of a North American trade bloc.

• China’s foreign minister criticized the US for what he characterized as a “two-faced” approach to bilateral relations, pointing to perceived inconsistencies. He highlighted President Trump’s complimentary remarks toward President Xi contrasted with the implementation of trade tariffs as examples of these mixed signals.
• His remarks follow new trade measures by Mexico to also review tariffs on Chinese imports. The move was seen as a way to curry favor with the incoming administration as they look to prevent a broader trade war with Mexico.
• The United States’ ability to persuade more allies to impose tariffs on China is likely to fuel Beijing’s concerns about being isolated from the global community. However, this outcome hinges on Washington’s capacity to maintain unity among its allies — a challenging task, given apprehensions about potential US tariffs. That said, a unified front against China could serve as a strategic off-ramp for US allies seeking to preserve their relationships with Washington while addressing shared economic concerns.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is still digesting the latest economic data. In sports news, Ole Miss pulled off an upset victory over number four ranked Tennessee. Today’s Comment will cover Europe’s decision to ramp up defense spending, the challenges in assessing the current state of the US economy, and other market-related developments. As usual, the report will conclude with a roundup of domestic and international data releases.

Europe Arms Up: The EU has intensified discussions to strengthen its defense capabilities, as it no longer trusts that the US will honor its security commitments. This shift has triggered a surge in European bond yields, as the EU not only works to enhance its defense infrastructure but also revises its fiscal targets.

• EU leaders are convening an emergency summit in Brussels to talk about bolstering their defense capabilities in support of Ukraine. European officials will use the meeting to advance a series of new proposals aimed at enhancing the bloc’s ability to allocate funds for defense. This move comes as Germany and France have taken more assertive steps to ensure their security in the event of a potential US withdrawal of support.
• Germany’s incoming Chancellor Friedrich Merz has agreed to support expanding the country’s fiscal limits to facilitate increased spending on defense and infrastructure. The new initiative is expected to allow for unlimited defense spending and establish a 500 billion EUR ($541 billion), 10-year fund to drive infrastructure investments. The increasing in spending is on a pace not seen since the fall of the Berlin Wall.
• However, the legislation still requires a two-thirds majority in parliament to become law, which could prove challenging given the reluctance of the far-right AfD and far-left parties — who collectively hold roughly 27% of seats — to support increased military spending. There is also likely to be some pushback from German lawmakers that are more fiscally conservative.
• In France, President Emmanuel Macron is advocating for the EU to consider how his country’s nuclear weapons could serve as a deterrent against Russia. His comments follow a proposal from Merz, who has called for Germany, France, and the UK to develop their own nuclear sharing network as a potential alternative to relying on the US.

• The main takeaway from this shift in tone regarding defense spending across the EU is that member states will likely need to borrow significantly. One key development to watch is the potential creation of another joint European bond, similar to the one used to fund pandemic-related expenditures. This move could also bring the EU closer to forming a fiscal union, which would likely impact global bond markets and pose a challenge to the dominance of US Treasurys.

Mixed Economic Signals: A strong February PMI Services survey from the Institute for Supply Management (ISM) has bolstered optimism that the economy remains in expansion territory. However, both the index and the Federal Reserve’s Beige Book highlight growing concerns among firms about the potential for a downturn. These conflicting signals are likely to exacerbate ongoing market uncertainty.

• The ISM Services PMI unexpectedly rose from 52.8 to 53.5 in February, driven by a sharp increase in new orders, employment, and inventories. However, the report also highlighted growing inflationary pressures, as input prices surged to their highest level since early 2023. While the data has alleviated some concerns about an imminent downturn, it has raised fears of a potential reacceleration in inflation.
• The PMI report also highlighted that firms remain concerned about persistent uncertainty and the outlook for future business activity. Additionally, survey respondents expressed unease over potential deep cuts to government spending. The wariness has led to concern that economic activity could start to slow.
• The latest Federal Reserve Beige Book indicated that GDP growth may have improved slightly since mid-January, despite most regions not experiencing actual growth. The report revealed that eight out of twelve districts reported either no growth or a contraction during recent weeks. While some of this slowdown was attributed to adverse weather conditions, there were also reports of firms expressing concerns about rising prices.

• Currently, investors are closely monitoring economic data to assess the impact of tariffs and government spending on the economy. The market is likely to sell off at any sign of consumers cutting back on spending or firms laying off workers, while rallying in the opposite scenario. Although there are some indications that a downturn may be on the horizon, there is no conclusive evidence of one yet.

Steering with Open Ears: The president has decided to hold talks with business leaders as he aims to shape his agenda in a way that minimizes the impact on businesses. While these discussions may result in adjustments to some of his policies, a full reversal is unlikely.

• The Trump administration has announced a one-month delay in tariffs on all goods eligible for duty-free treatment under the USMCA, a move specifically benefiting the auto industry. This exception follows intense lobbying from the sector, which warned that the import taxes could severely disrupt supply chains. Estimates suggest that the tariffs could increase the cost of a vehicle by approximately $10,000.
• Chipmakers and computer hardware developers also plan to visit the White House, as they have raised concerns about import and export restrictions. This move coincides with the president’s broader shift in policy, which includes not only tariffs and export controls but also a move away from the previous administration’s approach of fostering domestic industry through public investment. Instead, the focus is now on a strategy centered around foreign direct investment.
• While the administration has shown a willingness to compromise with tech leaders to prevent an economic slowdown, it appears unwilling to abandon some of its more controversial policies. This reluctance to compromise suggests that the president and his team may be aiming to drive significant changes in the country, for better or worse. At this stage, the situation remains highly fluid, with developments evolving rapidly. As a result, expect considerable volatility in the near term.

China’s Response: Beijing appears to be better prepared to handle a trade war with the US compared to President Trump’s first term, signaling that the trade tensions could persist for longer than many are expecting.

• The government plans to implement policy measures aimed at achieving its growth target of around 5% for 2025. These measures not only include further monetary policy accommodation, with the People’s Bank of China expected to lower its policy rate and the reserve requirement ratio, but also include an increase in the fiscal deficit target to accommodate higher spending.
• In the meantime, businesses are struggling to compel their Chinese suppliers to absorb the majority of the tariff costs. For instance, Walmart has asked its suppliers in China to shoulder the full burden of the tariffs, only to face pushback, as such a move would force these companies to operate at a loss. This development suggests that American firms may have to absorb some of the costs themselves or pass them on to consumers.
• While we still believe the trade war is likely to exacerbate China’s economic challenges, we are closely monitoring political developments within the region, as they could play a decisive role in Beijing’s ability to manage escalating trade tensions with the US. That said, we remain confident that Beijing will strive to contain the trade war as much as possible, including pursuing a potential deal with the US.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some key decisions from the Chinese government’s annual legislative sessions. We next review several other international and US developments with the potential to affect the financial markets today, including a big, new fiscal stimulus program proposed in Germany and a short recap of President Trump’s speech to a joint meeting of Congress last night.

China: At the opening of the “Two Sessions” legislative meetings yesterday, Premier Li Qiang announced that the government would target about 5% economic growth in 2025, matching expectations and in line with the goals from the previous two years. The target for consumer price inflation was set at 2%. The government’s expected budget deficit was set at 4%, up from 3% in recent years and the highest in decades.

• Given China’s structural economic headwinds and budding trade war with the US, the new economic growth goal is considered aggressive.
• That, coupled with the increased budget deficit, implies that the government will unveil significant stimulus policies later in the sessions. If it does, Chinese equities would likely get a boost.

Germany: Center-right leader Friedrich Merz, who won last month’s election, said his party and its prospective coalition partners plan to exempt defense spending from Germany’s strict spending and debt limits. They also plan to set up a massive, off-budget fund of 500 billion EUR ($536 billion) for infrastructure projects.

• The initiative exemplifies how the rising threat of Russian aggression and the Trump administration’s reluctance to support the US’s allies in Europe have spurred greater defense spending on the Continent. As a result, European defense stocks remain in a strong rally.
• More broadly, the new spending on infrastructure also has the potential to stimulate faster economic growth in the European Union’s biggest country. In response, European stocks are in a strong rally so far this morning. European bond prices have fallen, pushing up yields, while the euro has appreciated 0.6% to $1.0694.

United States-Japan: In a statement early this week that hasn’t been widely reported, President Trump accused Japan and China of deliberately weakening their currencies to garner trade advantages. In response, Trump hinted that he was prepared to impose tariffs to retaliate for the practice. Trump’s statement may be the first sign that he’s planning broad tariffs against Japan, even though some of his other tariffs, such as those on autos and steel, would hit certain economic sectors.

United States-Ukraine: The Financial Times today reports that the US has followed up its suspension of military aid to Ukraine by freezing all intelligence sharing, although at least one Ukrainian official has said some information continues. Among other consequences, any freeze on intelligence sharing would hamper Kyiv’s ability to effectively target Russia’s invasion forces and give the Kremlin a further advantage in the run-up to expected peace talks.

United States-Venezuela: The Trump administration yesterday told energy giant Chevron that it will revoke the firm’s license to produce oil in Venezuela in 30 days. The move is in retaliation for Caracas’s recent slowdown in accepting Venezuelan immigrants deported from the US. Chevron’s Venezuelan operations, which produce some 240,000 barrels of oil per day, will be taken over by state-owned oil company Petróleos de Venezuela, known as PdVSA. However, PdVSA is not expected to be able to maintain the operation’s output for long.

US Economic Policy: In his speech to a joint session of Congress last night, President Trump mainly recapped his accomplishments so far. The speech contained few major, new policy announcements. For investors, the key takeaways were probably Trump’s announcement of a new initiative to boost US shipbuilding and confirmation that the specific product imports to be targeted in his next round of tariffs will include a range of metals, including copper.

• Trump also acknowledged that the tariffs put into place by his administration would cause some economic disruptions, but he insisted that “we’re OK with that.”
• On a more positive note, Commerce Secretary Lutnick said overnight that Trump today could announce a deal with Canada and Mexico that would soften the tariffs on them. The statement has helped give a boost to US stock prices so far this morning.

US Economic Statistics: According to the Wall Street Journal, Commerce Secretary Lutnick last week disbanded two committees of outside experts that had advised government agencies on data collection, analysis, and reporting for decades. The committees were typically made up of unpaid academic economists, think-tank researchers, and business executives.

• The move will raise concerns that US economic data releases, such as the quarterly report on gross domestic product, could be manipulated for political purposes under the new administration.
• If that happens, concerns about unreliable data could undermine asset prices.

US Labor Market: The US Office of Personnel Management (OPM) has quietly issued an addendum to its January memo to agencies that spurred mass firings of probationary workers. Citing a court case invalidating the move, the addendum has clarified that OPM doesn’t have the authority to order firings at individual agencies. Rather, agency chiefs must decide who and when to fire. The new language may slow some of the administration’s effort to cull the federal work force. Still, the threat of firing will remain, likely slowing consumer spending.

US Stock Market: In market action yesterday, the S&P 500 price index for large-cap US stocks fell 1.2%, settling below its level on election day. Stocks have now lost all of their price gains in the initial euphoria over President Trump’s election, probably reflecting his aggressive tariff policies, signs that his policies are weighing on economic activity, and uncertainty over the direction of future policy.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some key observations on Friday’s disastrous summit meeting between President Trump and Ukrainian President Zelensky. We next review several other international and US developments with the potential to affect the financial markets today, including key reports on consumer price inflation from the eurozone and Turkey and signs that the paused US tariffs on Canada and Mexico will finally take effect tomorrow.

United States-Russia-Ukraine: By now, we assume that those who care about global affairs and understand that international relations can profoundly affect their personal lives have already started to digest President Trump’s failed meeting on Friday with Ukrainian President Zelensky. We therefore won’t try to rehash all the details here. Rather, we provide a quick summary of the meeting and then focus on what it says about Trump’s evolving foreign policy and what it portends for US investors.

• To recap, the meeting was set for the two leaders to sign a preliminary deal in which the US would get a cut of Ukraine’s future mineral profits to repay the US’s past support and, supposedly, to cement the US’s interests in Ukraine and deter further Russian aggression. The meeting devolved into acrimony when Zelensky warned that Russian President Putin can’t be trusted. It broke up with Zelensky evicted from the White House and the deal left unsigned.
• Neither Trump nor any top administration official has provided a comprehensive statement of the president’s global goals and strategy. As we’ve written before, one thrust so far has been to punish traditional US allies – especially Canada, Mexico, and the European members of the North Atlantic Treaty Organization – for supposedly taking advantage of the US since World War II. But unleashing brutal rhetoric, tariffs, and military threats against the allies doesn’t seem to be the whole story.
• One great mystery about Trump’s foreign policy is why he has seemed relatively soft on China so far and why he seems so intent on excusing Putin – a dictator who essentially aims to recreate the Russian Empire and, therefore, is a threat to Western Europe’s wealth, economic potential, territory, technology, democratic institutions, and cultural development, all of which have made the region such a valuable ally for the US over decades.
• In the Trump-Zelensky meeting, it’s striking that the point at which it “went south” was when Zelensky said that Putin can’t be trusted. After a quarter-century of evidence pointing to Putin’s brutality and duplicity, the question arises as to why that statement would so easily set off Trump and Vice President Vance. It also highlights how administration officials and nominees have apparently been instructed to avoid any criticism of Putin and to parrot Russian talking points on global affairs.
• As we’ve noted before, some observers think Trump is trying to pull a “reverse Nixon” or “reverse Kissinger” by splitting Russia away from China. Secretary of State Rubio, a relatively traditionalist Russia hawk, even articulated this view recently. However, there are many reasons to doubt this possibility, from the lack of any obvious Chinese-Russian political tensions to exploit to the paucity of economic advantages the US could gain from closer relations with Russia.
• Another potential reason for Trump’s embrace of Russia is the possibility that he aims to divide the world into spheres of influence, with the US taking the Americas (possibly with outposts in Greenland, the Middle East, and some Pacific islands), Russia taking Europe, and China taking Asia up to the “first island chain.” If so, it seems like a bad deal for the US to trade Europe for a freer hand in the Americas. This strategy would also require trusting Beijing and Moscow to respect the US sphere.
• A final potential reason that we explore here is political affinity. Alliances often are built on a common political outlook, so Trump’s embrace of big, authoritarian, strong-man countries such as Russia and Saudi Arabia could simply signal his comfort level with that style of government. Since Trump has positioned himself as a champion of the US’s conservative working class, who are looking to him to break the political and economic hold of the elites, such an embrace of assertive politics may be well received by his base.
• In sum, it’s true that Europe has lost some luster as a political, military, and economic partner for the US. However, surrendering the region to the China/Russia geopolitical bloc potentially sets the stage for further international chaos. Even if peace in Ukraine and the reopening of Europe to Russian energy gives a boost to European stocks in the near term, greater Russian influence on the Continent could constrict US economic opportunities over the longer term.

United Kingdom-France-Ukraine: British Prime Minister Starmer hosted French President Macron, Ukrainian President Zelensky, and other European leaders yesterday to try to hash out their own peace plan for Ukraine. According to Starmer, the Europeans’ aim is to develop a plan that would entice President Trump to commit the US to help provide security guarantees for Ukraine.

• Late yesterday, Macron indicated that the Europeans are working on a one-month ceasefire that would stop Russia and Ukraine from conducting air and sea assaults and attacks on each other’s infrastructure. The ceasefire proposal would not apply to ground attacks due to the difficulty in policing them.
• A second part of the developing plan would involve Ukraine signing a mineral deal with the US, similar to the one that was supposed to be signed at Friday’s Trump-Zelensky meeting.
• However, it’s important to note that the UK and Ukraine today have both distanced themselves from the plan Macron suggested.

Eurozone: The February consumer price index was up just 2.4% from the same month one year earlier, not quite as tame as the expected 2.3% but better than the 2.5% recorded for the year to January. Stripping out the volatile food and energy components, the February core CPI was up 2.6% compared with 2.7% in the year to January. The decline in inflation last month should help bolster the case for further interest-rate cuts when the European Central Bank holds its next policy meeting later this week.

Turkey: The February consumer price index was up “just” 39.1% from the same month one year earlier, matching expectations and cooling from the 42.1% increase in the year to January. The data marked the ninth straight month in which Turkish inflation has cooled, likely setting the stage for the central bank to keep cutting the country’s sky-high interest rates in the coming months.

United States-Canada-Mexico-China: Commerce Secretary Lutnick yesterday said the paused US tariffs against Canada and Mexico will indeed go into effect on Tuesday, but President Trump is still deciding whether to apply them at the originally planned 25% rate or at some lower rate. Lutnick said the new 10% additional levy against China is “set” and will also go into effect on Tuesday.

• The big, new tariffs against the US’s largest trading partners could disrupt economic activity, but it’s still too early to know if they’ll worsen consumer price inflation.
• In any case, tariff risks continue to drive investors into stock market sectors that are more domestically oriented and therefore are perceived to be more insulated from Trump’s new trade policies. The Health Care, Consumer Staples, Real Estate, and Financials stock sectors are all up more than 5% so far this year versus a gain of just over 1% for the overall market.

US Public Lands Policy: President Trump on Saturday signed an executive order directing federal agencies to examine ways to bypass environmental regulations that control timber production in US national forests and other public lands. The directive suggests Trump will try to boost domestic timber output to offset planned restrictions on imported wood. If so, any quick boost in domestic production could help reduce the costs of newly built homes and other buildings as labor and other costs keep going up.

US Cryptocurrency Market: President Trump yesterday named five cryptocurrency tokens that will be included in his new US digital-currency reserve. The tokens included will be Bitcoin, ether, solana, Ripple-linked XRP, and cardano. As might be expected, overnight prices for the tokens jumped, with the increases ranging from about 9% for Bitcoin to more than 60% for cardano. Nevertheless, prices for Bitcoin and other major cryptocurrencies remain far below their most recent highs.

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