by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is on hold as investors await the release of US PMI data, which will provide insight into the strength of the economy. In sports news, Canada secured a victory over the US in the 4 Nations Face-Off. Today’s Comment will cover key highlights, including our analysis of Scott Bessent’s recent interview with Bloomberg, an overview of the upcoming German elections this weekend, and discussions of other important market developments. As always, the report will also feature a summary of the latest international and domestic data releases.

Scott Bessent Speaks: The US Treasury Secretary spoke with Bloomberg, outlining the Trump administration’s key objectives as it advances its policy agenda. The interview occurred just one day before his scheduled meeting with China’s top financial official, where the two were set to discuss the evolving dynamics of US-China relations.

• During the discussion, Bessent reaffirmed the US’s commitment to maintaining a strong dollar policy and upholding Federal Reserve independence, though not without a few pointed remarks. He noted that while the US prefers a strong currency, it also wants other countries to avoid currency manipulation, specifically calling out China and the European Union. He also criticized the Fed for suggesting that tariffs could contribute to inflation, implying that even if such an effect occurred, it would likely be transitory.
• Bessent also addressed and dispelled rumors surrounding gold. He emphasized that the US holds all the gold reported on its balance sheet and noted that these reserves are subject to regular audits. Additionally, he dismissed speculation that the US might revalue its gold holdings as part of its efforts to establish a sovereign wealth fund, saying that it was not something he had considered.

• Additionally, he discussed the Trump administration’s efforts to reduce long-term bond yields. Bessent indicated that the Treasury might maintain the current duration of bond issuances until the Federal Reserve halts its quantitative tightening program. He also suggested that cost-cutting measures could play a role in helping to bring yields down further.
• Although the interview did not provide significant new insights, it did highlight the Trump administration’s preference in avoiding extreme measures while pursuing its agenda. Despite the provocative rhetoric often seen in headlines, the administration has shown a reluctance to adopt interventionist policies, such as devaluing the dollar or revaluing gold, that could severely destabilize financial markets. This suggests a more cautious approach than the bold claims might imply.

German elections: The country is holding parliamentary elections on Sunday, with the two leading parties, the Union parties (CDU/CSU) and the far-right Alternative for Germany (AfD), expected to secure the most votes. However, neither is projected to win a majority.

• Recent polls suggest that CDU/CSU is likely to secure around 30% of the vote, while AfD is expected to garner 21%. Although the combined support for both parties would be enough to form a government, CDU/CSU has categorically ruled out entering into a coalition with AfD. That said, the race remains highly unpredictable, with roughly a fifth of the electorate still undecided.
• The battle for control of the government is expected to be highly contentious. While the CDU/CSU holds an advantage, a strong performance by AfD could significantly undermine their leverage. Meanwhile, the other two parties likely to gain seats — the Social Democratic Party (SPD) and The Greens — are polling at 16% and 13%, respectively. However, neither party is close to securing the number of seats required to form a coalition.
• If the polls are accurate, CDU/CSU may have to rely on smaller parties to form a government. These include the left-wing Sahra Wagenknecht Alliance (BSW), The Left party, and the fiscally conservative Free Democratic Party (FDP). While FDP is ideologically closer to CDU/CSU, polls suggest the party is trending below the 5% threshold required to secure parliamentary seats. As a result, CDU/CSU may be forced to make concessions to one of the left-wing parties to achieve a governing majority.

• Year-to-date, the German equity market has been one of the world’s best-performing markets, rising nearly 12%. This growth has been fueled by optimism surrounding a potential economic rebound, expectations of increased fiscal spending following the election, and the possibility of an end to the war in Ukraine. We suspect this trend could continue as long as there are no surprises in the election.

The Great Rebalance: US and Chinese officials are set to discuss measures aimed at addressing trade imbalances, particularly by encouraging China to reduce its reliance on exports for growth and boost its domestic consumption. 

• Ahead of the talks, Chinese Premier Li Qiang emphasized the need for the country to expand its services sector, particularly in areas such as healthcare, sports, and entertainment. His comments come as the country struggles to deal with crippling deflation due to the lack of domestic demand for goods and services.
• While Li’s remarks suggest a willingness to engage in dialogue, China is unlikely to change its course of action without sustained pressure from the US. China has a history of making promises and not delivering on them.
• We believe a crucial step for the government to reduce its reliance on export growth and stimulate domestic consumption is the creation of a comprehensive social safety net. This would empower households to spend more freely on discretionary items.
• The US effort to improve its savings and trade balance may rely on convincing China to boost welfare spending. While Chinese leaders have discussed strengthening the social safety net, little action has been taken. If reforms materialize, increased consumer confidence could make China a more attractive investment destination by driving domestic consumption and reducing export reliance.

Zelensky-Trump Rivalry: Ukrainian President Volodymyr Zelensky and US President Donald Trump have been embroiled in a heated exchange over Ukraine’s valuable mineral resources. The tension arose after Zelensky reportedly refused to cede more than 50% of the rights to these resources without firm guarantees of security and stability for Ukraine.

• The Trump administration has argued that the proposed deal would strengthen bilateral ties by aligning the interests of both countries. It believes that such an arrangement would foster mutual benefits and long-term cooperation. However, President Zelensky has emphasized that any agreement must include concrete commitments and guarantees from the US administration to ensure Ukraine’s sovereignty and security are safeguarded in exchange for access to its valuable resources.
• The dispute over Ukraine’s mineral resources is particularly significant, as many of these valuable materials, which include rare earth elements and titanium that are critical for weapons development and advanced technologies like semiconductors, are located in regions currently occupied by Russia.
• While the friction between Zelensky and Trump is unlikely to cause a complete breakdown in relations, it could strain their partnership and complicate efforts as peace talks move forward.

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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 comments from President Trump regarding China. In sports news, reigning champions Real Madrid secured a dominant victory over Manchester City in the UEFA Champions League playoffs. Today’s Comment will cover our insights on the recent FOMC meeting minutes, provide an update on the Republican effort to advance President Trump’s agenda, and discuss other market-related developments. As usual, we will also summarize key international and domestic data releases.

Fed Cuts On Hold: The minutes from the January FOMC meeting revealed that Fed officials remain cautious about adjusting monetary policy. Their hesitation stems from concerns over the recent uptick in economic activity and uncertainties surrounding recent policy proposals. Additionally, officials started discussions about their plans for further quantitative tightening.

• In January, the committee unanimously voted to hold rates steady as it awaits clearer signs of progress on inflation. Fed officials highlighted concerns about upside risks to inflation, citing potential trade restrictions, a slowdown in immigration, and geopolitical tensions that could disrupt supply chains. Additionally, they noted that seasonal factors might further complicate the assessment of inflation trends.
• Their comments came ahead of the latest CPI report, which showed a stronger-than-expected acceleration in inflation for January. While factors such as auto and tenant insurance, along with egg prices, drove much of the increase — likely on a temporary basis — goods inflation moderated notably. This has raised concerns that progress on inflation may be stalling.
• Regarding the Fed’s balance sheet, the central bank believes that reserves remain abundant but cautioned that the debt ceiling may be obscuring underlying issues. Consequently, there is concern that once the debt limit is lifted, reserves could decline more rapidly to levels deemed “appropriate.” As a result, officials also discussed temporarily suspending the balance sheet runoff until the debt limit issue is resolved.

• The potential end of the balance sheet runoff is likely to provide a much-needed boost for US government bonds, as it is expected to increase demand. That said, a moderation in inflation and additional Fed rate cuts could also push long-term yields lower.

Trump Picks a Side: President Trump has thrown his support behind the House Republican tax cut bill, aiming to consolidate all his priorities into a single comprehensive piece of legislation, which he has famously described as “one big beautiful bill.”

• The president’s decision comes amid escalating tensions between Senate and House Republicans, who are struggling to align on a cohesive strategy to advance the Trump administration’s agenda. The primary divergence lies in their approaches. The Senate bill seeks an early victory by prioritizing immigration reform and raising the debt ceiling, thereby creating breathing room to deliver on tax reform. In contrast, the House bill adopts a more comprehensive approach, aiming to tackle all pressing issues simultaneously.
• The differing approaches stem from concerns that the House bill may lack the necessary support to pass through Congress. While it includes tax cuts, it also proposes reductions to certain social spending programs, which are likely to face significant pushback from moderate lawmakers. Moreover, such opposition could delay lawmakers’ ability to meet the March 14 government funding deadline, potentially exacerbating market uncertainty.
• So, while the president has indicated a preference for the House bill, he has also expressed willingness to support the Senate bill to ensure the legislation moves forward. Furthermore, the White House has shown openness to reducing defense spending as another avenue for achieving savings. We remain optimistic that a new tax bill will be passed this year, which would be highly bullish for US equities.

China Deal Possible? President Trump believes he can still secure a trade deal with China, despite rising tensions. His comments come just a few weeks before tariffs on Mexico and Canada, which the administration plans to impose, are set to take effect on March 4.

• Trump imposed a 10% additional tariff on imports from China shortly after taking office in January, citing concerns that China was not doing enough to curb the flow of fentanyl into the US and to address its unfair trade practices. While his decision was widely expected, the tariff rate was significantly lower than the 100% tariffs he had promised during his campaign, suggesting a potential moderation in his stance.
• That said, his true intentions remain unclear. The president may be using China as a signal to other countries that he is open to negotiating deals. Notably, his comments come just a day after he pledged to impose 25% tariffs on autos, pharmaceuticals, and semiconductors.
• So far this year, the dollar has weakened significantly amid signs that the president is less willing to pursue aggressive tariff measures than many had feared before he took office. This trend could continue if he steps back from other trade-related threats.

Canadian Elections: The Conservative Party’s once-insurmountable lead has narrowed significantly in recent weeks, raising doubts about its ability to form a strong coalition in the upcoming election.

• Recent polling reveals a decline in voter trust in the US, likely influenced by trade disputes and jokes about the country’s potential statehood. Voters express greater confidence in the Liberal party’s ability to advocate for them in dealings with the US.
• Additionally, Prime Minister Justin Trudeau’s decision to step down has contributed to the party’s surge in support, as he had become deeply unpopular with the public. His departure has been a central theme in the Conservative Party’s messaging, particularly due to his support for a carbon tax.
• The latest polls show that the Conservative Party’s advantage has narrowed significantly, dropping from an 18% lead over its Liberal rivals to just 7%. The survey indicates that the Conservatives now hold 39% of public support, compared to 32% for the Liberals.
• The rise of the Liberal party could compel the Conservatives to adopt a more confrontational trade policy toward the US to win sufficient parliamentary support. Such a strategy increases the risk of escalating trade tensions between the two nations.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with a recap of the big diplomatic meetings on the Russia-Ukraine war that have taken place over the last two days. We next review several other international and US developments with the potential to affect the financial markets today, including surprisingly good economic growth in Japan in the fourth quarter, a sudden scandal for Argentina’s president, and a Federal Reserve official’s statement that further interest rate cuts should not be off the table.

US-Russia-Ukraine-Europe: At a meeting today in Saudi Arabia, high-level US and Russian officials agreed to establish diplomatic teams to work on wrapping up Russia’s war against Ukraine and improving US-Russian bilateral relations. According to the State Department, the teams will “lay the groundwork for future cooperation on matters of mutual geopolitical interest and historic economic and investment opportunities which will emerge from a successful end to the conflict in Ukraine.”

• Yuri Ushakov, the Russian president’s foreign affairs advisor, gave only a muted assessment of the talks, calling them “not bad” and insisting that it was too early to say that US-Russian relations were improving. Ushakov’s statements are consistent with other signs that Russia will take a tough line on negotiations.
• Indeed, the Kremlin today issued a statement that it would not accept any role for European countries in the Ukraine peace talks and is “categorically opposed” to a European peacekeeping deployment as part of any deal. The Kremlin also insisted that the North Atlantic Treaty Organization (NATO) rescind its open-ended 2008 invitation for Ukraine to join NATO.
• Meanwhile, Ukrainian President Zelensky, who was not allowed to attend the meeting, warned that Kyiv will not abide by any agreement negotiated between Russia and the US without its involvement.
• Finally, we note that the US-Russia meeting today followed a Monday summit of leaders from NATO, Germany, France, Italy, Spain, Denmark, Poland, and the UK, in which the leaders discussed how they should respond to being frozen out of the US-Russia talks on Ukraine and how they should help end the war. At the meeting, France and the UK supported sending European peacekeeping troops to help guarantee Ukraine’s security, but the other attending countries pushed back on the idea.

Israel-Hamas: Israeli Foreign Minister Gideon Sa’ar today said Tel Aviv will start negotiations with the militant Hamas government in Gaza to end the war there, despite a two-week delay because of disputes over the ceasefire constituting the first phase of the talks. Those disputes had called into question the peace process itself. The foreign minister’s statement is likely to be taken as reassurance that the war can wind down and the energy-rich region can be stabilized.

Japan: Data yesterday showed gross domestic product grew at a seasonally adjusted, annualized rate of 2.8% in the fourth quarter, almost three times the expected rate and enough to mark the third straight quarter of healthy expansion. The key contributor to growth in October through December was international trade, while consumer spending came in on the soft side. The data will likely encourage the Bank of Japan to consider more interest rate hikes in the near term, prompting a modest appreciation in the yen over the last day.

China: New reports say the Chinese government has transferred its stakes in five national investment firms from the country’s sovereign wealth fund to Central Huijin Investment, a subsidiary of the fund with experience in arranging mergers and workouts for underperforming companies. The move suggests that creating big, consolidated “national champion” investment firms will be the next step in Beijing’s effort to make China a “financial superpower.”

Australia: The Reserve Bank of Australia today cut its benchmark short-term interest rate by 25 basis points to 4.10%, marking its first rate cut since November 2020. Although the central bank has come under pressure to ease rates ahead of national elections, RBA chief Bullock warned after the decision that policy will have to remain restrictive in the near term because of continuing inflation. Nevertheless, the Australian dollar so far this morning is trading down 0.2% at $0.6343.

Argentina: Libertarian populist President Milei today is caught up in a snowballing scandal after he went on X to promote a new cryptocurrency called $LIBRA on Friday night, apparently prompting the price to surge. The price then plunged suddenly, leaving investors in the lurch. Milei claims that he was not a part of any effort to defraud investors and has said he will cooperate with any investigation. Nevertheless, the scandal may undermine the trust Milei has earned by helping bring down Argentina’s consumer price inflation.

US Monetary Policy: In a speech today, Fed board member Christopher Waller said US monetary policymakers shouldn’t be reluctant to keep cutting interest rates if price pressures start cooling again, despite uncertainty about new policies from the Trump administration. While some observers have called for the Fed to stay on the sidelines until the administration has rolled out more of its economic program, Waller’s statement is a reminder that some Fed officials are still looking for an opportunity to cut rates further.

US Labor Market: Utah’s governor has signed into law a bill that bars public employee unions from negotiating wages and other terms of employment. Pushed by Utah’s Republican-led legislature and signed by its Republican governor, the new law shows how the populism of today’s Republican Party doesn’t necessarily align with traditional populist economic policies, such as protecting organized labor. From President Trump downward, the form of populism pursued by today’s Republican leaders often focuses more on cultural issues.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Note: Due to the holiday, the Daily Comment will not be published on Monday, February 17.

Happy Valentine’s Day! The market is currently processing the latest retail sales data. In sports news, the US dominated Finland in the NHL 4 Nations Face-Off. Today’s Comment will explore the shifting landscape of US foreign policy, examine the possibility of gold revaluation, and cover other market-related news. As usual, our report will include a summary of domestic and international data releases.

DIY Foreign Policy, We Can Help: President Trump has increasingly downplayed the US’s traditional role as the “world’s policeman,” and instead is emphasizing its position as a leading defense supplier. This shift reflects a deliberate strategy to scale back America’s global security responsibilities while encouraging other nations to enhance their own defense capabilities.

• On Thursday, President Trump raised the possibility of convening a meeting between Russia and European nations to discuss a joint agreement to reduce their defense expenditures. While it remains uncertain whether Putin or Xi would be open to such a proposal, the suggestion underscores President Trump’s broader inclination to scale back US global influence.
• Additionally, this move reflects President Trump’s broader strategy of engaging with rival powers to ease global tensions. By excluding the European Union from discussions on the Russia-Ukraine conflict and proposing the inclusion of China in future negotiations, the administration signals a willingness to bypass traditional allies in favor of direct diplomacy with major geopolitical competitors.
• This shift in US priorities has prompted Europe to reevaluate its security framework. French President Emmanuel Macron has been a vocal advocate for greater European self-reliance, urging EU member states to take more responsibility for their collective defense, particularly in supporting Ukraine.
• That said, President Trump has been actively pushing US allies to buy more American-made weapons, framing arms sales as a key tool for addressing trade imbalances and making countries more self-reliant for security. On Thursday, he underscored this strategy in talks with Indian Prime Minister Narendra Modi about a potential F-35 fighter jet deal. The announcement came as Defense Secretary Pete Hegseth pledged to accelerate arms sales to EU nations.

• The shift from being a global security provider to a leading defense supplier represents a calculated, albeit tactical, adjustment for the US as it seeks to balance its international influence with domestic economic priorities. By encouraging allies to take on greater defense responsibilities, the US aims to reduce its direct military burdens while maintaining its geopolitical clout. While there are some concerns about the impact this shift will have on defense stocks, we remain cautiously optimistic about the sector.

Gold As a Policy Tool? Despite disinterest from the Trump administration, a controversial proposal to revalue US gold reserves at the current market price of approximately $3,000 per ounce is gaining traction as the government seeks additional funding.

• Changing the book value from the fixed rate of $42 per ounce could generate a one-time windfall of roughly $760 billion, which could be used to support the president’s agenda. This revaluation could allow the government to sell gold on the open market to help achieve some of its policy aims.
• One potential application would be to sell gold and use the proceeds to purchase other currencies, thereby weakening the US dollar. Alternatively, the revenue from gold sales could be used to fund government spending, potentially facilitating the passage of budget legislation.
• Two obstacles could impede the revaluation of gold. Because the price is fixed by law, congressional approval would be necessary. Also, significant gold sales could depress global prices, posing political risks and potentially harming the global financial system, given that many central banks hold gold as a reserve asset.
• While the revaluation of gold is not currently under consideration by the Trump administration, the idea could gain traction if the administration struggles to achieve its agenda, particularly in the realm of trade policy. In such a scenario, revisiting the revaluation of gold as a fiscal tool may become a viable option. Given this potential, gold remains an attractive investment for many, although future policy moves — such as revaluation — could significantly influence market sentiment.

Axis of Evil: The Pentagon’s Indo-Pacific chief, Admiral Samuel Paparo, has expressed growing concerns that China may be preparing to assert control over Taiwan. This warning comes at a time when the US is actively encouraging allies and partners to reduce their reliance on American military protection and instead bolster their own defense capabilities.

• Speaking at the Honolulu Defense Forum, the Pentagon chief cautioned that the scale and frequency of China’s military exercises could serve as a pretext to mask an actual offensive against the island. By conducting extensive drills, China might create a veil of ambiguity, making it difficult to distinguish between routine training and a genuine threat.
• Paparo also pointed to the deepening cooperation among Russia, China, and North Korea as they increasingly coordinate efforts to counter US influence and power projection worldwide. These nations have been actively sharing intelligence and technology, strengthening their strategic alignment to challenge American dominance.
• His message likely explains why the Trump administration is shifting its strategic focus toward the Indo-Pacific region, prioritizing efforts to counterbalance China’s growing influence, while reducing its emphasis on protecting Europe.
• A major threat to the global economy is large-scale warfare, particularly involving major powers. Increased assertiveness by China and its partners in the Indo-Pacific, coupled with the US pivot to the region, raises the risk of confrontation, especially as the two economies decouple. While an immediate military conflict is unlikely, the risk within the next decade may be increasing.

The Big Beautiful Bill Progresses: Conservative lawmakers have finally reached an agreement on a budget resolution aimed at advancing the president’s initiatives through a single bill. The breakthrough came after fiscal hawks within the Republican Party insisted on guarantees for budget cuts to ensure that the proposed initiatives would not exacerbate the deficit.

• The bill passed out of committee on Thursday, moving one step closer to becoming law. The proposal would authorize $1.5 trillion in spending cuts to help fund the president’s tax initiatives, increase the defense budget, and provide funding for border security.
• One of the more controversial elements of the proposal includes potential cuts to Medicaid, a move supported by many Republican lawmakers who argue that the program is plagued by fraud and inefficiency. However, such reductions are likely to render the bill politically contentious, as critics warn the cuts could harm vulnerable populations who rely on the program for essential healthcare.
• While we anticipate that tax cuts will likely be enacted by the end of the year, we remain skeptical that the final bill will achieve the budget neutrality that current lawmakers are aiming for. That said, we believe the proposed tax reductions could provide a boost to equities and may also support bond markets if the administration successfully avoids significantly increasing the budget deficit in the process.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market is processing the latest developments in Ukraine. In sports news, Canada was able to defeat Sweden in the NHL 4 Nations Face-Off. Today’s Comment will take a deeper dive into the CPI report, discuss the latest developments in the Ukraine-Russia talks, and provide updates on US congressional budget talks as well as other market news. As usual, it will include a roundup of international and domestic data releases.

CPI Fails First Test: The January CPI report surprised markets with a stronger-than-expected acceleration. Headline inflation rose to 3.0% from 2.9% year-over-year, and core inflation edged up to 3.3% from 3.2%. This higher reading led traders to scale back their forecasts for rate cuts this year from two to one and drove the 10-year Treasury yield upward.

• The good news is that despite the rise in the inflation report many of the sharp increases appear to be temporary. For instance, financial insurance was one of the primary drivers of inflation, and the increase is likely tied to the adjustment of premiums for the costs associated with the natural disasters that occurred toward the end of the year. Additionally, owners’ equivalent rent and rent for primary residences, which are heavily weighted in the index, remained relatively subdued.
• The bad news is that the disinflationary pressure from new and used car prices, which had been a significant drag on the index, seems to be fading. This could mean that services, lately a persistent source of inflationary stickiness, will need to bear a greater burden in reducing overall inflation. Moreover, this development raises the risk of a resurgence in goods inflation, particularly if tariffs are implemented.
• The ugly news is that the window for making substantial progress toward the Fed’s 2% inflation target is narrowing. As highlighted in earlier reports, the first few months of the year typically offer the best opportunity for the Fed to make meaningful strides in lowering inflation. This is because the high readings from early 2024 are more likely to be replaced by figures that align with the long-run average as the year progresses.

• While the January inflation report was disappointing, with Fed Chair Powell noting that “more work needs to be done,” Fed officials remain confident that inflation could fall to 2% by early 2026. This optimism is rooted in the growing frequency of inflation reports showing that inflationary momentum continues to trend downward.
• As illustrated in the chart above, the number of annualized monthly inflation reports exceeding 4% has dropped significantly and now represents less than half of the reports since 2022. This marks a sharp decline from the first few months of that period, when all reports exceeded this threshold. Furthermore, a growing share of reports now show inflation below 3% and even at 2%, reinforcing the downward trajectory.

Ukraine War Talks: President Trump announced plans to hold talks with Russian President Vladimir Putin in an effort to help resolve the ongoing conflict in Ukraine. While no concrete plans to end the war have been proposed so far, it appears that Ukraine may need to make concessions and could increasingly rely on the European Union for additional support.

• Prior to the announcement, Defense Secretary Pete Hegseth stated that Ukraine’s expectation of regaining its pre-2014 borders was unrealistic. He also expressed skepticism about the possibility of Ukraine joining NATO if a deal to resolve the conflict were to be reached.
• Hegseth emphasized that the US would not deploy troops on the ground to ensure Ukraine’s security, adding that Europe would need to bolster its own presence to protect its borders as the US shifts more of its strategic focus toward countering China.
• The decision to push for concessions from Ukraine and Europe underscores the Trump administration’s view of the EU as a junior partner in the relationship. While this approach is likely to raise tensions between Washington and Brussels, it could also facilitate a resolution to the conflict — a prospect that has already strengthened European equities and boosted the euro.

Budget Breakthrough: Senate Republicans advanced their budget resolution out of committee on Wednesday, moving closer to meeting the president’s goal of securing funding for energy, defense, and border security. The measure establishes a fiscal framework that paves the way for conservative lawmakers to advance the Trump administration’s agenda through the budget reconciliation process.

• Despite progress in the Senate, House Republicans have struggled to gain momentum as they work to fulfill President Trump’s vision of a single “big, beautiful bill” that incorporates key elements of the Senate’s proposal, including the highly touted tax cuts. However, their efforts are being hampered by fiscal hawks, who are demanding deeper budget cuts before they agree to support the deal.
• The latest proposal from House Republicans has sparked significant controversy, as it seeks to identify $2 trillion in budget cuts, raising concerns that they may consider reductions to social programs like Medicaid and food assistance for low-income households.
• Lawmakers in both chambers of Congress are expected to vote along party lines on any portion of President Trump’s bill that includes tax cuts, making it increasingly likely that two separate bills will be passed rather than one. That said, any progress toward enacting tax cuts would likely be welcomed by equity markets, while proposed budget cuts could be favorable for bonds.

Reciprocal Tariffs: President Trump has vowed to impose tariffs on any country that levies duties on US goods. While the president has not specified which countries could be targeted, the timing of this announcement — coming just ahead of his scheduled meeting with Indian Prime Minister Narendra Modi — suggests it may serve as a negotiating tactic.

• The move is part of the president’s three three-prong approach to tariffs, known as the three Rs (Restriction, Revenue, and Reciprocity), which come from former President William McKinley.
• Restrictions involve leveraging trade policies to boost domestic manufacturing by limiting imports. Revenue tariffs impose taxes on imported goods, creating an additional income stream for the government. Reciprocal tariffs, on the other hand, are used as a tool to pressure other countries into lowering their own tariffs.
• While William McKinley achieved some success in advancing his trade goals, President Trump may face a more daunting challenge. The key difference lies in the two approaches — Trump is attempting to implement all three Rs simultaneously, whereas McKinley applied them in combination over time.
• Trump’s widespread use of tariffs to achieve multiple objectives may weigh on economic growth by making the investment environment less predictable. However, in the long run, these measures could potentially benefit exporters.

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