by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with new developments related to Chinese artificial-intelligence firm DeepSeek and its market-disrupting new AI model. Importantly, new evidence suggests that DeepSeek’s success may have depended on stolen intellectual property from the US’s top AI developer. We next review several other international and US developments with the potential to affect the financial markets today, including political pressure on the Japanese government to provide more tax breaks and new developments on the Trump administration’s effort to pause federal grants and loans.

DeepSeek and Global Semiconductor Industry: As investors continue to digest the implications of the cheap, powerful new artificial-intelligence model from Chinese firm DeepSeek, the CEO of Dutch semiconductor-equipment giant ASML insisted the development would be positive for chip makers because it would lead to even more demand for their products. The statement has boosted ASML’s stock price by about 8.8% so far this morning, and other European tech stocks have rallied as well.

• The all-in cost of DeepSeek’s new model was almost certainly much higher than reported. Nevertheless, the company’s success does suggest that the future AI industry won’t necessarily involve the super expensive advanced chips and huge electricity requirements that Western firms had been banking on. Thus, much of their AI-related investment to date may not pay off.
• On the other hand, cheaper and easily accessible AI models probably would lead to wider adoption of the technology, increasing the demand for basic chips and potentially boosting productivity across a wide range of industries.

DeepSeek and US-China Relations: OpenAI, maker of the US’s advanced ChatGPT AI model, said it has evidence that Chinese firm DeepSeek used the US company’s proprietary models to cheaply train its own open-source model, in violation of ChatGPT’s terms of service. The Trump administration’s AI czar, David Sacks, had also raised concerns earlier that DeepSeek’s apparent success relied on intellectual property theft from the US, as so many other Chinese technological advancements have.

• If true, DeepSeek’s ability to leverage ChatGPT’s model illustrates how hard it may be for cutting-edge AI firms to maintain their advantage.
• In any case, if DeepSeek illegally used ChatGPT’s intellectual property to gain its edge and wipe hundreds of billions of dollars off the value of key US technology firms, it seems certain that the development will further worsen US-China tensions. For one thing, it would likely encourage the Trump administration to be even more aggressive on imposing trade barriers with China.

Japan: Key opposition parties are reportedly demanding expensive new tax breaks to support Prime Minister Ishiba’s budget for the fiscal year beginning April 1. The Democratic Party for the People is demanding a hike in the amount of income exempt from tax, while the Japan Innovation Party is asking for free elementary and secondary education. The disputes could potentially undermine the minority Liberal Democratic Party/Komeito government’s prospects in the elections expected this summer and/or further worsen Japan’s budget deficit.

United Kingdom: As part of its drive to boost British economic growth, the government of Prime Minister Starmer has announced a series of infrastructure investments, including support for a third runway to ease severe capacity constraints at Heathrow Airport, the country’s largest. The new runway will likely face a long planning period and litigation, but it is expected to boost UK economic growth by more than 0.4% per year when it is finally completed.

United States-Greenland-Denmark: In the first survey of Greenlanders since President Trump expressed his interest in buying the autonomous island from Denmark, some 85% of respondents said they didn’t want to become part of the US. About 9% were undecided, and only 6% wanted Greenland to be bought by the US. The results echo the view of Greenlandic Prime Minister Múte Egede, who has also said his citizens reject the idea of a US takeover.

US Monetary Policy: The Fed will wrap up its latest policy meeting today, with the decision due at 2:00 PM ET. The policymakers are widely expected to hold the benchmark fed funds interest rate unchanged at its current range of 4.25% to 4.50%, but surprises are possible given that the annual rotation of committee members will bring new officials to the panel. Investors will be looking to Chair Powell’s post-meeting news conference for guidance on the future path of rates and for his reaction to President Trump’s demand for rate cuts.

US Fiscal Policy: A federal judge late yesterday afternoon temporarily blocked the Trump administration’s order to freeze the disbursement of federal grants, loans, and other aid, which we described in our Comment yesterday. The injunction lasts until Monday, when an in-depth hearing is scheduled. A key legal issue is whether the president can stop the disbursement of funds appropriated by Congress, which has the power of the purse under the Constitution.

• Separately, to ensure all federal workers are on board with Trump’s back-to-the-office mandate, the administration has offered buyout packages to every full-time job holder. Under the buyout, workers who don’t want to give up remote work and resign by February 6 would be paid through the end of the fiscal year on September 30, with benefits.
• The buyout offer applies to all full-time federal employees except for military personnel, the Postal Service, and those working in immigration enforcement or national security.
• If implemented, the administration expects 5% to 10% of the federal workforce to quit, saving the federal government around $100 billion per year. Of course, the result would likely be a degradation of government services, especially if the offer is taken up disproportionately by the most capable and productive workers, who may have the best prospects in the private sector.
• In any case, if the program is implemented, it could potentially cause at least temporary distortions in the labor market and economic data.

US Labor Market: The National Assessment of Educational Progress from the Department of Education showed that only 67% of US eighth graders were reading at a “basic” or better competency for their grade level in 2024. Only 60% of fourth graders were at that standard. Math scores were flat to slightly better but the nearly continuous slide in reading scores over the last decade raises concern about the quality of the US workforce in the coming years.

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