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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