Fuelling Risk Appetite?
US stocks rallied on Thursday, fuelled by easing geopolitical tensions, strong performance from tech giants, and growing expectations of interest rate cuts.
The S&P 500 climbed 0.8% after briefly touching a new all-time high, while the Nasdaq 100 extended its record streak with a 1% gain.
Talk of President Trump naming a new Fed chair earlier than expected fuelled speculation about a shift toward looser monetary policy.
Fresh economic data showed the US economy contracted more than anticipated in Q1 by an annualised 0.5% and the goods deficit unexpectedly widened due to lower exports.
Most tech giants, such as Amazon (+2.4%) Alphabet (+1.7%) and Meta (+2.4%) led the gains, while Apple bucked the trend, slipping 0.3% following a price target downgrade by JPMorgan Chase.
We get May PCE today. Given the inputs from CPI and PPI (Labor market data drill down shown below), Jerome Powell has already telegraphed the number at 2.3%, so there should be no surprises.
That's a real rate (Fed Funds rate minus inflation) of around 200 basis points, which is tight policy, putting downward pressure on the economy.
That said, the discussions over the past week about the timing of the Fed’s resumption of the easing cycle have nudged rate cut expectations forward (a bit). That, and the Fed's newly announced plan to reform bank leverage rules are good for stocks, good for market risk appetite.
We now have the Nasdaq on new record highs.
The S&P 500 has traded to new record highs.
What else, other than some reduced geopolitical risk over this past weekend, is fuelling risk appetite?
This resulting declaration from this week's NATO Summit ...
"Allies commit to invest 5% of GDP annually on core defense requirements as well as defense-and security-related spending by 2035."
A move from 2% (a commitment that most constituent countries weren't even meeting) to 5% is a historic structural shift in global military, economic and geopolitical dynamics.
Does this tie into the Trump "escalate to de-escalate" strategy we talked about in April? Maybe.
After the big April tariff announcements, we talked about some commentary by Scott Bessent, comparing the Trump tariff strategy to Reagan's tactic of "escalating to de-escalate" in dealing with the Soviets.
Core to this Reagan tactic was a massive military ramp-up, which provoked the Soviets into a costly arms race.
Reagan then (arguably) coordinated with the Saudis to flood the oil market with supply, crashing oil prices. That slashed Soviet oil income, which it needed to finance the military buildup. From an economically fragile position, Gorbachev made a deal.
With that in mind, this big NATO military spending commitment could serve a few purposes:
Most of the world is economically realigning with the U.S. (via tariffs, using the U.S. consumer as leverage) and now militarily (via leverage of U.S. security).
This military surge could get Putin to the table to make a deal.
This could create the global alignment needed to isolate China, to end China's predatory multi-decade economic war.
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