Mark Vitner

Consumer Sector: Dancing but Uneasy

July’s personal income and spending report showed households still have stamina. Personal income rose 0.4%, wages and salaries 0.6%, and real spending advanced 0.3%, led by a 2.0% jump in durable goods. The personal saving rate ticked down to 4.4% but remains sturdier than the sub-4% lows of 2023.

Inflation surprised slightly on the soft side, with headline PCE up 0.2% and core PCE 0.3%, running near 2.9% y/y. Consumption is supported by wages, not savings drawdowns, reducing the risk of a sudden stop. Upside potential, however, looks limited.

Consumer spending is off to a solid start in Q3, despite concerns over tariffs and job growth.

Sentiment tells a different story. The Conference Board’s confidence index slipped, with households citing job worries and tariff-driven inflation fears. The University of Michigan’s final August sentiment reading echoed that unease, hitting its lowest since last fall. This divergence between steady data and sour mood underscores the risk that spending momentum might fade.

Housing: Momentum Slips Further

Housing markets cooled further in midsummer. Case-Shiller home prices fell 0.3% in June, slowing to their weakest annual gain since July 2023, with several Sun Belt metros seeing outright declines. The FHFA series posted its softest growth since 2012, and the Freddie Mac National Home Price Index fell 0.22% in July and is now up just 1.4% yr/yr. Pending home sales fell 0.4% in July, pointing to weaker existing sales in August.

Affordability remains stretched, and with labor market worries mounting, buyers are staying cautious despite modest rate relief. For housing-related industries, the implication is a prolonged plateau rather than an imminent rebound. Mortgage rates would likely need to fall below 6% to produce a meaningful jump in sales, which looks unlikely before spring 2026.

Business Investment: Still Carried by AI

Durable goods orders continue to show resilience. Headline orders fell 2.8% in July on weak aircraft bookings, but core capital goods orders rose 1.1%, a stronger-than-expected sign that equipment spending is holding up. Shipments also improved, suggesting Q3 equipment investment may grow at a 3.2% pace versus 2.5% in Q2. While aircraft orders fell, they are up a whopping 139% year-to-date through July.

The AI buildout, aerospace, and defense continue to drive capital spending, which began Q3 strong.

Q2 GDP was revised higher, reflecting gains in structures, equipment, and intellectual property, with AI-related outlays masking broader softness. Corporate profits rebounded 1.7% in Q2, but tariff effects on margins are likely to show up in Q3. The equipment cycle remains intact, though narrowly concentrated in AI, electronics, and related capital goods. Aerospace and defense are other key drivers.

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Trade: Import Surge Widens the Deficit

The July goods trade deficit widened by $18.7B to $103.6B, largely on industrial supplies and capital goods imports. Some of this reflects AI demand but also catch-up in orders previously delayed by tariff uncertainty. Exports were flat.

The larger trade deficit adds downside risk to Q3 GDP after Q2’s upside revision. Longer term, tariffs are providing meaningful federal revenue—estimated at $2.6T through FY2034—but at the cost of growth. Higher import costs and supply chain uncertainty are complicating capex decisions. Some major projects are moving forward under temporary tariff reprieves.

Labor Market: Cooling but Not Cracking

Weekly claims remain contained, but slower hiring remains a key theme. August payrolls are expected to rise by just 60,000, with unemployment edging up to 4.3%. Immigration declines are weighing on labor force growth, particularly in states that previously absorbed large inflows.

Slower payroll growth and higher unemployment signal easing wage pressures. But persistently low layoffs suggest firms are still hoarding labor, reflecting the high pace of retirements and tighter immigration enforcement. AI is also slowing hiring in IT fields, leading to a rising unemployment rate for young, college graduates.

Credit and Rates: The Curve Steepens

Treasury markets digested Powell’s Jackson Hole dovish tone, only to be jolted by President Trump’s firing attempt of Fed Governor Lisa Cook. The episode raised additional questions about Fed independence, pushing term premiums slightly higher, and accelerated curve steepening.

Markets are keeping an eye on threats to Fed independence but show minimal concern.

Two-year yields fell 6–8bps while long bonds edged higher. The 2s/10s spread broke out to 63bps, the widest since early 2022. Corporate spreads remain historically tight, with IG spreads near late-1990s lows. Funding remains accessible, but the risk of abrupt repricing lingers.

A September rate cut remains likely—but will not necessarily be the start of a deep easing cycle. Markets may be over-pricing cuts. Front-end relief is likely, but long-end volatility remains a risk.

Geopolitical Developments: A World on Edge

Israel expanded its proactive military posture, successfully striking targets in Yemen, Syria, and Gaza City. These operations underscore Israel’s view that it is fighting for its survival against adversaries determined to erase it from the map. The elimination of Hamas propagandist Abu Obeida was both a symbolic and operational success, weakening Hamas’s highly effective psychological warfare machine.

Russia has intensified its information warfare campaign across Europe and the U.S., leveraging nuclear threats, propaganda about “inevitable victory,” and divisive rhetoric aimed at weakening Western resolve. Ironically, the strong show of unity among European leaders during recent Oval Office meetings may have hardened Putin’s determination to divide the West. Look for the U.S. to boost armament shipments to Ukraine via European partners.

The Western Hemisphere is also in flux. Guyana’s elections highlighted the fragility of regional stability. Violence erupted when ballot boxes traveling through the disputed Essequibo border region—claimed by Venezuela and rich in hydrocarbons—came under fire from across the border. Venezuela, having ignored a UN ruling to refrain from holding referenda in the territory, continues to challenge Guyana’s sovereignty. Against this backdrop, the U.S. Navy’s deployment of destroyers, amphibious ships, and a submarine near Venezuela is more than counter-narcotics enforcement—it is a signal that Washington is prepared for contingencies in a region where disputed oil wealth and authoritarian governance collide.

Geopolitical pressures continue to fester on multiple fronts but with minimal market impact.

Recent developments point to persistent geopolitical tail risks. Israel’s widening front raises the prospect of an endgame in Gaza and renewed push for the Abraham Accords. Iran will likely attempt to disrupt that timetable. Russia’s disinformation efforts could inject volatility into European assets and policymaking. And in the Americas, Guyana’s elections and the U.S. Navy’s posture near Venezuela tie local politics to global energy dynamics, with potential consequences for oil supply and market volatility.

Appeals Court on Tariffs: Exec Authority Checked

The Court of Appeals for the Federal Circuit dealt the administration a setback last week, ruling 7–4 that the president exceeded his authority in imposing broad-based tariffs under the International Emergency Economic Powers Act (IEEPA). The decision effectively affirmed a lower court’s judgment that tariff authority resides with Congress, not the White House. For now, however, the tariffs remain in place. The court stayed its ruling until mid-October and further delayed enforcement should the administration, as expected, appeal to the Supreme Court. That appeal could extend the tariffs’ life until at least June 2026.

While the ruling clipped one legal avenue, it did not strip the president of tariff powers altogether. The administration could lean on other statutes, including Section 122, which permits tariffs of up to 15% for seven months, or Section 301, which allows for country-specific tariffs, as was used against China in 2018–2019. Both tools are more limited and cumbersome, and an eventual shift away from blanket IEEPA tariffs may push the administration toward narrower sectoral levies—particularly in areas like semiconductors, pharmaceuticals, or furniture—rather than sweeping reciprocal duties.

The administration will likely pivot on tariffs toward specific targeted industries and regions.

How the Supreme Court would rule is far from a sure thing. The majority of the Appeals Court judges were appointed by Democrats and two of the three Republican-appointed justices sided with the president. Treasury Secretary Bessent has argued that tariffs are a tax and would thus be deflationary, which provides a wedge for opponents to argue against tariffs in court. Only congress has the ability to levy taxes. The counter argument is that tariffs work like a tax and are allowed to be placed by the president for several reasons, including national defense and in response to unfair practices overseas.

The implications are threefold. First, the ruling introduces fresh uncertainty into the investment climate. Companies that front-ran imports to avoid tariffs are unlikely to adjust quickly given the possibility of a Supreme Court appeal and continued tariff exposure. Second, the prospect of refunds or retroactive claims if the tariffs are struck down creates fiscal and market volatility, with potential knock-on effects for Treasury issuance and long-term yields. Finally, the case reasserts judicial limits on executive trade powers, a reminder that tariff-first diplomacy, while potent, may prove less durable when tested in court. For markets, the net effect is more uncertainty rather than less.

Risks to Watch

1. Tariff-driven inflation: Core PCE is expected to rise back slightly above 3% later this year. A larger move would complicate the Fed’s easing path and likely unnerve the financial markets.
2. Fed independence erosion: The markets have largely ignored the Lisa Cook controversy. Further political interference could increase long-end yields, raising borrowing costs even as front-end rates fall.
3. Treasury market liquidity: With deficits wide and issuance heavy, even modest shocks could trigger funding stress, ending what has been an unusually good borrowing environment.
4. Energy and commodity shocks: Israel’s strikes and U.S. naval moves near Venezuela raise the risk of sudden supply disruptions. WTI oil appears anchored between $60 and $80 a barrel. The markets are pricing in a status quo for both issues, as well as Ukraine-Russia.

The Week Ahead

• Tuesday, Sept 2: ISM manufacturing and construction spending. Manufacturing remains near the 50 threshold; construction is soft, with upside from nonresidential projects like data centers and pharma.
• Wednesday, Sept 3: JOLTS job openings, Beige Book, Auto Sales. Look for continued declines in job openings and quits; Beige Book should reveal tariff effects. Auto Sales likely steady at 15.5–16.0m units.
• Thursday, Sept 4: ADP employment, productivity, jobless claims, trade balance, ISM services. ADP’s deviation from BLS is now seen as more realistic. Productivity should improve modestly; services index watched for hiring/pricing.
• Friday, Sept 5: August nonfarm payrolls, unemployment, wages. Expect around 60k payrolls, unemployment at 4.3%, and 0.2% wage growth. Initial August readings are often inexplicably weak and later revised higher.

 Key Takeaways

Last week reinforced a central tension: the economy is resilient enough to keep consumers spending and businesses investing in select sectors, yet fragile enough that the Fed is poised to ease. The prudent course is to secure near-term funding at lower front-end yields, hedge long-end risk, and prepare for tariff-induced surprises.

Geopolitics remain a wild card. Israel’s regional strikes, Russia’s disinformation push, and U.S. naval maneuvers underscore the unpredictability of global risk. The appeals court ruling on tariffs adds another layer of uncertainty, reminding markets that policy made by executive fiat may not withstand judicial scrutiny.

The economy, like the dance floor in July’s income report, still feels steady—but the band is about to change tunes, and no one wants to be caught mid-step when the tempo shifts.

Dog Days, Lingering Pressures

The dog days of summer have brought record equity highs and a veneer of calm. July’s CPI—headline inflation steady at 2.7% y/y with shelter easing—further fueling hopes that tariffs would not bite as hard as feared. But those hopes proved short-lived.

The headline PPI surged 0.9% in July, the largest monthly increase since early 2022. Core PPI rose 0.4%, double expectations, signaling stronger pipeline pressures. Import prices also came in firmer, climbing 0.4% versus 0.1% expected, with industrial supplies and consumer goods leading gains. Take together, the data suggest core PCE rose 0.3% in July, or 2.9% year-to-year—less benign than CPI alone implied. Some of July’s spikes likely reflect catchup in purchases of industrial supplies and materials stockpiled ahead of tariffs. The replenishing of those stocks boosted demand and helped pull prices higher.

Tariffs did not deliver an immediate inflation shock but are now seeping into supply chains.

Tariffs did not deliver an immediate inflation shock, but their effects are seeping into supply chains. And with ground beef prices rising ahead of Labor Day, households feel inflation’s persistence more acutely than headline figures suggest. The persistence of inflation, particularly for everyday items, is emerging as the key issue for this year’s off-year elections, which are typically seen as a harbinger for the mid-terms.

Consumers: Still Resilient, But Uneasy

Retail sales rose 0.5% in July, which is a shoulder month for most retailers and makes up a relatively small proportion of their overall sales. Control group sales, or what we often call core retail sales, also rose 0.5%, and prior months’ data were revised higher. Autos (+1.6%) and online retailers (+0.8%) led gains, supported by extended Prime Day promotions and competitive discounts. Furniture, clothing, and sporting goods also posted solid advances, while housing-linked segments most closely tied to housing appreciation, including building materials, hardware, and home improvement centers (-1.0%) and restaurants (-0.4%) lagged. Real core sales point to slightly stronger Q3 personal consumption, once again emphasizing one of our most often refrains about the U.S. economy, which is to never underestimate the capabilities of the U.S. consumer.

Confidence is historically weak, however, and is wavering. The University of Michigan’s preliminary August sentiment index slipped to 58.6 from 61.7, ending a four-month streak of improvement. One-year inflation expectations rose to 4.9% and long-run expectations to 3.9%, reversing recent progress. While the link between sentiment and spending has weakened since the pandemic, the deterioration reflects growing household unease over inflation, tariffs, and labor market conditions. The contrast between solid spending and softening sentiment underscores the precarious balance sustaining growth.

Crosscurrents Beneath the Surface

Industrial production slipped 0.1% in July, its first decline in four months, as weakness in utilities (-0.2%) and mining (-0.4%) offset resilience elsewhere. Manufacturing output was flat overall, though auto production fell 0.4%, reflecting tariff-related pressures and affordability headwinds.

Production of high-tech equipment is up 14% y/y; aerospace is surging as Boeing ramps up.

Not all the details were negative. High-tech equipment output rose 1.4% in July and is up 14% year-over-year, fueled by AI and semiconductor investment as new plants ramp production. Overall business equipment saw output rise 0.5% in July and production has grown at an 11% annualized pace over the past six months. Aerospace also stands out: Boeing is boosting 737 Max output and raising 787 assemblies, steadily working to keep pace with its historic backlog.

Elsewhere, output of consumer goods edged higher (+0.1%), with gains in tariff-sensitive categories such as furniture and wood products, which are benefiting from some reshoring of upholstered furniture. These improvements may prove fleeting, however, given sluggish new and existing home sales and weakening homebuilding. Steel and aluminum production held steady, supported by industrial demand, though higher input costs remain a constraint.

Markets: Calm at the Highs

Despite firmer inflation, equities pushed higher this past week, with the Dow at record highs and the S&P 500 close behind. Treasurys told a different story: the yield curve steepened as the long-end backed up on the hotter PPI and import price data. The front end held relatively steady, with traders still assigning around an 80% probability to a September cut. Talk of a half point cut has vanished.

Financial market valuations reflect precarious complacency heading into fall.

This disconnect—stocks at record highs, real yields rising, inflation proving stubborn—captures the precarious complacency of late summer. Investors have shed some of their long-held skepticism about tariffs and appear to view labor risks as temporary. It is still early innings on both fronts, however, and upcoming releases on employment and inflation will carry a great deal of weight this fall.

Geopolitics: Anchorage and Beyond

On August 15, Trump met Putin in Anchorage. The summit ended without a deal but marked a clear shift in U.S. posture toward Ukraine. Trump dropped his demand for an immediate cease-fire, opening the door to a broader settlement more favorable to Moscow—recognition of Crimea, neutrality, and frozen front lines in Donbas and the south. Stalled on the battlefield, Putin is seeking to secure diplomatically what he could not by force. Anchorage was not Reykjavik; it looked far more like Munich 1938.

Now the spotlight shifts to Washington, where Zelensky met with Trump on August 18, joined by leaders from the U.K., France, Germany, Italy, Finland, and the EU, along with NATO Secretary-General Mark Rutte. Their task: preserve Western unity, keep Trump focused on Putin as the aggressor, and prevent a rift that could fracture Ukraine’s support. Early reports showed Trump and European leaders were closely aligned.

The divide is stark. Security guarantees—once a flashpoint between Trump and Zelensky—are now under discussion, potentially modeled on NATO’s Article 5 but issued bilaterally by the U.S. and European states. Yet the territorial issue remains a chasm. Putin’s terms for Ukraine to cede Donetsk in exchange for a frozen conflict elsewhere are a constitutional nonstarter for Kyiv and overwhelmingly opposed by the Ukrainian public. Analysts warn that conceding hardened defenses would most certainly invite future Russian offensives.

The Stakes in Anchorage Echo Munich, Not Reykjavik. Let’s Hope the Outcome is Different.

At a minimum, Trump would do well to demand the withdrawal of Russian forces from Transnistria in Moldova as part of any settlement, removing a threat to Ukraine’s southwestern flank. Otherwise, the outcome risks echoing the 1938 Munich Agreement, when Hitler was granted the German-speaking Sudetenland of Czechoslovakia under the promise of peace. Within months, he struck a separate deal with Slovakia, encircled what remained of Czechoslovakia, and effortlessly swallowed the rest. Conceding Donetsk without removing Russia’s forward positions in Moldova could set up a similarly perilous dynamic, inviting Moscow to return later and complete the conquest from a position of even greater advantage.

Trump’s rhetoric has added pressure, suggesting Zelensky “can end the war almost immediately if he wants to.” Meanwhile, Russian drone strikes—including one in Kharkiv this morning that killed four civilians—underscore Moscow’s unwillingness to halt the war. Markets may briefly rally on cease-fire talk, but appeasement would deepen long-term risks, embolden adversaries from Beijing to Tehran, and raise doubts about Western resolve. For Trump, the political stakes are equally high. Biden’s presidency never recovered from Afghanistan; a perceived capitulation in Ukraine could be more damaging still, with potential to reopen the GOP field for 2028, which had recently consolidated around J.D. Vance.

The consequences extend far beyond Europe. If Washington is seen conceding territory under pressure, the message to other adversaries will be unmistakable. Xi Jinping could interpret it as a green light to test U.S. resolve in the South China Sea or accelerate plans for Taiwan. Tehran and Pyongyang would likewise conclude that coercion pays. Trade and tariff deals would also likely prove even harder to reach, particularly with India and China, as Trump would be viewed as a far less strong leader than he has proven so far.

Russia is betting heavily that U.S. security guarantees will prove as hollow as those given to Ukraine in 1994, when Kyiv surrendered its nuclear arsenal. Moscow is also amplifying far-right narratives in the U.S. against “forever wars,” aiming to erode bipartisan consensus on supporting Ukraine. These fringe movements have a small but committed following that are likely unwittingly being supported by Russian intelligence.

Markets will oscillate between optimism over the possibility of a cease-fire and anxiety that appeasement only defers larger conflicts. Energy prices may ease on signs of progress, while defense stocks could see near-term pressure but retain longer-term support. The euro remains vulnerable if Europe is perceived as conceding leverage to Moscow, while the dollar continues to benefit from safe-haven flows. Treasurys, as ever, will mirror risk appetite—steepening on real progress, flattening if talks collapse.

Bottom line: Putin is using negotiation and flattery to extract what his army could not achieve by force. Financial markets, which are forward-looking, would quickly see through a bad deal—shrugging off near-term relief about the absence of secondary sanctions on India and China and instead pricing in greater instability for the U.S. and Western democracies in the years ahead, amidst what would be a diminished and politically weakened U.S. presidency. We expect Trump to work out a good deal that ends the war and provides durable security guarantees that fall just short of immediate NATO membership for Ukraine.

High-Stakes, High Altitude: Jackson Hole 2025

This week, global policymakers converge at the Jackson Lake Lodge in Wyoming for the Kansas City Fed’s annual Jackson Hole Symposium, August 21–23, under the theme “Labor Markets in Transition.” With only about 120 attendees, the event is one of the most exclusive global economic forums. For Chair Powell—likely his last appearance before his term ends next May—the stakes are high: the Fed is deeply divided between those urging preemptive cuts and those worried about additional inflationary pressures from tariffs. Easing when inflation is rising requires a great deal of clarity in the Fed’s messaging.

Markets enter the week focused squarely on Powell’s Friday remarks. Futures currently price around an 80% probability of a quarter-point September cut, but weak July payrolls and large downward revisions to the two prior months’ data have sharpened attention on the Fed’s employment mandate. Based on our analysis of the Quarterly Census of Employment and Wages series, the state employment data and data from private sources, we estimate nonfarm payroll growth is currently running at just 60,000–80,000 jobs per month. That may be enough to hold the unemployment rate steady, given reduced immigration flows—or at least limit how much it rises.

At the same time, a rising number of consumers report that jobs are harder to get, coinciding with broader weakness in sentiment. Consumers are equally worried about higher prices, particularly for necessities such as housing, groceries, and transportation—not only the cost of new and used vehicles, but also higher maintenance and insurance costs.

The optics also amplify the risk: Powell’s final Jackson Hole appearance comes as equities trade at stretched valuations near 24x forward earnings. Markets have climbed the wall of worry largely on expectations of Fed easing and resilient corporate earnings. That leaves them highly sensitive to Powell’s message. A hawkish guardrail could unsettle risk assets, while dovish reassurance may extend the rally in equities, Treasuries, and a weakening dollar. Either way, Powell’s tone will set the trajectory heading into this fall.

Looking Ahead: Light on Data, Heavy on Stakes

It is a relatively light week for economic reports, but a heavy one for monetary policy and geopolitics:

Tuesday, August 19 – Housing Starts & Permits Expected to slip below 1.3M. New home inventories remain elevated (511,000 in June, +8.5% y/y), with completed homes up 21%. Rising supply is weighing on builder sentiment and slowing new construction.

Wednesday, August 20 — FOMC Minutes

Will offer details on the July debate, though they predate the unexpectedly weak jobs report and firmer July inflation data.

Leading Economic Index (July)

The consensus is looking for a 0.1 point drop.

Thursday-Saturday August 21-23 — Jackson Hole Symposium – Powell’s keynote (Aug 22) is the highlight. Markets expect a dovish tilt, but stubborn inflation may force a more cautious tone.

Friday, August 22 — Existing Home Sales

Forecast to rise slightly to 3.95M. Affordability remains tight. The rising supply of homes for sale is providing some support for sales, particularly at the upper end. With sales skewed toward higher priced homes, the median sales price has risen to all-time highs.

Final Thoughts: Calm with Fault Lines

This week may feel light on data, but it is heavy with risk. Powell’s Jackson Hole remarks and Zelensky’s White House visit are set to define the narrative far more than the economic data. Beneath the calm of record equity highs lie clear warning signs: producer prices are accelerating, consumer sentiment is slipping, the LEI is flashing red, and geopolitics and public policy remain on edge.

The dog days may feel slow and tranquil, but as Powell speaks at Jackson Hole and Zelensky negotiates in Washington, complacency could quickly give way to volatility this fall.

The Recovery Slows Beneath the Surface

The July employment report confirmed the labor market is softening. Nonfarm payrolls rose by just 73,000, well below consensus.  Moreover, May and June data were revised lower by a combined 258,000. Over the past three months, the economy has added an average of just 35,000 jobs per month.

The private sector has held up slightly better, adding an average of 52,000 jobs a month for the past three months. Private-sector hiring is being carried by healthcare and social services. Manufacturing employment fell for the third straight month, while construction and professional services were flat. A subset of tech jobs we track within professional and technical services lost 12,300 jobs and has shed 33,200 jobs over the past three months.

Much of the downward revisions to May and June data was to state and local government. The timing of the end of the school year often leads to wide swings in the seasonally adjusted data this time of year. Still, downward revisions of this magnitude are rare. Federal government payrolls have declined for six consecutive months, reflecting DOGE cuts and retirements.

The unemployment rate rose to 4.2%, but the unrounded figure was 4.248%—the highest since November 2022. Labor force participation edged down to 61.7%, and the employment-to-population ratio slipped to 60.1%. Long-term unemployment rose to 1.8 million. The participation rate has fallen 0.5 percentage points over the past year, while the employment-population ratio has fallen 0.4 percentage points.

Structural shifts are becoming more apparent. A slowdown in immigration and an aging population have lowered the breakeven rate of job growth, making headline unemployment appear healthier than underlying conditions suggest. Broader measures of labor market health continue to deteriorate. Without the drop in labor force participation, much of which is tied to tighter immigration enforcement, the unemployment rate would easily top 4.5%

Tariffs in Effect: The Next Phase of Strategic Trade

President Trump’s reciprocal tariff order took effect on August 1, raising rates to 15% or more on imports from countries without new trade agreements. Some targeted nations—including Canada, Switzerland, Brazil, and Taiwan—face effective rates as high as 50% on select goods. Secondary sanctions on Russia could boost effective tariff rates even further, with India and China two of the most impacted nations

The move is part of a broader strategy to align trade with national security and industrial policy. Tariffs are now being paired with investment pledges in energy, logistics, and semiconductor supply chains. The average effective tariff rate has now likely risen above 15%, by far the highest in the modern era.

The inflation impact has so far been modest, with most firms absorbing costs through margin compression. But policy uncertainty is weighing on investment: core capital goods orders have now declined for three consecutive months, and ISM Manufacturing remains below 50. Retailers and manufacturers are adjusting inventories in anticipation of further disruption, and many firms have been waiting for tariffs to be finalized before deciding how much to pass on to consumers.

Geopolitics: Flashpoints and Fallout

Russia intensified its military operations in Ukraine last week, launching more than 300 drone and missile strikes—the most in a single week since May. Ukrainian infrastructure in Odesa and Kharkiv was heavily targeted, and Chasiv Yar, a key defensive position in Donetsk, appears to have fallen. Peace negotiations remain stalled. President Trump has moved up the deadline for Russia to respond to U.S.-led peace initiatives, warning that secondary sanctions will soon be imposed on nations that continue to trade with Russia, particularly in energy and dual-use technologies.

The move prompted a fierce response from Moscow. Russian Security Council Deputy Chair Dmitry Medvedev threatened that any escalation of Western involvement would trigger a reactivation of Russia’s “Dead Hand” nuclear response system—an automated retaliation protocol developed during the Cold War. Medvedev also warned that Moscow considers any economic siege an act of war, and state-controlled media began running simulations of nuclear attacks on European capitals. These provocations signal that the Kremlin is escalating not only militarily but also in the information and psychological warfare domains.

These threats suggest the Kremlin views the prospect of secondary sanctions as a serious escalation and threat—one that could strain Russia’s economic lifelines and test the cohesion of its leadership. Medvedev’s outburst may reflect growing internal anxiety over the potential for isolation from China, India and other critical trading partners. President Trump would like Indian refiners to stop purchasing Russian oil and commit to purchase more U.S. crude as part of a broader trade deal.

In the Middle East, Gaza’s deepening humanitarian crisis prompted Canada, the U.K., and France to announce plans to recognize Palestinian statehood at the upcoming U.N. General Assembly. The Trump administration responded swiftly, imposing new sanctions on Palestinian Authority officials and warning that such moves could jeopardize future trade cooperation, including under the USMCA framework. Secretary of State Marco Rubio criticized the recognitions as premature and even counterproductive, arguing they may embolden Hamas and undermine prospects for a lasting ceasefire.

The divergence between the U.S. and its allies reflects broader tensions over diplomatic strategy as well as greater tolerances for appeasement in Canada and western Europe. Critics of unilateral recognition argue that it offers symbolism without substance—particularly in the absence of a defined leadership structure or clear territorial boundaries. The Trump Administration continues to emphasize the potential of expanding the Abraham Accords framework as a more durable pathway toward Palestinian statehood and a broader, more equitable and enduring peace.

Markets and the Fed: September in Play

Markets are now pricing in a high probability of a 25bp rate cut at the September FOMC meeting, and potentially a half-point cut if labor market conditions deteriorate further. Two Fed governors dissented in favor of immediate easing at the July meeting—the most open policy division at the Board level in over three decades. Bond yields fell across the curve, and the dollar reversed its recent rally and edged lower. Equities sold off sharply on Friday, capping the worst week for stocks since the Liberation Day tariff announcement in early April.

The economy appears to be on the precipice of recession. Consumer spending has shown no net growth this year, after adjusting for inflation. Housing is in full retreat, with sales stumbling and new construction ramping down. Home prices are also weakening, which will undermine home improvement spending. Businesses are also holding off on capital spending, outside of AI and related power initiatives

Earnings: AI Delivers a Tailwind

Amid macro uncertainty, Q2 earnings from Microsoft and Meta offered a rare bright spot. Microsoft’s revenue rose 18% to $76.4 billion, driven by continued strength in cloud and AI services. Meta’s revenue jumped 22% to $47.5 billion, fueled by strong demand for AI-powered advertising tools.

Both companies raised capital spending guidance and emphasized productivity gains. Meta now reports that over 2 million advertisers are using its AI-generated ad content platform. These results reinforce the view that the AI investment cycle is maturing—providing near-term earnings support and long-term productivity gains.

The performance of these mega-cap firms has helped buoy equity sentiment even as broader growth softens. Investor appetite for firms with pricing power, capex discipline, and exposure to AI remains strong. There is a downside, however, as AI is increasingly displacing workers, both through layoffs and reduced hiring.

Looking Ahead: August Signals, September Setup

The back nine is proving to be as difficult as we feared. Labor market momentum has faded, real consumption is stalled, and tariff-related uncertainty continues to cloud the outlook. While the Fed retains room to ease, inflation data are likely to remain mixed. This week’s calendar is relatively light but still should provide a few key signals. The ISM Services Index will shed light on underlying demand and pricing power, both of which appear to be softening. Productivity and unit labor cost data may prove the most consequential—any improvement there would strengthen the case for near-term policy easing. Inflation expectations from the New York Fed and the preliminary University of Michigan sentiment survey also warrant close attention.

This Week’s Key Reports

Monday, August 4
• Factory Orders (June) – Expected to be soft due to volatility in commercial aircraft orders, which surged in May. Broader business investment remains cautious amid tariff uncertainty and unclear rate trajectory.

Tuesday, August 5
• ISM Services Index (July) – Forecast to rebound to 51.7. Watch for signals on service-sector demand and pricing pressure.

Wednesday, August 6
• Fed Speakers – Governor Lisa Cook and Boston Fed President Susan Collins will participate in a livestreamed panel discussion at 2:00 p.m. titled “A Central Bank Perspective on the Evolving Global Landscape.”

Thursday, August 7
• Q2 Productivity & Unit Labor Costs – A key read on whether the economy can sustain growth amid structural labor constraints driven by tighter immigration enforcement and accelerating AI adoption.
• Initial Jobless Claims – Seasonal adjustments may inflate the headline figure; continuing claims are expected to continue their gradual upward trend.
• New York Fed Consumer Expectations Survey – Closely watched for near-term inflation expectations, which several Fed officials have highlighted recently.
• Fed Speaker – Atlanta Fed President Raphael Bostic to deliver remarks.
• Consumer Credit (June) – Credit growth may slow as consumers grow more cautious about employment stability and future income.

Friday, August 8
• University of Michigan Sentiment (Prelim August) – Inflation expectations remain the key metric, particularly after their early-year spike and subsequent decline.

Final Points

The U.S. economy is not in crisis, but it is clearly losing altitude. Slower hiring, stagnant consumption, a weakening housing market, and rising trade friction are straining the expansion’s resilience. If policymakers misjudge the risks—or wait too long to cut rates—the glide path could steepen quickly. A September rate cut now appears likely, but the timing and tone of the Fed’s messaging will shape whether markets interpret it as a much-needed precautionary adjustment, a political capitulation, or a belated rescue move.

A precautionary adjustment is the outcome policymakers are aiming for. If executed successfully, it could bring down long-term interest rates and mortgage costs—relieving pressure in the housing market and reducing refinancing risk across the broader economy.

A Gun and a Grievance

On July 28, 2025, a mass shooting at 345 Park Avenue in Midtown Manhattan claimed four lives—including an off-duty NYPD officer and a Blackstone executive—and left another victim critically injured. The gunman, 32-year-old Shane Devon Tamura, a former Las Vegas casino worker, opened fire inside the building—home to the NFL’s headquarters—before taking his own life.

Tamura left behind a note blaming the NFL for his alleged chronic traumatic encephalopathy (CTE), a degenerative brain disease he attributed to playing high school football. Fueled by resentment and unmet medical needs, he drove cross-country to confront league officials. After mistakenly arriving on the wrong floor, he opened fire indiscriminately—turning a personal grievance into public tragedy.

The attack echoed the December 2024 assassination of UnitedHealthcare CEO Brian Thompson, who was gunned down on a Midtown sidewalk by Luigi Mangione—a man with no personal connection to Thompson or the company, but who viewed the insurance industry as emblematic of a system that had failed him. Both incidents reflect a disturbing trend: individuals channeling institutional resentment into targeted violence.

Though their motivations differed, both attackers believed the system had wronged them—and that violent retribution was justified. That segments of social media applauded their actions—celebrating Mangione’s murder and framing Tamura’s attack as a social protest—raises troubling questions about the normalization of vigilante justice.

These events carry serious economic consequences. After Thompson’s assassination, major insurers removed executive profiles from their websites and quietly upgraded security protocols. Following Tamura’s attack, the NFL and other tenants at 345 Park Avenue tightened access restrictions, while corporate security firms reported a surge in demand. Investor confidence, executive mobility, and board-level recruitment may all suffer if cities like New York are perceived as unsafe for business leadership.

At the foundation of functional capitalism lies the rule of law. Executives must be able to lead without fear of arbitrary violence. Markets thrive when disputes are resolved through legal channels—not through bloodshed or intimidation. When violence becomes an accepted or romanticized outlet for grievance, the cost of doing business rises and capital flows elsewhere.

The path forward requires a coordinated response: expanded mental health care, greater institutional accountability, enhanced urban security, and a firm recommitment to zero tolerance for violence—including on social media, university campuses, and within political discourse. However legitimate a grievance may be, redress must remain within the bounds of law.

The Midtown shooting is a grim reminder that public safety is not merely a civic issue—it is a moral and economic imperative. The protection of human life must remain the first responsibility of a functioning society, and the preservation of safe, open, and orderly environments is essential for commerce to thrive. In cities like New York, where trillions in capital flow each year and millions live, work, and lead, law and order is not a luxury—it is the foundation upon which both lives and livelihoods depend.