This one’s a must-view, folks. Not just because it’s smart and informative (it is), but because if you want to understand where this global trade war is headed, you need to understand where we’ve been. We’ve been here before, same script, different century, shinier weapons.
Opium Wars & Fentanyl
Today, the U.S. is hammering China over trade surpluses, supply chains, and fentanyl exports like it’s some 21st-century morality play. But let’s not kid ourselves, this ain’t new. Roll back the tape to the 1800s, when Britain was guzzling Chinese tea and bleeding silver to pay for it. The Empire didn’t sit down to rethink its consumption habits or embrace austerity. Nope. It pumped opium into China, grown in India by the ever-helpful East India Company. When the Qing Dynasty pushed back, the Brits (and later the French) came with gunboats. Balance-of-payments problem solved… with cannon fire.
That little-remembered and mentioned kerfuffle was called the Opium Wars, and it ended with China coughing up Hong Kong and swallowing a bitter cocktail of treaties, humiliation, and foreign occupation. So when U.S. negotiators start waving fentanyl stats as leverage in trade talks, don’t be surprised if Beijing hears echoes of a century-long trauma. To China, this isn’t just trade. It’s history. It’s memory. It’s power.
And that’s the problem. Washington’s playing checkers while Beijing’s playing Go—with a 5,000-year memory and no term limits.
Watch This Video
Economic Warfare: When Trade Turns to Warpulls back the curtain on this high-stakes chessboard and shows how trade, usually sold to the masses as the peaceful handshake of globalization, can become a blunt instrument of power. It’s a guided tour through the dark history of economic statecraft, from the silver flows and theft of Intellectual Property (IP) of the 19th century to the semiconductor sanctions and auto and steel tariffs of today.
Watch it. Learn something. Because the next chapter of this trade war isn’t going to be written in spreadsheets. It’s going to be written in strategy, scars, and steel.
The S&P 500 closed at 6000.4 on Friday, marking a significant psychological level with a 1.5% weekly gain. The strong performance was primarily driven by a short-covering bid, which reflects some big players are way offside, in our opinion. The rally gained momentum towards the end of the week, following a solid employment report (+139,000 jobs), which exceeded market expectations. Despite this, the employment data saw revisions downward for previous months’ data, and the job growth was increasingly concentrated in just two sectors: leisure and hospitality, and healthcare.
As we move into the next week, maintaining the 6000-level will be critical for the S&P 500. If the index can consolidate above this level, it increases the possibility for new highs as we move through the summer months. However, failure to hold this level might signal a shift in market sentiment that stocks cannot break through the top of the trading range. The upcoming CPI report is likely to play a crucial role.
Dollar
The dollar showed signs of weakness this week, particularly against EM currencies. The almost flat performance of the dollar index was distorted by Dollar/Yen strength, which appreciated 0.6% on the week. The dollar’s broader softness was notable, especially against emerging market currencies. This likely reflects a strong appetite for emerging market assets as global investors seek higher returns amid increasing risk appetite.
The dollar’s weakness against EM currencies suggests a shift in global capital flows. Emerging markets are poised to benefit from a stronger carry trade environment, while the U.S. faces mounting inflation risks that could further affect the currency’s value.
AI Trade
Across global risk markets, one theme continues to dominate: the AI trade. U.S. technology stocks linked to AI growth saw strong performance, particularly in sectors like information technology (+3.0%), communication services (+3.2%), and electronics technology. Asian markets, particularly Taiwan and Korea, also surged in tandem with strong demand for semiconductors and digital infrastructure driven by AI innovation.
Despite these advancements, there is still a significant underappreciation of AI’s economic impact in the market. AI technologies are not just reshaping industries but are poised to transform global productivity in ways that may not be fully captured in current market valuations. As AI continues to drive both corporate earnings and productivity gains, it is likely to become an even more dominant macro driver than traditional factors like inflation or trade tensions.
Global Markets
In Europe, the European Central Bank (ECB) continued its easing cycle, reducing its Deposit Rate by 25 basis points to 2.00%, citing softer inflation but maintaining a modest easing bias. With core inflation slowing to 2.3%, the ECB is expected to pause rate cuts in July, but a final reduction in September remains likely.
Across emerging markets, the week saw a broad rally in stocks, with EM equities rising 2.3%. This was led by Korea and China, whose currency movements and strong equity performances indicate growing investor confidence in the region despite broader global uncertainties. As EM currencies continue to outperform the U.S. dollar, the global risk appetite for these regions may remain robust, further supported by easing inflation in several key markets.
Key Takeaways
The 6000 threshold for the S&P 500 is crucial. Maintaining this level could set the stage for new highs, while a failure to hold it may signal a shift in market dynamics.
Emerging market currencies are seeing strong inflows, especially with the dollar weakening. This could continue if inflation data supports a dovish Fed stance.
AI continues to be a macro driver underappreciated by the markets. As this sector evolves, it may significantly outperform broader market expectations.
European and emerging market assets are showing resilience. The ECB’s stance and strong performances in Asia and EM currencies highlight opportunities in these regions.
As we head into the week ahead, all eyes will be on CPI data and further economic developments that may shape the outlook for the global economy, particularly in terms of tariffs, inflation, and central bank policy
Markets
U.S. Market Analysis
S&P 500 closed at 6,000.4, up +1.5% for the week and +2.02% YTD
Nasdaq Composite gained +2.2%, supported by strength in information technology and AI-related stocks.
Russell 2000 (small-cap index) rose +3.2%, outperforming large caps but remains down over 4% YTD.
Weekly gains were concentrated in:
Information Technology: +3.2%
Communication Services: +3.2%
Materials: +1.7%
Lagging sectors:
Consumer Staples: –1.4%
Utilities: –0.9%
Cboe Volatility Index (VIX) fell to 16.8, down from 18.6, indicating reduced market anxiety.
Rally was driven by:
May nonfarm payrolls: +139,000 jobs (vs. 130,000 est.)
Prior months revised down by –95,000
Unemployment rate held at 4.2%
Global Market Analysis
MSCI EAFE Index (Developed ex-US): +0.7% weekly return, +18.2% YTD
Eurozone:
Germany: +1.5%, +34.1% YTD
Italy: +1.3%, +34.7% YTD
France: +1.0%, +19.5% YTD
Emerging Markets (MSCI EM Index): +2.3% weekly, +11.4% YTD
China: +2.5%
Korea: +6.5%
Brazil: +1.6%
Japan (Nikkei 225): –0.6% on the week, yen weakened –0.4% vs. USD.
U.S. Dollar Index was soft overall:
EM FX basket rose +1.1%
Notable moves: AUD +0.8%, EUR +0.3%, JPY –0.4%
Crude Oil (WTI) rose +6.3%, reaching a 6-week high amid easing U.S.-China trade tensions
Economics
U.S. Economic Overview
Labor Market:
Nonfarm payrolls: +139,000 (May)
Unemployment rate: 4.2%, unchanged
Hourly earnings: Not explicitly cited but wage pressures are moderating
Inflation:
May CPI (due Wednesday) expected to show early tariff pass-through effects
ISM Indices:
Manufacturing PMI: <50 for third straight month (contraction territory)
Services PMI: Contracted for first time in nearly a year
ISM export orders: Lowest in 5 years, import orders at GFC lows
Rate Outlook:
Futures imply 2 Fed cuts in 2025, starting in September
Treasury yields (as of June 6):
2-yr: 4.04%
10-yr: 4.50%
30-yr: 4.96%
2s/10s spread: +47 bps, marginal steepening
Global Economic Overview
Eurozone:
ECB rate cut: 25 bps to 2.00%
May core inflation: 2.3%, headline: 1.9%
Wage growth easing: Q1 comp per employee +3.8% YoY
Japan:
Core CPI revised higher for FY2025; BoJ likely to hike next in January
Domestic equities pressured by –1.8% weekly decline and rising yields
China:
PMI (official manufacturing): 49.5 (contracting)
Non-manufacturing PMI: 50.3; signs of soft service sector demand
Yuan rallied +2.5% against USD
India:
RBI rate cut: 50 bps to 5.50%
Inflation forecast: Lowered to 3.7%, GDP growth held at 6.5%
Stanley Fischer’s impact on our journey as economists is both profound and personal. From the moment we encountered his co-authored textbook Macroeconomics—a work that distilled the complexity of the dismal science into practical, accessible insight—Fischer became a silent guide along our academic and professional path. But it wasn’t just his texts—it was his imprint on the entire field of macroeconomics that shaped us. He didn’t merely study macroeconomics; he helped define its modern contours.
Fischer’s intellectual architecture stands behind some of the most foundational frameworks in contemporary macro policy. His influence radiated through his groundbreaking research, his textbooks, and especially his students, who went on to helm central banks and global institutions. As chief economist of the World Bank during our own time there, he wasn’t just a senior figure; he was a beacon. His clarity of thought and firm grasp of both theoretical nuance and practical application brought coherence to chaos and helped us appreciate the true scale and responsibility of macroeconomic policymaking.
When we began grappling with the real-world stakes of fiscal reform and financial crises, it was Fischer’s example that pointed the way. From stabilizing Israel’s inflation-wracked economy to orchestrating IMF responses to systemic shocks in Asia and Latin America, he showed us that macroeconomics—done right—can be both precise and humane. He modeled a discipline anchored in analytical rigor but guided by ethical responsibility.
What stands out most, though, is Fischer’s legacy as a teacher. We were never in his classroom, but we worked with those he mentored—Bernanke, Draghi, Summers—and through them, learned much, the seriousness of purpose, clarity of thought, and devotion to the public good.
Stanley Fischer didn’t just teach macroeconomics; he embodied its highest ideals. We remember him not only as an intellectual giant but as the mentor we never met, whose influence quietly shaped every meaningful step of our professional journey.
Some sage advice and very relevant to the current economic situation.
Global markets ended the month of May on relatively firm footing, with equity indexes rebounding modestly, inflation easing slightly, and consumer confidence stabilizing. However, beneath this surface calm lies a deeper undercurrent of concern—a growing alarm over sovereign debt and deficits that is beginning to reverberate through financial markets, particularly in the U.S. bond market. As summer approaches, deficits and debt sustainability are poised to dominate financial and policy discourse, propelled by mounting warnings from influential voices in finance and an increasingly precarious fiscal landscape.
Market Snapshot
Markets digested a mix of macroeconomic signals during the holiday-shortened week. U.S. equities rallied early on news that President Trump postponed a 50% EU tariff, but ended the week below their highs due to revived trade friction with China and legal uncertainties surrounding the administration’s tariff authority.
Treasury yields, which had spiked the previous week, cooled off, with the 30-year bond slipping from its psychological 5% threshold. Meanwhile, PCE inflation data—closely watched by the Federal Reserve—showed a continued moderation, offering tentative hope for rate cuts later in the year.
Globally, the ECB is widely expected to cut rates in June, while Japan and China are contending with both inflation pressures and deteriorating industrial output. Latin America’s current accounts remain manageable, but risks tied to global trade policies persist.
Spotlight on Debt & Deficit
The most urgent issue facing global markets is not immediate trade disruption or short-term inflation—it is the increasingly untenable trajectory of U.S. government debt. This theme was sharply underscored in two pivotal developments this week:
Jamie Dimon’s Alarm Bell: The JPMorgan Chase CEO warned that the U.S. bond market could “crack” under the weight of federal debt expansion. “I just don’t know if it’s going to be a crisis in six months or six years,” he cautioned, referencing rising yields, foreign investor retreat, and mounting Treasury issuance.
Wall Street’s Pushback on Trump’s Tax Plan: According to a Washington Post investigation, top Wall Street executives have privately warned the Trump administration that its new tax package—projected to add at least $2.3 trillion in new debt—could destabilize bond markets and raise borrowing costs across the economy.
Investors are increasingly vocal, describing the tax plan as a “poisoned chalice” that could exacerbate term premiums and crowd out private investment. The Treasury’s ballooning $29 trillion market, already strained by high rates, faces diminished demand from foreign buyers and banks, many of which are urging regulators to ease bond trading restrictions to prevent a liquidity crunch.
Why This Matters: The Long-Term Implications
Rising deficits may feel abstract, but their impact is concrete: higher interest rates on mortgages, car loans, and business credit; lower government spending on essential services due to growing debt-service obligations; and potential erosion of confidence in the U.S. dollar as the global reserve currency.
The convergence of fiscal expansion, global de-dollarization trends, and mounting geopolitical tensions suggests that the bond market is at a critical inflection point. With the Congressional Budget Office projecting debt-to-GDP to exceed WWII-era highs and rating agencies like Moody’s already downgrading the U.S., this is not a distant threat—it is a present and pressing one.
Outlook: Summer of Reckoning
The summer of 2025 may mark a pivotal period in global market evolution. With major fiscal legislation under debate, expected central bank moves in the U.S., Europe, and Asia, and judicial rulings looming over tariff legality, investor sentiment may become increasingly reactive. The Treasury market will likely serve as a sensitive barometer for investor confidence in U.S. fiscal responsibility.
Expect further volatility in long-duration bond yields, persistent debates over deficit-financed growth strategies, and a growing chorus of market voices calling for structural fiscal reform.
Recommended Summer Reading: Understanding Debt and Deficits
To deepen understanding of these pivotal issues, consider these insightful books:
“This Time is Different” by Carmen Reinhart & Kenneth Rogoff – A historical analysis of sovereign debt crises and why fiscal excess often ends badly.
“Fiscal Reckoning: The Looming Debt Crisis and What It Means for You” by James L. Payne – A clear-eyed examination of the political and economic roots of America’s debt problem.
“Debt: The First 5,000 Years” by David Graeber – A broader anthropological and historical take on the social contracts behind monetary debt.
Markets may appear stable for now, but this equilibrium is fragile. As summer begins, the conversation must shift from short-term trade skirmishes to long-term fiscal strategy. The U.S. bond market’s ability to absorb vast new issuance without significant dislocation will define not only domestic financial conditions but also global capital flows and investment strategies. Investors, policymakers, and voters alike must confront the reality that fiscal sustainability is no longer a theoretical debate—it is an urgent, market-moving imperative.
Markets
U.S. Market Analysis
U.S. equity markets posted weekly gains despite late-session volatility, driven by easing Treasury yields and improved consumer confidence data.
The S&P 500 rose 1.88%, while the Nasdaq led major indexes with a 2.01% gain; small-cap indexes underperformed but finished in positive territory.
Treasury yields cooled after a strong 7-year auction, with the 30-year yield pulling back below 5%, calming recent rate pressure.
Trade tensions re-emerged after President Trump accused China of violating their trade deal, briefly reversing earlier gains in tech stocks.
Positive inflation data and delayed EU tariffs helped sustain bullish momentum through most of the week.
Global Market Analysis
European stocks advanced modestly, supported by softening inflation and postponed U.S. tariff hikes; the STOXX Europe 600 added 0.65%.
Japan’s Nikkei 225 rebounded 2.17% as U.S.-Japan trade talks showed signs of progress, while BoJ policy remained steady amid strong Tokyo inflation.
Chinese markets declined slightly due to light economic data and limited trade news; infrastructure stimulus is expected to support growth in the near term.
Hungary’s central bank left its base rate unchanged at 6.50%, citing persistent inflation risks and uncertainty tied to global trade dynamics. Policymakers flagged potential upside risks to inflation from international market volatility and maintained a restrictive stance.
South Korea’s central bank cut its policy rate by 25 bps to 2.50%, responding to expectations of slowing domestic growth. Officials noted stable inflation near 2% but expressed concern over rising household debt and currency volatility under accommodative conditions.
Economics
U.S. Economic Overview
April’s core PCE inflation cooled to 2.5% YoY—the lowest since 2021—boosting market expectations for potential Fed rate cuts later in 2025.
Consumer confidence rebounded sharply in May, with the Conference Board index rising to 98.0, breaking a five-month decline.
The U.S. bond market remains under scrutiny as Wall Street and policymakers grow increasingly concerned over the sustainability of federal deficits.
Jamie Dimon and other financial leaders warned of an impending “crack” in the Treasury market if debt levels continue rising unchecked.
A federal court’s temporary block on Trump’s tariffs raised short-term uncertainty, though markets appeared resilient in the face of legal and policy volatility.
Global Economic Overview
The ECB is widely expected to cut rates next week as headline inflation eased in Spain, Italy, and France, reinforcing a dovish policy outlook.
Germany reported a larger-than-expected increase in unemployment and weakening business sentiment, highlighting diverging growth patterns across the EU.
Japan’s Tokyo core CPI rose to 3.6% YoY in May, the highest in over two years, while industrial production and job data signaled a mixed outlook.
China’s economy showed signs of stabilization, but structural reforms remain elusive; planned infrastructure investment may support momentum into Q3.
Hungary’s inflation outlook remained elevated, with core inflation at 5.0% in April. Central bank officials emphasized caution amid tariff-related uncertainty and vowed to maintain tight monetary conditions to anchor expectations.
South Korea’s economic growth forecast was revised down, with policymakers anticipating modest recovery in domestic demand. Inflation is expected to hover around 2%, while exports face downside risks from U.S. tariffs and slowing global demand.
Week Ahead
Key U.S. & Global Events
Markets will watch for White House commentary following renewed tariff threats against China and the EU.
G7 meetings in mid-June may set the stage for broader policy coordination on trade, fiscal strategy, and geopolitical risk.
Legal proceedings related to U.S. tariff authority could shape investor sentiment around trade and inflation expectations.
Upcoming Economic Data
Monday: ISM Manufacturing Index, Construction Spending
When President Donald Trump took office in January 2017, he inherited a relatively stable fiscal environment. The federal budget deficit stood at approximately $581 billion, or 3.05% of GDP—a level widely regarded as sustainable by historical standards. Ironically, that same 3.0% benchmark has since resurfaced as the stated deficit target for the Trump 2.0 administration.
Trump 1.0
Early in his first term, President Trump pledged to restore fiscal discipline and reduce the deficit. However, those ambitions quickly faded amid sweeping legislative changes. The passage of the Tax Cuts and Jobs Act of 2017 reduced federal revenues, particularly from corporate and individual income taxes, while discretionary spending, most notably on defense, continued to climb. As a result, the deficit steadily expanded throughout Trump’s first term.
COVID Deficits
The fiscal situation worsened dramatically in 2020 with the outbreak of the COVID-19 pandemic. In response to the public health emergency and economic shutdowns, the federal government launched a series of massive relief packages, including direct stimulus payments, enhanced unemployment benefits, and business assistance programs. While these measures were crucial in mitigating the economic fallout, they came at a steep fiscal cost. By March 2020, the rolling 12-month deficit had already reached $1.036 trillion (4.77% of GDP). Within months, it ballooned to $3.35 trillion, or 15.17% of GDP, by the end of Trump’s first term.
Federal Reserve Financing of COVID Deficits
This explosion in borrowing marked the largest one-year deficit expansion since World War II, underscoring the magnitude of the crisis and the aggressive fiscal response. What began as an effort to rein in a manageable deficit quickly morphed into an era of unprecedented federal borrowing, all or most of it monetized by the Federal Reserve, laying the groundwork for subsequent inflationary pressures and long-term fiscal challenges (see, No Trouble… table below).
Biden Administration
President Joe Biden inherited this fiscal turbulence, taking office with a deficit nearing 15% of GDP. His administration enacted additional large-scale spending, including the American Rescue Plan, while also attempting to wind down pandemic-era outlays. Although the deficit declined from its peak, it remained far above pre-pandemic norms. By December 2024, at the close of Biden’s term, the rolling 12-month deficit was $2.03 trillion (6.84% of GDP) and ticked up slightly to $2.07 trillion (6.92% of GDP) by March 2025. The cumulative deficit during Biden’s tenure reached $7.8 trillion, or 26.3% of GDP, mirroring the scale of Trump’s borrowing.
Fiscal Revenues
On the revenue side, thus far during FY 2025 (October 2024–April 2025), individual income taxes were the largest source, totaling $1.681 trillion, up 7.0% from the prior year. Social insurance and retirement receipts followed at $1.018 trillion (+3.5%), while customs duties surged 34.4%, likely reflecting renewed tariff enforcement. In contrast, corporate tax revenues fell 9.2%, signaling economic softness or increased use of tax offsets.
Government Expenditures
On the spending side, the Department of Health and Human Services led all agencies at $1.058 trillion, a 10.7% year-over-year increase. Social Security expenditures rose 8.7% to $945 billion, and interest on the national debt jumped 9.6% to $684 billion—now exceeding defense spending ($509 billion) by over 30%, highlighting the growing weight of debt service in an era of higher interest rates.
In sum, the U.S. fiscal trajectory over the last two presidential terms has shifted from post-recession recovery under Obama to crisis-driven deficits under Trump, and into a structurally imbalanced, high-deficit environment under Biden. The road ahead requires confronting unsustainable entitlement growth, rising interest burdens, and sluggish revenue expansion, while safeguarding the broader economic foundation.
The big question is: can we get there before investors throw in the towel and a bond market crisis erupts?
Remembering our fallen – the best of the best – in France.
Every year, I share this video of French caretakers who take sand from Omaha Beach in Normandy, and scrub them into the letters to give them the gold coloring.
On this Memorial Day, let us pause—not just for a moment, but with full hearts—to remember the men and women who made the ultimate sacrifice. Their courage, their devotion, and their willingness to lay down their lives are the very reasons we are free to gather, to speak, to live, and to hope.
It has been said—perhaps callously —that “a single death is a tragedy, a million deaths a statistic.” But today, we push back against that cold arithmetic. Today, we say each life matters. Each name etched in stone is someone’s son, someone’s daughter, someone’s love. Their absence is not a number—it is a wound felt in homes, in memories, in empty seats at the table.
Some of us know that grief firsthand. Some have felt that sharp, silent moment when the knock comes at the door and time stands still. Others have been spared that pain, but few among us do not have, somewhere in our family tree or in our circle of friends, someone who answered the call and never came home.
So today, let us remember them—not just as soldiers, but as people. Let us summon empathy, and let that empathy stir us to action. Comfort those who mourn. Stand with those who carry silent sorrow. Uplift those who feel forgotten.
And most of all, live with gratitude. Let your freedom remind you that it came at a cost. Let your daily joys be acts of honor for those who can no longer share in them.
Take courage, as they did. Live well, as they hoped we would.
And let us never, ever forget.
Thank you. Gregor
It’s staggering to consider that the Civil War claimed the lives of roughly 750,000 Americans—about 2% of the population at the time. To put that in perspective, it would be equivalent to losing over 7 million people today. In the wake of such immense national grief, Americans across the country began holding tributes to honor those who had fallen. These observances coalesced into what became known as Decoration Day, a solemn tradition of adorning soldiers’ graves with flowers and flags. The first official nationwide commemoration took place on May 30, 1868, as declared by Union veterans’ leader General John A. Logan. Chosen because it was not the anniversary of any particular battle, the date symbolized unity and remembrance. Over time, Decoration Day evolved into Memorial Day, a national holiday dedicated to honoring all U.S. military personnel who gave their lives in service. What began as a gesture of mourning became a cornerstone of national memory and gratitude.
Global Macro Monitor 