Daily Commentary

MarketMinder’s View: Please note MarketMinder is nonpartisan, assessing Germany’s political developments solely for their potential economic or market effects. The Social Democratic Party’s (SPD) Bärbel Bas resigned as co-party leader and Labor Minister on Monday. The SPD’s coalition partner, Chancellor Friedrich Merz’s Christian Democratic Union (CDU), had called for Bas’s resignation for months. An inability to enact pension reform appeared to lead to Bas’s political downfall, which the article details. The upshot for investors: Germany’s government isn’t united, decreasing the likelihood major change arrives any time soon. “For months, the CDU and SPD have been grappling with low poll numbers, disappointing election results, and disputes over key reform projects. Plans for changes to the electricity tax, the introduction of a sugar tax, the pension and the labor market reform — hardly any initiative has been able to proceed without public controversy.” This is a recipe for gridlock—frustrating for constituents and reform proponents but positive for stocks, as it lowers the likelihood of big change creating winners and losers. Any significant change will struggle to become law. Moreover, the molasses-paced process gives businesses time to prepare, further dampening the market effect. Merz's reforms aren’t economic game changers, but they don’t need to be. German growth is more resilient than many appreciate.

MarketMinder’s View: Friendly reminder: Trade deals aren’t always free-trade deals. Sometimes they are bilateral protectionism. That is how we classify today’s pact between the EU and China. For years, EU leaders bemoaned a flood of cheap, subsidized Chinese electric and hybrid cars. EU residents love them for their affordability. Governments hate them because they undercut local manufacturers, which politicians blame for hollowing out German and European heavy industry. So EU leaders spent months threatening tariffs and import bans. China threatened retaliation. They got together with China in a last-ditch effort to avoid a trade war, and apparently it worked. “The deal ‘opens the prospect of cutting China’s export [of hybrids] by more than a half,’ [Trade Commissioner Maroš Šefčovič said, adding that this would translate into a reduction in exports of plug-in and battery-powered hybrid cars by ‘several millions’ over the next four years, said Šefčovič at a press conference in Beijing on Friday.” Negotiations on other items, including rare earths and EU access to China’s food and drink market, will continue. And here is a wrinkle: “China said both sides would adhere to ‘procedures concerning company price undertakings’ for hybrid cars suggesting one method of curbing sales would be to set higher minimum price tags for Chinese cars sold in Europe.” Friends, China has a little secret. Its government doesn’t enjoy dumping cheap exports abroad. Doing so whacks profit margins and extends a capacity glut officials have spent years trying in vain to address. This deal looks like cover to solve some of its long-running gripes with local companies and governments. So despite the embedded protectionism, it looks like a two-pronged positive. It avoids a trade war (yay). And it potentially helps China toward its long-sought transition to an economy that runs on domestic services, not goods exports.

MarketMinder’s View: We find this piece confused. It argues low long-term Treasury rates are an economic shock absorber. Investors flock to Treasury bonds’ perceived safety when they get scared, making it cheaper for Uncle Sam to borrow to fund higher unemployment payments. Cheaper Treasurys also make business lending cheaper, “an indirect lifeline to the private sector.” Now, with the US economy supposedly weak outside the AI boom and Treasury yields up, this piece argues Uncle Sam, Corporate America and consumers are tapped out. It warns those hoping for a 2022 repeat, when rates rose without recession, will be disappointed since households spent the excess savings that allegedly kept us afloat then. To us, this connects too many dots on the cork board. It corrals a bunch of coincidental factoids without considering causal links. And it doesn’t consider counterpoints. Like: If rates are so bad now, then why did rates similar to today’s prevail for decades before 2007 without being auto-recessionary? If businesses outside AI are so strapped, why are commercial and industrial lending and broad money supply growing gangbusters? Business loans generally go to small and midsized businesses, not AI titans. We aren’t dismissing recession risk, but you generally don’t get recession when investment and the lending that fuel it are strong. Note, too, fast-growing S&P 500 capital expenditures aren’t just AI-driven. Investment is broad. Lastly, even if there is a higher chance of recession at some point, that isn’t a stock market timing tool. Stocks and other market-based indicators move before the economy. They generally signal when corporate America needs to tighten its belt after overindulging. Not the other way around.