Good morning Traders and Quants! We made it to another Friday!

Markets extended their pullback Thursday, with the S&P 500 logging its third straight decline and the Nasdaq leading losses as investors rotated out of tech into energy and defensives. 

A stronger-than-expected final Q2 GDP print of 3.8% and weekly jobless claims falling to 218,000 underscored ongoing U.S. economic resilience, but traders leaned risk-off ahead of today’s PCE inflation release. Bond yields pushed higher, with the 10-year finishing near 4.17%, and the dollar strengthened against major peers. 

Oil stayed anchored around $65 after swinging intraday on Trump’s comments about sanctions and Russian exports. Despite the recent three-day slide, the S&P 500 remains up nearly 12% year-to-date, and September is still tracking as one of the strongest in a decade.

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Momentum is again under scrutiny. Tariffs returned to the spotlight Thursday, with Trump unveiling sweeping new levies: a 100% tariff on branded drugs without U.S. plants, a 25% duty on heavy-duty trucks, and steep tariffs on furniture and home goods beginning October 1. Asia sold off sharply on the news, pharma names in particular, while Europe is still parsing potential exemptions under existing trade deals.

Chipmakers were also in focus. The White House is weighing a mandate for a 1:1 ratio of U.S.-made to imported semiconductors, a policy that could upend supply chains and give leverage to firms like TSMC, Micron, and GlobalFoundries. Big buyers such as Apple and Dell would bear the adjustment burden.

At home, positioning remains stretched. Retail cash balances are near four-year lows, institutional levels near decade lows, leaving little margin for error if volatility spikes. Earnings expectations remain supportive, analysts still project Q3 EPS growth near 8%, with semis up 40%+, but breadth remains narrow. Traders will be looking at PCE data to confirm whether the setup justifies current multiples.

The Fed remains fractured just as inflation data looms. Powell’s “no risk-free path” warning has become the mantra, but FOMC voices are pulling in opposite directions. Bowman emphasizes labor fragility after August’s soft jobs data, while Bostic warns inflation risks remain underpriced. Newcomer Miran dissented last week, arguing for a 50bp cut. Markets are now pricing only 39bps of easing into year-end, down from earlier in the week.

The Supreme Court will soon weigh Trump’s attempt to remove Governor Lisa Cook, a case that could strip the Fed of its independence. Former Fed chairs and bipartisan economists have warned that a win for Trump would shatter credibility and push long rates higher as investors price political control into monetary policy. Traders need to recognize that policy risk is no longer confined to data, it’s institutional.

Abroad, central banks remain cautious. The SNB held at zero after six straight cuts, citing tariff headwinds. ECB officials remain caught between slowing growth and energy-driven inflation, while BOJ chatter keeps yen traders on edge. The policy divergence story remains intact.

Geopolitics is again in play. Trump publicly vowed to block Israeli annexation of the West Bank, applying rare pressure on Netanyahu while floating a Tony Blair-led Gaza transitional authority. Arab leaders welcomed the stance; Israel remains divided. Markets are treating it as headline risk rather than systemic, but energy premiums are sensitive.

NATO is scrambling after Russian drones breached Polish and Danish airspace, exposing vulnerabilities to low-cost threats. The new “Eastern Sentry” mission underscores a shift from heavy weaponry to counter-drone tech, but the cost asymmetry is glaring—Patriots versus plywood UAVs. For markets, it means Europe’s defense budgets will keep swelling, further straining growth.

In Washington, Defense Secretary Pete Hegseth has summoned top generals and admirals to Quantico for a “mystery meeting.” The lack of disclosure has rattled senior officers already uneasy after leadership purges and Trump’s demand to slash flag ranks. Speculation ranges from a new defense strategy to expanded drug interdiction in the Caribbean. Defense equities could catch a bid on expectations of reallocation.

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Shutdown risk is escalating. With funding set to expire September 30, agencies have been told to prepare for furloughs and cuts. Trump is framing the fight around immigration and spending restraint, narrowing paths to compromise. Markets so far are shrugging, but the closer Congress gets to the deadline, the more disruption to data and federal payments traders must price.

Legal headlines are adding noise. Former FBI Director James Comey was indicted on charges of false statements and obstruction, a move Democrats call politicized. Combined with Trump’s tariff blitz and aggressive health policy messaging, it’s another reminder that regulatory risk is being set by narrative, not consensus. Investors need to treat D.C. as an active driver of volatility, not background chatter.

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Markets are in a holding pattern. Breadth is still narrow, tariffs are back in play, and the Fed faces both internal fractures and external political pressure. Yet GDP revisions show growth resilience, earnings estimates remain firm, and positioning is already defensive in bonds and Forex.

Today’s PCE print will set the tone into quarter-end. A soft number could unlock room for another cut in October, while a hotter reading would reinforce Powell’s caution and embolden hawks like Bostic. Either way, traders should expect volatility to pick up as macro, politics, and geopolitics all collide.