Even More Winning

By Molly Schwartz, cross-asset macro strategist at Rabobank

Brent crude oil sank $4.60 to its lowest price since September, at $93.70/bbl on renewed hopes of world peace, as Trump announced over the weekend that it’s “highly unlikely” that we will order extensive strikes on Iran, assuming Iran signs a “very strong agreement.” The definition of what constitutes a “very strong agreement” may be flexible, depending on how the Trump Administration plans to define “winning” in the Middle East, after facing defeat in the US Midterm elections. 

But Hegseth is still coming under fire—not from the blue tsunami sweeping through DC in January, but rather from Republican Representative Thomas Massie, who has filed to impeach Hegseth. Massie wrote on X yesterday: “I’ve seen some of my colleagues say @SecWar Hegseth has been effective and they agree with the war, so they’ll vote not to impeach. That’s not the questions though. The question is whether he committed impeachable acts, and the answer is yes, eight times:” which, according to the articles, include starting the Iran war without congressional authorization, continuing the Iran war after Congress ordered US forces removed, extrajudicial killings, and more.

A few Fed speakers crawled out of the woodwork yesterday to opine on the inflationary environment in the US, including alternate voter Barkin, from the Richmond Fed, and non-voter Goolsbee from Chicago. Rhetoric from both broadly aligned with the now more hawkish lilt across the FOMC, citing the persistence of core CPI inflation, especially in services, and the justification for future hikes. That said, the dot plot from the September SEP (which is noticeably missing a dot from Fed chair Warsh) projects one more Fed hike, followed by a hold throughout 2027, even as many FOMC board members project a second hike in 2027. 

After collapsing 4.4% in one day last week following the US Midterm elections, the S&P 500 is starting to show signs of recovery, having moved 3% higher, back to pre-November 4 levels. Despite the unfortunate headlines surrounding Jensen Huang, the Nasdaq also made a strong recovery, having moved 5% higher over the past two sessions, supported by the Philadelphia Semiconductor Index, which managed to work its way more than 11% higher. But the risks facing the US AI infrastructure buildout remain.

The Democratic victory cements additional difficulties for the buildout, but many Republican lawmakers are also joining the opposition to data centers. A different midterm outcome would not have necessarily permitted the degree of investment that some AI bulls are hoping for, even if markets might have been more reluctant to price that in. Communities remain reluctant to welcome data centres without clear assurances of the benefits, and moratoriums continue to crop up, further complicating the US effort to win the AI war against China., But what does “winning” even mean?

For the US and China, “winning” may look different. The US maintains a lead in frontier models and compute, while China benefits from a follower advantage; adapting successful approaches rather than funding all the experimentation needed to discover them means it may not need to match the US compute buildout to capture substantial benefits. 

Meanwhile, the US economy may concentrate its AI efforts on processes that increase productivity in white-collar work, while China may focus more heavily on the manufacturing applications. Both could become more productive by deepening their existing specialisations and comparative advantages, rather than converging on the same economic model. Unfortunately, this also sets the US behind as it seeks to reindustrialize, leaving the manufacturing gap between the US and China harder to close. But equities did well yesterday, so the market seems content to deal with these problems later.