As we’ve discussed over the past month, Trump’s escalate-to-de-escalate strategy has been about drawing the rest of the world back into alignment with the U.S., using the U.S. consumer as leverage.

In addition, his Treasury Secretary, Scott Bessent, spent the past few days making the case to the world that the U.S. has been and will remain the best place for global capital. 

He reminded the world that “we have the world’s reserve currency, the deepest and most liquid markets, and the strongest property rights,” and for those reasons, the United States is “the premier destination for international capital.”

And to further drive home the appeal for global investors and governments, Bessent says the Trump administration’s goal is simply more: “more jobs, more homes, more growth, more factories, more critical manufacturing plants, more semiconductors, more energy, more opportunity, more defense, more economic security, more innovation.”

Now, as we’ve discussed, and part of the sales pitch, the second level of the “escalate-to-de-escalate” strategy is about isolating China.

And with that, over the past couple of weeks, the administration has been making significant public efforts to reduce China’s supply chain negotiating leverage over the United States and the rest of the world.

And it’s all about India.

VP JD Vance was in India two weeks ago, hosted by Modi, and he made a speech on U.S. and India’s shared economic interests.

It was strategic — a signal to the world that India is positioned to fill the supply chain gap for certain critical low-cost manufacturing, minerals, pharmaceuticals, etc., as a “fair” trading “friend.” 

This was clearly intended to contrast with China.

JD ended his speech by saying “the future of the 21st century is going to be determined by the strength of the United States-India partnership … if we fail to work together successfully, the 21st century could be a very dark time for all of humanity.”

It has since been said by Trump advisor Peter Navarro, that India will be the first trade deal. 

And it may come by the end of the week.  

Trump said today that he will make a “very, very big announcement” before his Middle East trip on Monday. He calls it “one of the most important announcements in many years.”

Maybe its something bigger. 

Remember, we talked a few weeks ago about the potential for “a grand coordinated deal, all at once (and probably over a weekend)?”  

There’s probably a reason, almost a month since “Liberation Day,” that no trade deals have been done. 

 What would a grand coordinated deal look like (a “Mar a Lago Accord”)?

Based on what’s been guided by key Trump advisors:  Tariffs get slashed, in exchange for countries opening up their markets (take down their trade barriers), boosting their defense spending, committing to buy more from the U.S., invest in American manufacturing, and buy our Treasuries — and a very critical piece:  isolate China.

How do they deal with China? 

The day after Vance’s speech in India, Scott Bessent called out the IMF and World Bank in a prepared speech, for the failure of these Bretton Woods institutions to stick to their mission.  Instead of upholding global stability, they allowed China to (my liberal paraphrasing) corner the world’s exports market through decades of currency manipulation, and in the process become the world’s loan shark. 

In short, Bessent called on the IMF and World Bank to return to their mission (do their jobs).  That would mean policing China.  Curbing it’s manipulative economic practices, which would result in reducing China’s global economic advantage and reducing their geopolitical influence. 

We talked last week about earnings of six of the seven AI kings.

The seventh, Nvidia comes later this month.

And remember, it was two years ago in Nvidia’s May earnings call that Jensen Huang shocked the world, declaring “the beginning of a major technology era.”  He told us there was a “rebirth of the computer industry” underway, where “AI has reinvented computing from the ground up.”

And he told us there was a “retooling” going on across the economy, the beginning of a 10-year transition of the world’s $1 trillion data center, to accelerated computing.

And he had the numbers to back it up.  They grew revenues by 19% that quarter, from just the prior quarter (!), with the outlook to grow over the next quarter by 52% (shockingly huge).

As you can see in the chart, this was the beginning of Nvidia transforming itself into an AI company (growing data center business from 60% of the entire Nvidia business, to now nearly the entire Nvidia business).

We’ve now heard from six of the seven AI kings on Q1.

Remember, just months ago there were questions about whether the huge capex plans from this group would go forward, after the DeepSeek disruption of late January.  

They answered the questions with $300 billion worth of capex planned for 2025. 

Meta just raised its planned capex by 10%.  And Apple just committed to spend $500 billionover four years. 

And Satya Nadella, head of Microsoft, gave several signals this week that the technology revolution is accelerating.   

He said they are bringing on data center capacity (and executing the plan to spend $80 billion in capex this year) but customer demand for those computing resources is outstripping their supply.  

And that has a lot to do with this:  The large language model capabilities are (in his words) “doubling in performance every six months.” 

And clearly there has been a significant breakthrough in the past month or so, as he said Microsoft processed 100 trillion tokens in the quarter, half of that in the past month alone.   

That AI workload processing is up five-fold from a year ago.   

This explosive growth is all about AI agents automating tasks, from designing infrastructure, building and executing marketing plans to developing software. 

With that, we should expect a productivity explosion ahead. 

And hot productivity tends to be very good for economic growth.  

Jerome Powell himself presented back in 2016 at the Peterson Institute (here), that high productivity growth is a driver of a higher long-term potential growth rate of the economy.  

That’s good news.  Because it means we can see real wage growth — the kind that restores purchasing power and quality of life (catching up to the reset in the level of prices). 

And importantly, productivity driven wage gains are non-inflationary because rising wages are offset by rising output. 

So, stepping back from the media and geopolitical noise, this is the big picture — we’re in the early stages of an industrial revolution.

If you want to own the stocks of the companies building the infrastructure to power AI, the companies delivering the capabilities of AI to hundreds of thousands of businesses, and the companies that will best leverage the productivity enhancements from AI, you can find them in our carefully curated AI-Innovation Portfolio.

If you haven’t joined us yet, now is a good time.

In my note yesterday, we talked about the likelihood of a negative GDP number and a soft inflation number in this morning’s data. 

We got both.

So, with this morning’s inflation number, the Fed now has rates set at 200 basis points above the rate of inflation — a historically tight monetary policy stance.  By design, that puts downward pressure on an economy that just contracted in the quarter.

Next up is Friday’s jobs report — where a negative surprise is quite possible.  Remember, government job cuts from the past three months still haven’t shown up in the monthly labor data. 

Of course, a weak jobs number would compound a deteriorating economic picture.  And on that front, we got a warning shot this morning from a soft ADP private payrolls report. 

So, with the above in mind, the Fed meets next week. 

Let’s revisit what Jerome Powell said in March about conditions for adjusting policy, or not:  

“If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”

Also, remember the Fed has been telling us for the past year that signs of “cracks” in the labor market would be a condition to “react” (i.e. with rate cuts). 

We get the first look at Q1 GDP tomorrow.

And it should be negative.

Going in, the latest reading on the Atlanta Fed’s GDP model has the economy tracking at a 2.7% contraction in the first quarter (the green line).

But the Atlanta Fed also estimates that Q1 GDP has been dragged down by more than 5 percentage points because of the impact of imports.

GDP equals consumption + investment + government spending + net exports.  In the current case there has been a massive pull forward of imports to get ahead of tariffs.  And that means a big negative “net exports” drag for GDP.

The good news:  If we normalize for this anomaly in net exports, using 2024 average net exports, GDP for Q1 would be closer to 2% growth (working with the projections in the Atlanta Fed model).

But that won’t stop the media from hand wringing over a negative GDP number.

And then we’ll get the April jobs report on Friday.  And thus far, we haven’t seen the government job cuts reflected in the monthly labor report.  But as we’ve discussed over the past few months, a labor market shock is coming.

Who is on high alert to “unexpected weakness” in the labor market? 

The Fed.

Add to that, we’ll also get the Fed’s favored inflation gauge tomorrow, PCE for the month of March (its inflation target is 2% headline PCE).

And it should be disinflationary. 

Remember, the March CPI came in earlier this month at 2.4%.  And the last time we saw a number that low was September of last year — which happens to be the month the Fed kicked off its easing campaign, with a 50 basis point rate cut.

And based on the CPI and PPI reports, Fed Governor Waller has already given us the Fed’s estimate of where PCE will come in tomorrow.  In a prepared speech on April 14th, he said PCE should be flat for March, and fall to 2.3% for the year-over-year number.

That said, the Fed meets on rates next week.  The market is now pricing in a rate cut for June (a resumption of the easing cycle).  But a negative GDP number, a soft inflation number and a negative surprise on jobs over the next few days would make the Fed meeting next week more eventful.

We heard from Telsa and Google last week, on Q1 earnings.  And we’ll hear from four more tech giants this week.

Remember, just months ago there were questions about whether the huge capex plans from this group would go forward, after the DeepSeek disruption of late January.

But they didn’t flinch.  Instead, they all pressed the accelerator.  In aggregate, they announced $300 billion worth of capex planned for 2025.  Importantly, all in response to “signals of demand.”

Where do they stand now?

For the most recent quarter, Google and Tesla reaffirmed the big capex plans.  And we should expect more of the same from the cohort this week.

From that point, the focus will turn to Nvidia’s earnings, which will come in late May.

With that, the Trump administration has recently blocked Nvidia’s exports to China, which is thought to be about a 10%-15% revenue hit.

But remember, the headwind for Nvidia is supply, not demand.

On that note, Nvidia announced two weeks ago that new capacity for its most advanced chips has just started production in Arizona, and production in Texas is due in 12-15 months.  That will add to global chipmaking capacity which means Nvidia will be able to fulfill more of the demand backlog.

Amazon’s CEO (Andy Jassy) has said that the AI business could be growing faster if not for chip supply constraints.  So, this U.S. onshoring of chipmaking will effectively press the accelerator on the AI revolution.

With all of this, Nvidia remains the most important company in the world, which makes the trend in this chart below (sparked by the “ChatGPT moment”) the most informative about the current stock market environment:  it’s a correction within a long-term structural trend.

Relative to the ChatGPT moment, Nvidia is growing revenue three times faster, is twice as profitable, and yet its shares are cheaper (forward P/E of 24).  Meanwhile, Nvidia’s market position has never been more dominant, and demand has never been more insatiable.

Trump has been turning up the heat on Jerome Powell to restart the easing cycle.

With that, let’s revisit our discussion from earlier this month on the influence of central bank action on turning points in markets. 

Remember, we looked at this five-year chart of the S&P 500 in my April 3rd note …

Each turning point over the past five years was driven by some degree of central bank “dial turning” (i.e. monetary policy adjustment).

And that’s consistent with the history of major stock market turning points — they tend to be directly influenced by central banks.

The most recent turning point (the top in the S&P 500, the global barometer of risk-asset sentiment) also coincided with a central bank event:  a pause in the Fed’s four-month old easing cycle.

So, will the next turning point for stocks be marked by a central bank event?

Likely.

The bigger questions:  

>Will the eventual Fed action come in acknowledgment of their mistake, in misjudging the inflationary outcome of tariffs (which is demand-destructing)?  

>Or will the eventual Fed action come when something breaks in the financial system, resulting from their overly tight policy (which includes extracting $2 trillion of liquidity from the system over the past two years).

Keep in mind, the Fed’s job is to keep the ship in the channel (price stability and full employment), regardless of external forces.  

But the Fed tends to be reactionary — which means they tend to be late.

And because major central banks, generally, are late to adjust policy, they become a primary contributor to market excesses — in both directions.

With all of the above in mind, what did Chicago Fed President Austan Goolsbee say in the midst of the market correction back in August?  “If the economy deteriorates, the Fed will fix it.”

Yesterday, we talked about what seems to be a “Mar-a-Lago Accord” in the offing.

It’s been fourteen days since “Liberation Day” (reciprocal tariff announcements).  And it has been said repeatedly by the Trump administration that over 75 countries are clamoring to do a deal. 

But no deals done. 

Why?

Are they planning on doing a grand coordinated deal, all at once (and probably over a weekend)?  Maybe.

What would it look like, based on what’s been guided by key Trump advisors:  Tariffs get slashed, in exchange for countries opening up their markets, boosting their defense spending, and committing to buy more from the U.S., invest in American manufacturing, and buy our Treasuries — and isolate China.

If we look at the behavior of gold and the dollar, the market seems to be sniffing out such a deal, to include an agreement to devalue the dollar. 

Gold is up 13% since Trump’s 90-day pause on tariffs just one week ago.  The dollar is down 4%. 

That said, in a prepared speech last week, Trump’s top economist (Stephen Miran) dismissed the conventional economic view that trade deficits get fixed, naturally, through currency depreciation.  Not when you have the world reserve currency.   

Instead, he views tariffs as the solution — not currency manipulation.