Unadorned Notes: January 11-14, 2025
Small Business Confidence Hits High; Consumer Inflation Expectations Surge; Stocks Mixed Amid Rate Fears; U.S.-China Trade Imbalance Deepens; Biden Orders AI Infrastructure Expansion
Economics, Finance, and Business
Small Business Confidence Hits High: U.S. small-business confidence surged in December 2024 to its highest level since October 2018, with the National Federation of Independent Business reporting its Small Business Optimism Index rose 3.4 points to 105.1. This marked the second consecutive month the index exceeded its 51-year average of 98, while the Uncertainty Index fell 12 points to 86. Optimism was bolstered by the November 2024 election, which gave Republicans control of the White House and Congress, aligning with the political preferences of many small-business owners. The share of owners expecting economic improvement reached 52%, the highest since 1983, with increased expectations for inflation-adjusted sales growth. However, consumer sentiment showed caution amid concerns over potential trade tariffs and immigration policies.1
Consumer Inflation Expectations Surge: U.S. consumer inflation expectations rose sharply in January 2025, with the University of Michigan survey showing one-year expectations climbing to 3.3%, the highest since May 2024, and long-term expectations matching their June 2008 peak. Concerns over tariffs and immigration policies pledged by President-elect Donald Trump are cited as key factors driving these increases. Consumer sentiment weakened slightly, with the University of Michigan index dropping to 73.2 and the LSEG/Ipsos index falling 3.2 points to 54.4. Economists warn that higher inflation expectations could complicate Federal Reserve efforts, as the central bank projects only two interest rate cuts this year despite maintaining its benchmark rate at 4.25%-4.50%.2
U.S. Bourbon Market Declines: The U.S. bourbon industry faces a sharp downturn, with declining sales, oversupply, and reduced demand for premium spirits. Smaller distillers are struggling the most, as large inventories and shifting consumer preferences toward cheaper alcohol, low-alcohol drinks, and cannabis reduce profitability. Export uncertainties, including potential tariffs on American whiskey, add to the challenges, as producers fear a domestic glut if foreign sales decline. Some distillers are scaling back production, delaying expansion, and cutting jobs, while others, like Bardstown Bourbon, see opportunities to invest during the slowdown. Analysts warn that the industry’s current correction follows years of overproduction fueled by rapid growth and speculative investments.3
Stocks Mixed Amid Rate Fears: U.S. stocks closed mixed on Monday and Tuesday as rising bond yields and a stronger dollar dampened hopes for near-term Federal Reserve rate cuts ahead of key inflation data. The S&P 500 rose after earlier losses, while the Nasdaq Composite fell, weighed down by declines in major tech stocks. The Dow Jones Industrial Average rose, bolstered by non-tech components. The 10-year Treasury yield climbed to a 14-month high of 4.8%, reflecting investor concern over prolonged high interest rates following strong jobs data. Oil prices briefly surged to five-month highs amid tighter U.S. sanctions on Russian crude, while Moderna shares dropped 16% on reduced vaccine sales forecasts.4
U.S. Tightens AI Chip Exports: The Biden administration announced new export restrictions on advanced AI chips to prevent rivals like China from acquiring sensitive technology, citing national security concerns. The rules, which create a tiered framework for global exports, have sparked criticism from companies like Nvidia and Oracle for potentially undermining U.S. leadership in AI innovation. Rising bond yields and regulatory uncertainties, including these restrictions, have pressured the technology sector, with Nvidia and AMD experiencing stock declines. Meanwhile, energy stocks remained resilient, as crude oil prices hit three-month highs following new U.S. sanctions on Russia’s crude exports.5
U.S.-China Trade Imbalance Deepens: China’s trade surplus reached nearly $1 trillion in 2024, mirroring the U.S. trade deficit of similar magnitude, though only a third of each country’s imbalance was with the other. The Trump administration’s proposed tariffs to address the U.S. deficit may shift trade flows to other nations rather than reduce the overall gap. China’s exports, which rose over 12% last year, heavily rely on manufactured goods, while its imports remain concentrated in natural resources. Developing countries face mounting debts to finance Chinese imports, exacerbating global trade disparities, despite Beijing’s efforts to waive tariffs for poorer nations. Experts argue that mutual investments, rather than tariffs, could better address trade imbalances, though political resistance remains strong in the U.S.6
India Promotes “China Plus One”: China’s export restrictions on critical equipment have disrupted Indian industries such as electronics, solar panels, and electric vehicles, slowing production and increasing costs. In response, India is implementing the “China Plus One” strategy to attract manufacturers seeking to diversify supply chains away from China. Key measures include the Production-Linked Incentive (PLI) scheme, which has bolstered local smartphone production and drawn investments from global firms like Apple and Foxconn. Relaxed investment policies and foreign capital inflows are further positioning India as an alternative manufacturing hub. These initiatives aim to reduce reliance on Chinese imports while fostering long-term industrial growth and global competitiveness.7
Dubious Ties Cloud Gulf Finance: Recent fraud cases involving individuals falsely claiming Gulf royal affiliations highlight risks in the $1 trillion family office market. Minimal regulation in the UAE and cultural sensitivities around questioning royal links complicate due diligence, allowing some to exploit perceived connections to ruling families. These incidents have cast a shadow on reputable family offices, such as those linked to Sheikh Tahnoon bin Zayed Al Nahyan and President Sheikh Mohamed bin Zayed Al Nahyan. International pressure, including recommendations from the Financial Action Task Force, urges the UAE to strengthen oversight to combat financial crimes and enhance transparency. Competing financial hubs like Singapore are leveraging stricter regulations to attract global wealth, contrasting the UAE’s relatively lenient approach.8
U.S. Politics, Policies, and Geopolitics
Special Counsel Defends Trump Probe: Special Counsel Jack Smith’s final report defends his investigation into Donald Trump’s alleged efforts to overturn the 2020 election, calling it an “unprecedented criminal effort”. The report argues Trump’s presidency shielded him from prosecution, despite prosecutors’ confidence in their evidence. Smith revealed his team considered charging Trump with inciting insurrection but deemed the statute too risky due to its untested legal history. The report also addresses Trump’s co-conspirators, noting charges were considered but not pursued before the case ended with Trump’s election victory. Attorney General Merrick Garland rushed to release the report before leaving office, despite Trump’s attempts to block its publication.9
Biden Orders AI Infrastructure Expansion: President Joe Biden signed an executive order to accelerate the development of AI infrastructure, including data centers and clean energy facilities, on federal lands. The initiative aims to address the rising energy demands of advanced AI while ensuring projects align with environmental and community standards. Developers will finance construction and clean energy integration to prevent costs from impacting consumers. The order also directs studies on electricity pricing and water usage to mitigate the environmental impact of AI operations. Industry groups have welcomed the move, though concerns persist over water consumption and implementation under the incoming administration.10
SEC Sues Musk Over Twitter: The SEC filed a lawsuit against Elon Musk, alleging he delayed disclosing his purchase of Twitter shares in early 2022, violating regulatory requirements. The late disclosure allegedly allowed Musk to save $150 million by acquiring shares at artificially low prices, to the detriment of other investors. The agency seeks civil penalties and disgorgement of Musk’s alleged unjust enrichment. Musk and his attorney dismissed the case as politically motivated and criticized the SEC’s actions as harassment. This lawsuit adds to Musk’s history of disputes with the SEC, including a 2018 settlement over misleading Tesla-related statements.11
Impeached South Korean President Arrested: South Korean authorities detained impeached President Yoon Suk Yeol on charges of insurrection following a dramatic police raid on his official residence. Yoon, who was impeached last month for attempting to impose martial law to target political opponents, had ignored three summonses for questioning. The raid involved 3,200 officers and resulted in the arrest of Yoon’s acting security chief after a tense standoff. Yoon faces multiple investigations, including a Constitutional Court review of his impeachment, which could permanently remove him from office. His actions have triggered South Korea’s worst political crisis in decades, with protests and international scrutiny intensifying.12
Maduro Sworn In Amid Condemnation: Nicolás Maduro was sworn in for a third term as Venezuela’s president, despite international allegations of election fraud and widespread criticism. Opposition leader Edmundo González, recognized by several nations as the rightful president, remained in the Dominican Republic after threats of arrest. The U.S. and other nations imposed new sanctions on Venezuelan officials and raised the bounty for Maduro’s capture to $25 million. Maduro rejected allegations of fraud and accused foreign powers of interference, while Venezuela closed borders with Brazil and Colombia ahead of the inauguration. The country remains mired in economic and political turmoil, with millions of citizens having fled under Maduro’s rule.13