The Watchdog – Home and Abroad
Scott B. MacDonald, Ph.D. - Smith’s Research & Gradings – September 15, 2025
Summary: This week’s big event is the Fed’s September 16th-17th FOMC meeting. We expect, like most analysts, to see a 25-bps rate cut. Finally! Labor market weakness is too significant to be ignored. We also expect that the Fed meeting will indicate two more cuts this year and leave the door open to more in 2026. Although the earnings season is almost over, FedEx’s results will be worth poking through; the company is seen as a bellwether to the US and global economies. Geopolitics also remain a consideration, including Russia’s drone incursion into Poland, the Israeli attack on Hamas bigwigs in Qatar and more French political drama. Furthermore, the assassination of rightwing activist Charlie Kirk reflects a deepening polarization of US politics, especially as one of his hallmarks was to hold events on university campuses and discuss issues with people who often held opposite views. Shut down dialogue and the exchange of ideas and you shut down democracy.
Home Headlines
Hurry up Fed. The Fed is widely expected to cut interest rates by 25 bps on September 17th. There is an outside chance for a 50-bps cut. The cooling labor market has finally overtaken rising inflation as the Fed’s main concern. This was reinforced by the September results from the University of Michigan Consumer Sentiment Index which fell to 55.4, the lowest level since May, indicating a continued decline in consumer confidence based on concerns about cooling labor market, persistent inflation, and the negative impact of tariffs. We would expect Fed language supportive of two more cuts and the possibility of more in 2026. However, inflation has not gone away: August’s CPI showed stubborn price pressures in food, vehicles and household goods. This keeps the Fed’s mission complicated, though the trajectory is for lower rates through the medium term.
A brighter outlook for markets. With the Fed likely to loosen monetary policy, several Wall Street houses have upped their forecasts for equities. Deutsche Bank, Wells Fargo, Barclays, and Yardeni Research have raised their S&P 500 targets due to their belief that lower rates will help housing, construction and debt repayments; earnings are likely to remain resilient; and the AI investment surge is just starting. Let’s hope they are right. Equity markets are already hitting record highs and corporate and municipal bonds are tight despite considerable supply. Speed bumps always lurk, especially when things seem to be going well.
Homeowners insurance is at record highs and scaring off some buyers. Homeowners insurance premiums are hitting record highs, making homebuyers increasingly concerned about their ability to afford houses. According to ICE Mortgage Technology, the average single-family homeowner is now paying close to $2,370 a year for property insurance. Concern about this is reflected by Realtor.com survey of recent and prospective homebuyers: 75% are worried that they may be unable to afford insurance in the future, and close to 90% are bracing for higher prices. Those states most affected are California, where the market is adjusting to new regulations and January’s wildfires, and North and South Carolina, which experienced heavy flooding in 2024.
Clouds in my coffee. Retail coffee prices posted their sharpest year-on-year rise of this century. According to the US Bureau of Labor Statistics (BLS), ground coffee hit a record $8.87 a pound in grocery stores in August, the fastest clip since 1997. Even if you think BLS statistics are suspect, you only have to go into a grocery store or a Starbucks to drink the pain of higher prices. Why are coffee prices so high and about to get higher? One factor is drought which has hit Brazil and Vietnam has caused global supply shortages. Brazil is the world’s largest producer of Arabica beans and Vietnam is the largest producer of Robusta beans. And a 50% tariff on goods from Brazil imposed by President Trump is about to go into effect. Prices had already started to climb in July, when the 50% tariff was announced. The South American country has historically supplied around a third of the beans consumed in the US. According to Vizion, imports from other major producers, such as Vietnam and Colombia, have not filled the gap. Thus far surplus inventory has kept Americans caffeine-fueled, but that is running down and at some point, stocks must be replenished. As filmmaker David Lynch said, “I like cappuccino, actually. But even a bad cup of coffee is better than no coffee at all.”
Abroad Headlines
Russian drone incursion into Poland ‘was Kremlin test on NATO reaction’, says Warsaw. Poland’s foreign minister, Radoslaw Sikorski, stated that last week’s Russian drone incursion was an effort by the Putin regime to test NATO’s reactions by incremental escalations without prompting a full-scale response. The Polish foreign minister noted that the drones that reached Poland were not loaded with explosives, which led him to conclude “that Russia tried to test us without starting a war.” NATO announced that it will deploy more jets to the alliance’s eastern flank to deal with future drone attacks. Meanwhile, another Russian drone penetrated Romanian air space, which resulted in the country scrambling aircraft. The bottom line is that Putin is sending a message – I can reach you if I want to. NATO’s scrambling and supporting Poland is a good thin but there is more testing to come.
Raising pressure on Venezuela. Tensions in the Southern Caribbean are not going away. The Trump administration continues to raise the pressure on the Maduro regime. In August President Trump ordered US warships offshore of Venezuela in an anti-drug trafficking exercise, which led to the sinking of a ship alleged to be used by narcotraficantes. Since then Venezuelan aircraft flew around US ships, the US sent five F-35s to Puerto Rico to support the US flotilla, and most recently, a Venezuelan fishing ship was halted and inspected by US Navy personnel and then released. While the issue of a drug war with Venezuela has merits considering the regime’s active participation in the illicit transit of cocaine, gold and oil, the country is also a security threat to nearby Guyana (of which it claims two-thirds), Suriname, and Trinidad and Tobago, three important parts of the global energy system and US allies. The risk is that as the US keeps up the pressure on the Maduro regime a shooting incident could escalate into something bigger. Add to this, Trump has not hidden his wish to end the Maduro dictatorship. A further complication in US-Venezuelan tensions is the friendly nature of the regime with Cuba, China, Iran and Russia, making the South American country a hotspot in global geopolitical gamesmanship.
France’s sovereign ratings downgraded. Following the vote of no confidence in the government of Prime Minister François Bayrou (who lasted only nine months), the US rating agency Fitch downgraded France’s sovereign debt rating from AA- to A+. According to the rating agency, the turmoil caused by the repeated collapse of governments since the snap parliamentary elections in 2024 has eroded the country’s ability to implement “far-reaching fiscal consolidation”, and that it is unlikely to reduce the public deficit to below 3% of GDP in 2029. France’s fiscal deficit is one of the highest in the Eurozone at 5.8% in 2024 (similar to the US fiscal deficit). Fitch also forecasts that France’s debt will rise from 113.2% of GDP in 2024 to 121% in 2027, “with no clear prospect of stabilization in the following years.” Adding to the mix is the run-up period to the 2027 presidential elections, which are likely to limit the scope for fiscal consolidation, not to mention the likelihood “that the political impasse will continue beyond the election.” President Macron has appointed loyalist Sebastien Lecornu as prime minister, who is the fifth to be sworn in since 2022. He enters the fight with a minority in parliament and an angry public spearheaded by a new grassroots movement “Let’s Block Everything” (Bloquons tout), which held widespread anti-Macron demonstrations in France last week. Opinion polls show that two-thirds of French people want the President to stand down…
