Employment Is Heating Up, But So Is Inflation

Ed Yardeni:

As we’ve been predicting in recent months, labor market conditions are improving, while inflationary pressures remain elevated. We expect the FOMC will shift to a tightening bias at the June meeting of the Fed’s policy-setting committee and will probably hike the federal funds rate in July if current trends persist.

The prices-paid component of the NM-PMI survey rose to 71.3 in May, the highest since August 2022. The prices-paid index for the M-PMI was even higher at 82.1 last month (chart). Both confirm that inflationary pressures remain significant due to the energy shock, supply chain disruptions, and tariffs.

The Weekly Economic Index, which aggregates 10 high-frequency daily and weekly data series to track real-time US economic activity, rose to 3.2% for the week of May 29, its highest reading since August 2022. This suggests that real GDP is growing around 3% y/y.

We are also counting on productivity growth to keep a lid on unit labor costs inflation (ULC). So far, so good. Today’s revisions for Q1 reduced the growth rates of both productivity and hourly compensation. Productivity is still up nicely at 2.8% y/y, while hourly compensation increased 3.3%. So ULC inflation is now down to just 0.5% y/y during Q1.

This measure of the underlying inflation rate in the labor market is providing a strong disinflationary offset to the inflationary energy shock from the war. ULC inflation rose sharply during 2021 and 2022.

Ed then surprises with this: “The FOMC should pivot toward tightening monetary policy to avert a renewed wage-price spiral and to cool speculative excesses in the stock market.”

The Margin Inflection

From Goldman Sachs’ Eurozone team:

YTD, the increase in consensus forward EPS estimates has outpaced the STOXX 600 price gain. However, this masks a more fragile underlying picture. Excluding Commodity producers, earnings have been revised down year to date. Revenues have remained broadly stable on resilient global nominal growth, leaving margins as the main driver of negative revisions.

Survey data points to a clear inflection in margin momentum. Margins are driven by changes in growth, not its level, and the Composite PMI has just recorded its first back-to-back contraction since 2024. At the same time, pricing dynamics are deteriorating: PMI Input Prices are rising faster than Output Prices, pushing the spread, a proxy for margin pressure, close to historically low levels

 

The market is reassessing pricing power. Investors are no longer rewarding margin levels mechanically. The key question is sustainability. The premium for high-margin companies has declined.

Historically, firms with net margins above 11% traded at around a 30% P/E premium to low-margin peers, reflecting pricing power and competitive moats. That premium expanded post-GFC and again post-COVID.

It is now compressing and sits below its 10-year average, signalling a shift in how profitability is priced. The adjustment is driven by multiple compression at the top end rather than a re-rating lower down.

Pricing power dispersion still has further to run. The “strong pricing power” cohort, where both COGS and margin estimates are being revised up since the start of the Middle East conflict, continues to benefit from positive EPS revisions.

Year to date, 2026 EPS has been upgraded by 2% for these names, while “weak pricing power” companies, defined by rising COGS and falling margins, have seen downgrades of 10%, a revision spread of 12pp.

Wondering about the US?

Manufacturing PM prices:

Manufacturing and services:

Goldman Sachs’ US team:

The war put upward pressure on input costs and downward pressure on company margins. Our company price announcement tracker—which captures both prices paid and received—increased to its highest level since late 2023.

When discussing higher prices, companies most frequently mentioned the impact of higher oil prices but also noted increases in the costs of shipping, resin-based materials, and computer memory.

Companies expect higher input costs to put downward pressure on margins in Q2: analysts revised their margin expectations—a proxy for corporate guidance—down the most in the sectors for which our price announcement tracker increased the most.

Meanwhile

Data: Financial Modeling Prep; Chart: Noah Bressner/Axios

The K economy and the two-speed equity market.

Let’s not forget private markets as ADG reports. Declining margins can hit broadly.

Swinging Doors

Another day, another gate: Blackstone will accommodate only half the $4.5 billion in redemption requests logged for its flagship, $45 billion (exclusive of leverage) BCRED private credit vehicle during the second quarter liquidity window, the firm relayed in a Thursday securities filing.

The world’s largest alternative asset manager will stick with its prevailing 5% quarterly ceiling after honoring all 7.9% of withdrawals requested during the prior period. Blackstone’s March move left peers “frustrated” per the Financial Times, as the accommodation set an unwelcome precedent for other semi-liquid fund managers struggling with rising redemption pressures.

There’s a lot of that going around. On Tuesday, private credit manager Cliffwater disclosed that redemption requests in its $31 billion Corporate Lending Fund reached 17% of assets during the second quarter, up from 14% during the prior period. Cliffwater likewise applied its preexisting 5% limit to cash outflows this time after permitting 7% redemptions in the first quarter.

Those growing exits queues accompany deteriorating fundamentals across the direct lending domain. Downward credit estimates among Moody’s-assessed middle market firms outpaced upgrades at more than a 5:1 clip last year, helping push the share of triple-C-rated credits within that category to 34% from 15% in 2022.

The share of U.S. private credit borrowers now servicing their obligations with additional debt rather than cash (i.e., payment-in-kind) reached 11% in the fourth quarter per Lincoln International, up from 5.1% in March 2022. Over the same period, the ratio of so-called bad PIK, or borrowers who needed to amend loan terms to do so, rose to 6.4% from 2.3%.  

“There’s a lot going on beneath the surface,” PIMCO chief investment officer Daniel Ivascyn told Bloomberg this morning, predicting that credit markets have entered their first sustained default cycle in years even as benchmark high-grade and junk spreads each remain near their tightest levels in more than a decade.

Suzanne Gibbons, head of research at Davidson Kempner, added that some capital structures established during the mini-rate era of 2020 and 2021 “don’t make sense today.”

Investors positioned lower on the repayment hierarchy are all ears. Yesterday, Swiss private equity firm Partners Group announced it has capped withdrawals at its flagship, $8.6 billion Europe-focused vehicle at 5% after fielding second quarter redemption requests equivalent to 9.8% of assets during the second quarter, with the fund remaining gated in June and the 5% limit set to remain in force during the third quarter. 

“You do see investors broadly, after [spurring] redemption pressure within private credit for a number of quarters, now starting to redeem other asset classes,” commented CEO David Layton on Bloomberg Television Wednesday.

What happens in the Alps stays in the Alps? As PitchBook noted Tuesday, “a surge in loan defaults by sponsor-backed businesses would be critical for lenders. . . but potentially catastrophic for funds that hold shares in those businesses, as they are last in line to recover their money in the event of bankruptcy.”

“The Little Excursion”

Fitch Cuts Global Growth Outlook in Latest Downgrade to Capture Mideast Impact The ratings firm now expects the world economy to grow 2.4% this year

The ratings firm now expects the world economy to grow 2.4% this year, down 0.2 percentage points from its previous projection, citing the inflationary impact of higher energy costs and ongoing supply disruptions.

“Forecast cuts have been widespread as higher inflation squeezes real wages, dampens consumption and raises companies’ input costs,” Fitch economists said in a report. (…)

Under a more adverse scenario in which oil averages $100 barrel in 2026, equity prices fall by 10% and credit conditions tighten, growth in the U.S. could fall to just 0.8% over the next 12 months to 0.3% in the eurozone and 3.4% in China, it said.

In its baseline forecast, Fitch expects the U.S. economy to grow 1.9% and the eurozone economy 0.9%, both lower than previously projected. China’s growth forecast, however, was raised to 4.6% after a stronger-than-expected first quarter and resilience in export performance. (…)

The world is in the midst of “a very pronounced boom in global spending on IT and that is cushioning the impact on activity in the near term, particularly in Asia,” said Brian Coulton, chief economist at Fitch.

The AI buildout has fueled relentless appetite for chips and related products, providing a tailwind for tech-exporting economies like Taiwan and South Korea.

But while that is driving record gains in equities markets, bolstering corporate profits and buoying the broader economy, Fitch warned that a material slowdown in global growth could stop the momentum in its tracks.

Global Food Prices Steady Near Highest Level in Three Years

(…) The Iran war has choked flows of fuels and fertilizers through the Strait of Hormuz, sending prices of key farm inputs soaring. That’s pushed up the cost of growing corn, rice and other foodstuffs, while some of the world’s top growers are already warning of lower yields and production. (…)

The FAO warned last month the closure of the Strait of Hormuz is the start of a “systemic agrifood shock” that could spur a major food price crisis within the next six to 12 months.

“Such crises tend to be a slow burn in their effects,” said Tim Benton, professor at Leeds University in the UK and an expert in food security. “Raised fertilizer prices today will affect future harvests and supply. Logistical delays and increased costs will feed through into food prices in store more toward the end of the year.” (…)

In the US, where grocery prices already rose by the most in almost four years in April, economists expect the war to add to price pressures into 2027. In Europe, wallets will be hit by Christmas, Rabobank said, and in the UK, more than four-fifths of food and drinks producers plan to raise prices, according to a survey from the Food and Drink Federation.

“The next year to 18 months will be crucial in terms of the likelihood of significant food price inflation,” Benton said by text message.

The food security situation can be further complicated by the weather. A likely ‘super’ El Nino, a cyclical weather phenomenon that can drive flooding in one continent and drought in another, could hurt crops.

BOE Survey Finds Businesses Expect to Raise Prices at Faster Rate The survey suggests businesses are reluctant to respond if workers demand higher wages to cover the costs of higher energy bills

U.K. businesses polled in May expected to raise their prices at a faster rate, but wage increases were seen slowing, according to a Bank of England survey released Friday.

Some 2,086 chief financial officers were questioned between May 8 and 22, with energy prices having jumped after the attacks on Iran in late February and remained high since.

The survey found that businesses expected the prices they charge to rise by 4% over the coming 12 months, an increase from the 3.8% expected in April. Businesses reported that the prices they charge increased by 3.8% in the year to May.

(…) the survey suggests that businesses are reluctant to respond if workers demand higher wages to cover the costs of higher energy bills. The CFOs expected the wages they pay to rise by 3.4% over the coming 12 months, unchanged from April.

In the year to May, they reported that wages rose by 4.3%, and are therefore expecting a significant slowdown over the coming 12 months. (…)

In response to a separate line of questioning focusing on the impact of the conflict in the Middle East, 57% of businesses said they intend to raise their prices as a result, while just 5% expected to lower prices.

However, some 68% of businesses expected their profit margins to be lower as a result of the war, an indication that they don’t expect price rises to fully cover the increase in their costs. (…)

In the USA:

Source: Department of Commerce, Goldman Sachs Global Investment Research

Taiwan Inflation Tops Central Bank Alert Level on Oil Prices

Mitsubishi UFJ AM Says BOJ May Need Jumbo Rate Hike to Boost Yen

Mitsubishi UFJ Asset Management said a larger or out-of-cycle Bank of Japan rate hike can’t be ruled out, warning that an expected increase this month may not be enough to prevent further declines in the yen and Japanese government bonds.

“To stop yen weakness, 25 basis points is not enough,” said Masayuki Koguchi, executive chief fund manager at Mitsubishi UFJ Asset Management, one of the nation’s biggest investment firms. “If inflation starts to accelerate, there’s a chance that the BOJ could hike by 50 or 75 basis points at one meeting.” (…)

A rate increase of more than a quarter percentage point, or a move outside the BOJ’s scheduled policy meetings, would come as a major surprise to economists and investors. The last time the BOJ raised its policy rate by more than 25 basis points was in August 1990, when it delivered a 75-basis-point hike during Japan’s asset bubble. The central bank has not raised rates outside scheduled meetings since introducing a fixed policy meeting calendar under the BOJ Law that took effect in 1998.

But Mitsubishi UFJ’s view underscores growing concern that the BOJ may need to surprise markets to meaningfully influence the nation’s currency and bonds.

Mizuho Financial Group Inc.’s chief executive officer Masahiro Kihara said last week that the BOJ might be better off considering an outsized interest-rate increase to combat inflation. Nomura strategists also argued that for investors to shift to a more bullish stance on the yen, Governor Kazuo Ueda would need to signal the possibility that the BOJ may accelerate the pace of its tightening cycle or offer some indication that a one-shot 50-basis-point hike could be on the table at some point in the future.

Amir Anvarzadeh, strategist at Asymmetric Advisors who has covered Japan markets for 37 years, said that the BOJ is “years behind the curve.”

“Japan’s currency crisis is brewing,” he said. “If the BOJ doesn’t raise rates in its next meeting or if it doesn’t raise rates by say 50 basis points, I think the yen is toast and interventions will continue to be futile.” (…)

ECB to Hike Twice With Inflation Above Comfort Zone, Poll Shows

The European Central Bank will respond to the Iran war by raising interest rates twice this year before them keeping steady for longer than previously thought, economists say.

A Bloomberg survey conducted May 29-June 3 shows that all respondents but one anticipate a quarter-point hike at next week’s meeting, with most of them seeing another such step before the end of the year. That would bring the deposit rate to 2.5%. (…)

Euro-area consumer price-growth jumped to 3.2% from 1.9% over the first three months of the war, and is likely to accelerate further. That’s mainly due to direct effects from the surge in energy costs, but policymakers worry that such pressures could increasingly spill over into broader inflation via wages and corporate price-setting.

“The ECB will sell the hike as defending credibility,” said Arne Petimezas, head of research at AFS Interest. “With core inflation slightly above target before the war, it has no choice anyway but to hike.” (…)

Hawkish Executive Board member Isabel Schnabel this week warned that the risk of a de-anchoring of inflation expectations is rising. But three-quarters of respondents in the survey so far don’t see any evidence of such a development.

They do agree with the assessments of Schnabel and Chief Economist Philip Lane that the ripple effects of the war will be felt for quite some time, even after a peace deal is reached. Seventy-five percent of respondents said that could be the case for six months or even longer.

Speaking of credibility:

Musk Leaves Investors Starstruck at Dimon’s SpaceX Extravaganza

Elon Musk can still enchant investors with his vision of the future.

Any questions about SpaceX’s record-breaking initial public offering — be it about the valuation, the company’s trajectory or technical execution — were brushed aside as the retail marketing for the deal got under way. Smitten with the world’s richest man and lauding his character, many participants at an investor event hosted by Jamie Dimon at JPMorgan Chase’s headquarters chose to focus on the big picture.

“It was an epic event,” said Sidd Pagidipati, founder and chairman of Ayon Capital. “This company I think will be the biggest, largest, most iconic company in human civilization.” (…)

Some research analysts are telling would-be buyers that their models show 100 times revenue growth for SpaceX’s AI division by the end of the decade, to help justify the targeted valuation of $1.8 trillion. For the investors emerging from the JPMorgan event, those numbers sounded entirely justified.

It’s “not an outrageous valuation for the company,” said Dylan Hixon, president of Arden Road Investments, who’s gained exposure to the company over the years through venture funds and Special Purpose Banks. He estimates SpaceX comprises around 20% of their entire portfolio, and says they will continue to invest after the IPO. “This is a generational company.”

Several investors Bloomberg spoke to said they had not read the prospectus, which details ambitions like building a colony on Mars and a $28.5 trillion total addressable market. But Musk’s chat with Dimon, in which the billionaire detailed his vision for big ideas like space travel, vacations on the Moon and a Mars colony, swept the enthusiastic crowd along.

“He’s very prescient and a futurist. I’m a believer in what he does” Oliver Grace, chief executive officer of Grace Family Office, said in an interview. Grace said the event shored up his confidence because it showed “a lot of very serious people backing his venture.”

Ronald Baron, an ardent SpaceX bull and founder of Baron Capital, which manages nearly $50 billion in assets, intends to invest a billion dollars more in the company after it goes public — on top of its already over $15 billion stake in the company. The Baron Partners fund has about 33% exposure to SpaceX and more than 20% to another Musk venture, Tesla Inc., according to data compiled by Bloomberg.

“This guy has a dream, plus he’s a really good man with a great heart and brilliant guy, and he does things for humanity, not just for himself,” Baron told Bloomberg. He envisions that the SpaceX businesses will eventually generate “trillions and trillions and trillions of dollars a year of revenues.”

Is it me or are all the quotes above from people talking their book?

SpaceX, Other Mega IPOs Denied Fast Index Entry by S&P

S&P Dow Jones Indices will keep its existing eligibility requirements for benchmarks including the S&P 500, closing the door to fast entry for big tech IPOs like SpaceX and delaying billions of dollars in flows from passive funds.

The index provider in a press release Thursday said it will not shorten the 12-month seasoning period for newly public companies it currently has or waive existing profitability and public-float requirements based on a company’s size, diverging from a broader industry shift embraced by rivals Nasdaq Inc. and FTSE Russell.

For new listings like Elon Musk’s SpaceX, the denial means they won’t be greeted by a wall of demand from funds that track the S&P 500. Their fast inclusion in the benchmark would have led to about $14 billion in forced passive buying for SpaceX, more than $8 billion for OpenAI and about $4.6 billion for Anthropic PBC, according to Bloomberg Intelligence estimates.

The outcome means SpaceX, which is preparing what could become the largest IPO in history, would not be eligible for inclusion in the S&P 500 until at least one year after its listing. The company would also need to satisfy the index’s existing requirements for profitability and public float.

“I am genuinely surprised,” said James Seyffart, ETF analyst at Bloomberg Intelligence. “But S&P is the market leader and they can buck the trend.”

Nasdaq changed its rules recently so Space Exploration Technologies Corp., as the company is formally known, can join the Nasdaq 100 Index, a cohort of the largest non-financial companies listed on its exchange, in just 15 trading days, down from a three-month minimum. FTSE Russell adopted a similar approach, shortening the waiting time to five trading days.

The S&P 500 is the most heavily tracked equity benchmark in the world. About $7.5 trillion in passively managed funds follow it and another $3.4 trillion in actively managed assets are benchmarked against it, according to Bloomberg Intelligence data.

More broadly, passive, domestic equity index mutual and exchange-traded funds in the US held roughly $14.4 trillion in assets at the end of April, according to Investment Company Institute data, underscoring the scale of capital that generally cannot buy a stock until it enters a benchmark index. By comparison, active funds amounted to $8.2 trillion. (…)

“The S&P Dow Jones index committee deserves credit for maintaining the standards that made the S&P 500 the U.S. equity market benchmark.”

FT Alphaville:

(…) We’ve now got quite a variety of approaches across index providers.

• MSCI and FTSE Global already had fast-tracking for mega-IPOs using free-float weights after 10 and five trading days respectively.
• FTSE Russell switched methodology on their Russell indices to bring them into line with the FTSE Global rule book a couple of weeks ago.
• Morningstar CRSP has dropped their minimum free-float requirement to admit SpaceX and the rest of the likely floaters after only five days.
• And Nasdaq — they’ve cleared a path for fast-track index inclusion at a three-times weight, but only after 15 days.

To make this all easier on the eye and brain, we’ve recoloured our top index chart showing where this leaves money benchmarked and indexed to the largest individual stock indices:

All this got us wondering: is passive the new active?

The Wall Street Mania Pushing Knicks Tickets to $176,000

(…) Getting close to the action at such live events confers status, said Jaclyn Sienna India, founder of the concierge agency Sienna Charles. Think Taylor Swift madness for finance bros, with Jalen Brunson jerseys instead of friendship bracelets. A ticket is a rare opportunity to mingle in VIP areas over sushi rolls, not to mention fodder for Instagram posts or a chance to appear on television.

India’s firm arranges travel and other experiences for dozens of members—most of them in private equity—with net worths ranging from tens of millions to billions. The lower end of that spectrum tends to shell out more “because they have the most to prove,” she said. Her team already booked Knicks tickets as expensive as $176,000 apiece.

“If you’re not there, you’re a loser,” she said of the psychology behind such purchases. (…)

AI in action:

The quote you shared captures the timeless psychology of conspicuous consumption, status-seeking, and FOMO (fear of missing out) among the ultra-wealthy. Throughout history, whenever massive economic booms created vast sums of new wealth, the elite turned to staggering extravagance to prove their social standing.

Ancient Rome’s Patrician Era (Late Republic / Early Empire): Roman conquests flooded the capital with unimaginable wealth, land, and enslaved labor, creating an ultra-rich class of senators and generals. Wealthy Romans like Crassus and Lucullus used financial excess to buy political influence and social envy. Lucullus was famous for throwing banquets that cost the modern equivalent of hundreds of thousands of dollars for a single night, featuring exotic birds, sea monsters, and mountains of food. The concept of luxuria became a tool; if a politician did not host grand games or build massive villas, they lost their social standing.

Extreme wealth inequality stripped the working class of land, breaking Roman political norms. This polarization fueled a century of bloody civil wars, slave revolts, and political assassinations that ultimately destroyed the Roman Republic.

The Gilded Age (Late 19th Century United States): The rapid expansion of railroads, steel, and finance created America’s first multi-millionaires (like the Vanderbilts, Astors, and Rockefellers). Wealthy tycoons hosted competitive, hyper-exclusive parties to secure their spot in high society. A famous example was the 1897 Bradley-Martin Ball at the Waldorf-Astoria Hotel. The hosts spent the modern equivalent of millions on a single night, transforming the hotel into a replica of Versailles. Guests wore costumes dripping in real jewels and historical royal heirlooms just to signal they belonged in the elite “Four Hundred” social circle.

The Panic of 1893 shattered the economy, sparking a deep four-year depression. Public outrage over wealth inequality triggered the Progressive Era, bringing trust-busting laws, worker protections, and the introduction of the federal income tax.

The Roaring Twenties (1920s Western World): A booming stock market, industrial mass production, and easy credit fueled a decade of unbridled economic optimism. This era birthed the exact “if you’re not there, you’re a loser” mentality dramatized in The Great Gatsby. The newly rich threw lavish, multi-day estate parties, bought fleets of custom luxury cars, and traveled on opulent transatlantic ocean liners. Buying expensive art, funding underground speakeasies, and flaunting wealth during Prohibition became the ultimate status symbol for Wall Street’s sudden winners.

The infamous Wall Street Crash of 1929 wiped out billions of dollars in wealth in days. It plunged the global economy into the decade-long Great Depression, replacing lavish parties with breadlines and mass unemployment.

The “Greed is Good” Era (1980s Wall Street): Financial deregulation, corporate mergers, junk bonds, and a massive bull market minted a new class of hyper-aggressive investment bankers and corporate raiders. Much like today’s private equity boom, the 1980s Wall Street elite used wealth as a scorecard. This era was defined by six-figure corporate entertainment tabs, massive penthouses in Manhattan, and ostentatious displays of luxury. Memorably, corporate executive Saul Steinberg threw a legendary 50th birthday party in 1989 that featured living tableaux of Flemish paintings and cost millions—acting as a pure display of financial dominance.

The Dot-Com Bubble (Late 1990s Silicon Valley): The meteoric rise of the internet created overnight paper billionaires and multi-millionaires, many of whom were in their 20s and 30s. Young tech founders with “more to prove” engaged in wild spending. Companies with zero profit spent $2 million on single Super Bowl commercials just for bragging rights. Extravagant corporate parties featured performances by massive rock stars, and the newly rich bid up the prices of Silicon Valley real estate, private jets, and luxury sports cars to unprecedented heights before the crash in 2000.

The tech-heavy NASDAQ peaked in March 2000 before losing nearly 80% of its value. Trillions in paper wealth evaporated overnight. Hundreds of internet startups went completely bankrupt, and Silicon Valley faced a harsh multi-year recession.

Financial Market News

• Five Ideas for Reducing Income Inequality

I will not bore you with what economists told the WSJ: yaddi, yaddi, yadda…

But here’s one way the mega-rich are pushing…

The AI boom was the main driver overall for rich people’s wealth last year, says Luca Russignan, global head of Capgemini Research Institute for Financial Services.

The general public may soon get access to those same assets, particularly through mega-IPOs later this year, but likely won’t see the same returns as early-stage investors. (Axios)

Data: Capgemini World Wealth Report. Chart: Emily Peck/Axios

Elon Musk’s SpaceX lines up retail investors for record IPO allocation

SpaceX is preparing the largest retail allocation ever attempted in a megacap IPO, with Elon Musk seeking to reserve as much as a quarter of the company’s $75bn float for individual investors.

According to people familiar with the move, the billionaire chief wants to place small shareholders near the centre of the rocket and satellite group’s ownership from the outset, reflecting Musk’s longstanding preference for retail investors over Wall Street institutions. (…)

The world’s richest man promotes his businesses to 240mn followers on X, while Starship launches have turned the company into one of the world’s most recognisable private groups. In large-cap IPOs, retail buyers have historically received 5 to 10 per cent of the shares on offer. The allocation is significant enough that SpaceX took the unusual step of naming the five online brokerages distributing shares in its prospectus. (…)

“In the past retail participation hasn’t been driven by a lack of demand, it’s been driven by a lack of supply from the issuer,” said Anthony Noto, chief executive of financial super app SoFi. “Retail [has] been somewhat conditioned not to participate because they don’t have access.” (…)

“Retail traders are the new price setters in the market,” Scott Rubner, Citadel Securities’ head of equity and equity derivatives strategy, said in a note this week. 

Many gather on Reddit’s WallStreetBets forum, where recent posts from day traders have swung between fear of being left “holding the bag” as SpaceX insiders cash out and an equal fear of missing the trade entirely.

Musk has good reasons to favor the retail crowd:

Tesla’s forward PE is 191x when Yardeni’s 7 other megacaps’ PEs are below 33x …

… in spite of analysts pegging Tesla’s Long-Term Earnings Growth at 3.7% vs 22.8% for the other 7 megacaps.

Fly Me To Mars

Other inequalities:

SERVICES PMIs

S&P Global US Services PMI: Muted increase in business activity as optimism falters and employment falls solidly

The headline S&P Global US Services PMI® Business Activity Index recorded 50.7 in May, down from 51.0 in April. While remaining above the crucial 50.0 no-change mark, the index signaled only a marginal expansion that was among the weakest seen over the past two-and-a-half years.

The rise in business activity was supported by a renewed expansion in new business inflows midway through the second quarter. That said, sales growth was well below the long-run trend amid reports that budget constraints due to higher operating expenses had stunted growth. A stronger expansion in sales was also limited by a steeper reduction in international sales. The decline in foreign demand was the most pronounced since November 2022 and reflected economic and trade policy uncertainty.

Business confidence eased during May, reaching its lowest since October 2022, reflecting ongoing uncertainty regarding geopolitical instability and inflationary pressures. At the same time, firms were hesitant to take on staff, with headcounts falling for the second time in three months. In fact, the rate of job shedding was the most marked since May 2020.

Evidence of ongoing capacity pressures was nonetheless prevalent during May as outstanding business rose for the fifteenth month in a row but at a less pronounced rate than in April.

Cost pressures reportedly stemmed from rising fuel, energy and supplier prices, and pushed overall input costs up to the fastest degree in 2026 so far. Higher labor costs and tariffs also added to upward pressure on company operating expenses.

In line with the trend for overall costs, selling prices increased to a greater extent than in April with inflation comfortably above its long-run average. Firms often sought to pass higher input costs onto clients, although a stronger increase was limited by reports of competitive pressures.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

“While the US manufacturing economy is reporting a surge in demand as war-related supply and price worries drive precautionary stock building, it’s a different story in the service sector. Demand for services has been largely stalled over the past three months, losing the strength seen earlier in the year.

“The sluggish services economy is acting as drag on overall economic growth, which the PMI data signal to be running at a modest annualized pace of just above 1% so far in the second quarter.

“Hardest hit are the consumer-facing service sectors, where orders are now falling at the steepest pace since the pandemic in 2020, blamed on a combination of squeezed spending power from energy prices hikes and customers pushing back on higher prices being charged for services. However, business services are also seeing reduced order book growth compared to earlier in the year and financial services firms are coming under pressure from higher interest rates.

“Rising costs and cooling demand are meanwhile causing service companies to cut staff at the fastest rate seen since the early months of the pandemic.

“The increase in input cost inflation being signaled by the PMI points to a further rise in consumer price inflation in the coming months, but on the other hand the weakening of demand growth and downturn in the labor market being indicated could help allay concerns over any inflation spike becoming more entrenched.”

• The ISM services index increased by 0.9pt to 54.5 in May, somewhat above expectations. The composition of the report was mixed-to-strong, with increases in the new orders (+3.8pt to 57.3) and business activity (+1.8pt to 57.7) components, but a small decline in the employment component (-0.1pt to 47.9). (…) The press release highlighted the strength in the business activity component, but noted that “respondents reporting that new orders were higher than last month most frequently attributed this to seasonality.” It also added that “respondents commented frequently that their companies had instituted hiring freezes or were not backfilling vacated positions.” (GS)

• The latest ISM surveys suggest that both manufacturers and — more significantly — services companies are paying higher prices:

Canada: Service sector returns to marginal growth in May

Service sector activity in Canada rose slightly in May, although growth was marginal and limited by a drop in new business volumes.

Firms continued to report a challenging operating environment, characterised by general economic uncertainty, and this weighed on sales and business sentiment. Employment numbers were reduced marginally in response.

Latest data also showed a noticeable acceleration of input price inflation, with costs rising at their fastest rate for four years on the back of increased fuel and wage expenses. Service providers raised their own selling prices, with inflation the highest since July 2023.

 

Eurozone economic activity declines at quicker pace as inflation bites

Private sector business activity in the eurozone fell at the sharpest pace in 18 months in May, according to the latest S&P Global PMI® data, marking back-to-back months of contraction for the first time since the end of 2024. Weighing
on output levels was a further fall in demand for euro area goods and services, with export markets a particular drag as non-domestic new orders sank at the quickest rate in five months.

Signs of softening were also apparent in the eurozone labour market as job losses picked up.

As for pricing trends, input cost pressures ratcheted up further in May, remaining the sharpest seen since late-2022. For a third month in succession, the rate of output price inflation quickened.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“With business activity in the eurozone falling for a second successive month in May, it is looking increasingly likely that the economy will slip into contraction in the second quarter. The PMI data are indicating a 0.2% quarterly GDP decline barring any significant change in June.

“Price pressures have meanwhile intensified to their most worrying for over three years, hinting at inflation potentially running close to 4% in the coming months.

“These price pressures will sit uncomfortably with the ECB, which will want to be seen as acting swiftly to prevent higher inflation from becoming entrenched. However, policymakers will also clearly be concerned that they could be hiking rates into a downturn, adding to recession risks.

“Hence, while one interest rate hike might be seen as an insurance policy, the case for further rate hikes will be harder to make if the economy continues to weaken, not least as this softening of demand will itself constrain pricing power and wage growth.”

 

China: Service sector activity growth accelerates further in May

The headline RatingDog China General Services Business Activity Index moved further above the 50.0 neutral mark to 54.4 in May, up from April’s 52.6, signalling the steepest increase in services activity for three months. The current sequence of expansion began in January 2023.

The faster increase in activity was accompanied by a further acceleration in the rate of growth in new business moving through the second quarter. The rate of expansion in demand for services accelerated for the fourth time in five months and was broadly in line with the long-run survey average.

Increased client demand, business innovation and expansion, new client acquisitions, improved market conditions and the development of new projects were all mentioned as sources of new work. Incoming new orders rose for the forty-first successive month, the second-longest period of continuous growth in the survey history.

Higher inflows of new export business contributed to the latest rise in total new work, following slight declines registered in March and April. The rate of expansion in new international business was softer than the latest increase in domestic demand, however.

Chinese service providers continued to report positive forecasts for business activity levels over the next 12 months. Expectations improved to the highest since February and were greater than the rolling 12-month average. The latest anecdotal evidence highlighted improving market conditions, a brighter economic outlook, business developments, increased client demand, new projects and new business lines as reasons for optimism.

The faster increase in new business in May was sufficient to generate another rise in outstanding orders at Chinese service sector companies in May. Work-in-hand grew for the seventh month running, and at the steepest rate since June 2024.

Higher levels of outstanding business placed pressure on operating capacity, and companies responded by boosting workforces. Employment in the service sector rose for the first time in four months, and to a greater degree than the previous increase in January.

Cost inflationary pressure in the Chinese services economy continued to build in May. Companies linked rising costs to oil and fuel prices, increased procurement, higher wages and other labour costs, and increased business activity leading to greater expenses. The rate of input price inflation rose to the highest since October 2024, although it was still below the long-run survey trend since 2005.

With cost burdens rising but remaining below the long-run survey trend, service providers held their charges broadly unchanged in May.

Donald Trump’s pledge to unleash a ‘golden age’ of US manufacturing sputters

US private spending on manufacturing construction fell in April to $15.2bn, down about 16 per cent since Trump’s second term began, while factory employment has fallen by 77,000 jobs over the same period, according to official data.

The decline in spending on building plants comes despite 84 companies announcing more than $900bn in investments to expand US manufacturing since Trump’s inauguration in January 2025, according to FT calculations.

The divergence underscores how Trump has struggled to usher in a domestic manufacturing boom — one of his flagship initiatives — despite tariffs and pressure on businesses to invest in American factories.

“Announcements are what people say they’re going to do, but dollars spent is what’s actually happening,” said Didi Caldwell, chief executive of Global Location Strategies, which helps companies identify factory sites.

“From where we’re standing, we are not seeing signs of a manufacturing renaissance in the US.” (…)

Recent increases in US manufacturing output appeared to be driven less by confidence than by fears over rising prices and domestic and geopolitical uncertainty, added Chris Williamson, S&P Global’s chief business economist. (…)

“It isn’t reflecting the true health of the manufacturing economy, and it’s more worrying than it is encouraging.” (…)

Trafigura warns oil at ‘inflection point’ as Iran war stokes bumper half-year profits

Commodities trader Trafigura has warned that global energy markets are at an “inflection point” that could send prices sharply higher as it reported near-record first-half profits boosted by the war in the Middle East. (…)

Trafigura warned markets against complacency, with chief economist Saad Rahim arguing that the world had largely run through its “buffers” of fuel inventories and now stood “at an inflection point”.

The war in the Middle East has caused a production loss of about 14mn barrels per day, compared with pre-conflict levels, according to Rahim, who added that the price response did not reflect the magnitude of the energy crisis.

“The factors that have contained prices so far — elevated inventories, floating cargoes, co-ordinated SPR [strategic petroleum reserve] releases, a shoulder season, and demand destruction across Asia and Africa — have bought the market time, but are not a solution,” Rahim wrote in the report.

He pointed to low US petrol inventories as a particular concern, noting that these inventories are being drawn down at a record pace. Even if a peace deal between the Trump administration and Tehran was reached soon, “restoring production and shipping flows to pre-conflict levels will, by most estimates, take months, not weeks”,

Rahim added. Trafigura chief executive Richard Holtum echoed Rahim’s view, saying “the pressures that have built up across commodity markets and global supply chains in recent months will take time to unwind”. (…)

Oil inventories have helped withstand the supply shock to date. They exist for occasions just such as this. But the US can’t draw down much more: (John Authers)

Ed Yardeni:

Yesterday, we raised the caution flag, suggesting a possible pullback over the next few weeks. We are concerned about warnings from Exxon and Chevron executives that global crude oil inventories are so low that the crude oil price could spike to $150 a barrel unless the war ends very soon.

We also expect the FOMC to pivot from an easing bias to a tightening bias at the committee’s next meeting later this month. We then expect the FOMC to raise the federal funds rate by 25bps in July. The financial markets are also expecting a rate hike, but late this year.

The SpaceX IPO should be a big hit because everyone knows Wall Street has bent the rules to ensure the stock price soars initially. However, that could cause lots of volatility if a price spike triggers a wave of profit-taking.

Two charts on explosions. There is a chicken and egg question here, isn’t there?

Stocks drive record share of American wealth

A record 33% of the total wealth of the U.S. household sector was in stocks at the end of 2025, according to Federal Reserve data.

• That beats the ~30% during the meme stock-and-SPAC mania of 2021.
• And tops the ~27% reached in Q1 2000, just as the internet boom peaked.

“The willingness of households to hold a rising portion of their total financial assets in equities [has] made retail investors overall an important driver of the bull market in equities in recent years,” JPMorgan analysts wrote in a report late last month.

• Of course, that willingness hinges, in part, on how well stocks — and by extension, the Americans who own them — have done.
• Between the end of 2024 and 2025, the value of household portfolios soared 18%, or $10.31 trillion, to $67.77 trillion.
• That stockpile of stock market riches is likely at new records right now, after the S&P 500’s 10% rise so far this year.

In total, the country’s household equity assets are massive. But those holdings aren’t spread uniformly among all Americans.

• The richest 10% of American households owned about 87% of that total household stock market wealth, according to the Federal Reserve.

This uneven distribution helps explain some of the peculiar features of the current economic and political environment.

• For instance, the so-called K-shaped economy, in which GDP growth is increasingly reliant on spending by the wealthy, is likely driven in part by wealth effects of stock market gains for these folks.
• In other words, the rich seem to be feeling especially flush and are willing to spend.
• Meanwhile, 90% of the population hasn’t benefited from the booming market — even as relatively high inflation shrinks their real disposable income.

Also:

But also this:

Data: Goldman Sachs Investment Research; Finra; Note: Net margin debt is margin extended to customer securities accounts, after taking account of cash and unused remaining margin credit balances; Chart: Matt Phillips/Axios

And that:

BTW:

What the U.S. Has Accomplished in Iran The regime is much weaker, and time is on the side of the U.S. and its allies that want a more stable region.

By Condoleezza Rice in the WSJ:

The war against Iran has been a limited war, and its outcome is likely to be inconclusive. But it has achieved enough to produce a far better Middle East.

It drew America, Israel and the Arab states closer together through defense cooperation and intelligence sharing. In this regard, Israel has never been more secure. (…)

The war demonstrated that the Iranian regime’s leaders were physically vulnerable to U.S. military power and allied intelligence. It also showed that although Iran can close the Strait of Hormuz, that leverage is limited, as the U.S. blockade confronted Iran with the prospect of severe economic damage in return. (…)

It showed that China is no friend of the Arab world, as Beijing watched from the sidelines as Iran attacked the economic infrastructure of the region. (…)

Most important, along with Operation Midnight Hammer last June, Operation Epic Fury set back Iranian nuclear ambitions significantly. It will be a long time before Iran can build a viable nuclear weapon. (…)

In sum, Iran is far weaker today than it was in February. No amount of Iranian propaganda can mask this reality. America’s near-term goals should be to keep it in that weakened state, to strengthen the region’s political realignment, and to make certain that President Trump’s promise that Iran will never possess a nuclear weapon is fulfilled. (…)

Strategic patience is hard, and it isn’t always satisfying. But time is on the side of the U.S. and its allies. Reaching no deal is fine. Reaching a bad deal isn’t.

This is a new day in the Middle East, though it isn’t one without clouds. No American president has had a better chance to build a different and more stable region. It may just take a little more time.

Maybe you should also listen to this PBS video. Robert Kagan has a much different view of the US accomplishments in Iran:

• https://www.youtube.com/watch?v=QbqgQpQSwjY

Meanwhile:

Trump’s empire of debt This century the US has embarked on wars of choice and borrowed more to pay for them. That might not end well

(…) The conflict in Iran has been costing an estimated $2bn a day in short-term direct costs. The ratio of US public debt to GDP is set to breach its historic post-second world war high. And President Donald Trump has submitted to Congress a national defence budget request for 2027 of an astonishing $1.5tn, double the figure for 2020.

That number includes nothing for Trump’s latest war of choice. Suddenly the risk of overstretch looks very real — both to the US’s friends and to its foes. (…)

The US is still the world’s biggest economy and most potent military power. Its defence budget in 2025 was over $900bn, equivalent to 35 per cent of total global defence spending and more than three times the defence budget of China, the next most powerful military actor.

The American economy is notable for its high productivity and an impressive capacity for innovation, not least in AI. The question, then, is what could undermine the country’s otherwise winning formula for protracted hegemony.

The most plausible answer is costly wars and unstoppable surges in deficits and debt — a combination aggravated by Trump’s erratic foreign policymaking. (…)

Linda Bilmes of the Harvard Kennedy School notes that since the September 11 2001 attacks the funding pattern of US military conflicts in Iraq, Afghanistan and the wider region has been unprecedented.

“For the first time since the American Revolutionary War,” she wrote recently, “costs were paid for almost entirely by debt.” (…)

Against total current US government debt held by the public and federal agencies of about $36tn, this guns-and-butter tally amounts to fiscal incontinence on a very grand scale. (…)

The US Treasury’s interest bill has ballooned from 1.5 per cent of GDP in 2021 to more than 3 per cent today. The US deficit is currently running at nearly 6 per cent of GDP. There is no likelihood that this will come down significantly under Trump, despite promises by Treasury secretary Scott Bessent to halve it by the end of the president’s term.

Nor is the deficit likely to fall much under Trump’s successors because there is a structural deficit bias built into US politics. (…)

The lesson is clear, as Alan Auerbach, an economist at the University of California, Berkeley, recently argued in the IMF’s F & D Magazine: “The key to fiscal consolidation is bipartisan agreement. Neither party can then blame the other for short-term outcomes voters may not like.”

But with increasingly polarised politics there is no prospect of a bipartisan attempt to solve the fiscal problem. (…)

Conventional wisdom holds that there is no realistic alternative to the dollar. The Eurozone, China and Japan do not have deep, liquid government bond markets capable of providing safe assets to the world on the requisite scale.

But foreign investors are now moving out of Treasuries because of the debt problem, threats to the independence of the US Federal Reserve, the weaponisation of the dollar through financial sanctions and the erosion of political checks and balances under Trump.

In other words the markets are finally buying into the overstretch story. For their part the leading credit rating agencies have downgraded the US: S&P as early as 2011, Fitch in 2023 and Moody’s in 2025.

Until relatively recently, the largesse of monetary authorities was crucial in funding big increases in borrowing by the US and other rich countries. (…)

But central banks have recently been unwinding their balance sheets, running down the dollar component of their reserves and looking for alternatives including gold, commodities and the more liquid currencies of smaller advanced countries.

Indeed, a report by the European Central Bank showed this week that gold had now replaced US Treasuries as the world’s top reserve asset. By the end of last year bullion accounted for 27 per cent of all global central bank reserve assets, up from 20 per cent a year before. Treasuries fell from 25 to 22 per cent over the same time.

This leaves a gap that has been substantially filled by hedge funds, mainly American owned but often counted as foreign investors because of their bases in tax havens such as the Cayman Islands.

Many own Treasuries as part of highly leveraged “relative value trades”, financed by short-term borrowing that has to be constantly rolled over.

William White, former chief economist of the Bank for International Settlements, points out that this works well — until it does not. White argues that the purchase of government debt by non-bank institutions such as hedge funds depends in turn on their access to short-term financing such as the repo market.

He adds: “Should any disturbance interrupt that access, as in March 2020 [during the Covid-19 pandemic] or April 2025 [when Trump announced swingeing tariffs], an intense deleveraging spiral could easily follow.”

Recent shocks from hedge fund margin and collateral calls have made the Treasury market more fragile and a potential source of systemic risk.

Although the benchmark 10-year Treasury yield remains roughly where it was at the beginning of Trump’s second term, the odds are rising that his administration could find itself confronting debt market turmoil of the kind that toppled former UK prime minister Liz Truss after her unfunded tax-cutting “mini” Budget in 2022.

The Federal Reserve could then be obliged to buy Treasuries to prop up the market, perpetuating a morally hazardous boom and bust cycle in which investors assume the central bank will always come to the rescue when markets slump. (…)

White also worries about fiscal dominance — a phenomenon in which the central bank cannot raise interest rates to meet its inflation target because of the punishing servicing cost of high, short-term public debt. This in turn undermines price stability.

Another possible concern is financial repression, where the government forces banks and other financial institutions to buy its IOUs at below-market interest rates.

White foresees in the longer term a stagflationary world marked by the formation of two blocs, one dollar-based, the other renminbi-based with the Chinese currency being backed increasingly by gold.

A tangible step in this direction is the development of payment systems that do not rely on the dollar. Perhaps the most notable of these is the central bank digital currency platform mBridge, for which the chief technological input has been provided by the People’s Bank of China. (…)

Carstens, Knot and Claessens add: “While we do not predict an imminent crisis — the timing of such events is impossible to call — we do find that warning signs are multiplying and the window for preventive action is narrowing.”

The wisdom of the late Rudiger Dornbusch of MIT is relevant here. He famously remarked that “in economics, things take longer to happen than you think they will, and they happen faster than you thought they could”.

Barry Eichengreen, a professor at the University of California, Berkeley, draws a telling parallel in his latest book between the currency of Trump’s America and that of Nero’s Rome.

The denarius served as an international currency across the Roman empire. Nero resorted to debasement, reducing the silver content of the denarius, in a desperate effort to finance his ambitious programme of canal building, the reconstruction of Rome following the great fire of 64AD and the building of his extravagant 300-room Domus Aurea palace — all this while prosecuting costly wars on multiple fronts.

It was a classic case of imperial overstretch and marked the beginning of the protracted erosion of Rome’s economic and military primacy.

Louis XIV, the warmongering, profligate Sun King of France, apologised on his deathbed for having “loved war too much . . . and spent too much”.

While the world well knows there is zero likelihood of any recantation from the unapologetic 47th president, such an admission would make a fitting envoi for Trump.

But perhaps Trump’s real legacy will be the debt he, like his predecessors, has accumulated — and how it has undermined American power.

In 2016, just FYI:

“You’ve taken business bankruptcies six times.” –Hillary Clinton

“On occasion – four times – we used certain laws that are there.” –Donald Trump

PolitiFact uncovered two more bankruptcies filed after 1992, totaling six. Trump Hotels and Casinos Resorts filed for bankruptcy again in 2004, after accruing about $1.8 billion in debt. Trump Entertainment Resorts also declared bankruptcy in 2009, after being hit hard during the 2008 recession.

Why the discrepancy? Perhaps this will give us an idea: Trump told Washington Post reporters that he counted the first three bankruptcies as just one. (WaPo)