IEA Proposes Massive Release of Emergency Oil Stockpiles

China Auto Sales Drop 15% as Subsidy End Deepens Holiday Slump

China’s vehicle deliveries fell 15% in February, as the phasing out of government subsidies worsened the usual Lunar New Year holiday slump.

Vehicle wholesales dropped to about 1.8 million units last month, data from the China Association of Automobile Manufacturers released Wednesday showed. Deliveries of electric cars and plug-in hybrids fell 14% to about 765,000 units, a further sign that demand for new-energy cars is cooling.

While domestic demand remains soft, exports surged 52% in February, the data showed. BYD Co. is making inroads into markets like South America and the UK, while Geely Automobile Holdings Ltd. entered 13 new markets last year, including Brazil and South Africa.

Foreign automakers also use factories in China as an export hub. Honda Motor Co. plans to start exporting its China-made models to its home market, the first time a Japanese automaker has done so. Volkswagen AG.’s Anhui operations won a concession from the European Union to export its Cupra Tavascan without paying a 21% tariff after agreeing to a minimum import price and quota.

Small Business Outlooks Remain Healthy Despite Dip in Optimism

Small business optimism fell for the second consecutive month in February as firms reevaluated their capex plans. Hiring plans also moved lower, a deterioration seemingly driven by weak worker demand as opposed to scarce worker supply. The share of firms referencing labor quality as their top problem slipped to 15% in February, marking the lowest share since April 2020. (…)

A readjustment in capital expenditures was the primary drag on small business optimism. After rising four points in January, the net share of firms making capital outlays fell back six points in February.

 

Small business hiring plans deteriorated in February, providing additional evidence that hiring is likely to remain muted over the near term. A net 12% of small firms intended to hire over the next three months, down from 16% in January and the lowest reading since May 2024. Job openings ticked up slightly to 33% but also remained historically weak.

In contrast to the decline in the headline optimism index, small firms’ sales broadly improved in February. The net share of firms reporting an increase in sales over the past three months moved into positive territory for the first time since May 2022.

Small business earnings also shot up in February. The net percent of firms reporting an uptick in post-tax income jumped seven points to -14%. Although still negative on net, this indicator is sitting at its highest point since December 2021.

 

Small business inflation appears stuck in a holding pattern. A net 24% of small firms raised prices and 28% planned to raise prices, remaining elevated over historic norms. While each declined slightly compared to January, these inflation indicators have essentially moved sideways over the past year.

 

There is no easy exit to Trump’s war The US and Israeli attacks on Iran will leave the Middle East in greater turmoil

The FT Editorial Board:

(…) Since launching the biggest conflict in the Middle East in decades after being spurred on by Israeli Prime Minister Benjamin Netanyahu, Trump has been boastful, belligerent and confusing in equal measure. The critical question of how the conflict ends is left unanswered. He has failed to articulate a clear set of goals or a day-after plan.

He has spoken about destroying the Islamic republic’s ballistic arsenal and nuclear programme, a Venezuela-style leadership change, and an “unconditional surrender”.

On Monday, he described the war, which involves the biggest US military deployment in the Middle East since the 2003 US-led invasion of Iraq, as a “little excursion”. At the weekend, he dismissed concerns about rising fuel prices as “a little glitch”.

His administration appears to have underestimated the repercussions of the conflict it unleashed and failed to understand its enemy. US and Israeli officials say Iran’s ability to launch missiles has been significantly debilitated. (…)

Yet if Trump expected the regime to capitulate under fire, he is being proven wrong on a daily basis. Cornered and battling for its life, the regime has been lashing out in all directions, fighting an asymmetrical war of attrition that it has long prepared for. (…)

Gulf leaders had pressed Trump not to strike Iran and warned of the risks of a regional conflict if he did. Now their nations are bearing the brunt. Yet Trump told Fox News on Monday he was surprised that Iran “attacked countries that were not attacking them”.

There are hints that he is indeed seeking an off-ramp. Yet the war he started has no good ending. There are no signs the regime is about to capitulate — it appointed Khamenei’s son, Mojtaba, as successor to his father in an act of defiance. Nor are there indications that it is facing imminent collapse. (…)

Any chances of a transition to a more moderate, less hostile government appear remote. If the regime were to disintegrate, the more likely outcome is a fragmented, fractured nation.

Iranians will suffer and its neighbours will have another failed state in their backyard. Continuing the war risks triggering a bigger energy crisis that would have consequences for the global economy and, most important for Trump, endanger Republicans ahead of the midterm elections.

Ending it will leave the regime wounded and weakened, yet able to claim its survival as a victory. Whichever path Trump now takes, it will be others who pay the price of his Iran folly.

• Iranians rethink the price of regime change Destructive US and Israeli war and Islamic republic’s resilience have alarmed even those who supported foreign intervention

(…) “We weren’t supposed to be bombed,” Mandana said, her voice trembling after a massive explosion near her apartment by Vanak Square in central Tehran. “Our city, our country, this wasn’t supposed to happen. How is it that Venezuela . . . saw clean, bloodless regime change, but not here?”

The scale of destruction and the apparent resilience of the Islamic regime, which appointed Khamenei’s son Mojtaba as the new supreme leader in an act of defiance, has prompted many Iranians to rethink hopes that foreign intervention might bring about its end.

Approaching two weeks into the war, no signs exist of the sort of anti-regime unrest that broke out across the country in January before being crushed in a brutal crackdown that killed thousands.

Instead many, even those who loathe the Islamic republic, appear to have recoiled at the destruction and comments including Donald Trump’s threat to target electricity production facilities if the regime escalated. The US president also said Iran’s map will “probably not” be the same after the war, sparking fears the conflict could break apart the country.

One sociologist in Tehran, who is critical of the regime and the war, said there was anecdotal evidence of a growing “sense of nationalism emerging from the war” as happened during Israel’s 12-day conflict against Iran last year, when people rallied around the flag.

“The fear of Iran’s destruction is increasingly uniting people as they fear the consequences of such a large-scale conflict,” the sociologist said, asking not to be named.

Non-military sites have become collateral damage, as air strikes target police stations, military facilities and officials living in residential neighbourhoods. More than 1,000 civilians have been killed and over 8,000 homes damaged or destroyed, according to official figures.

The scenes of devastation — to schools, a desalination plant, passenger aircraft and historic landmarks such as Tehran’s Grand Bazaar and Golestan Palace — have shocked many Iranians.

“If they wanted to assassinate the supreme leader, why are they waging full-scale war?” asked one woman. Before the war, she — like many anti-regime Iranians inside and outside the country — had welcomed military intervention. (…)

FYI:

Iran’s Islamic Revolutionary Guard Corps, the paramilitary force that answers directly to the supreme leader, seems to have pushed Mojtaba’s selection through. Starting on March 3, Guard commanders pressured Assembly members through what Iran International describes as “repeated contacts and psychological pressure.”

The online vote took place under what participants called an “unnatural” atmosphere—opponents given limited time to speak, debate cut off. U.S. and Israeli bombs struck the Assembly’s office in Qom after members voted but before counting finished. U.S. President Donald Trump had called Mojtaba “unacceptable,” insisting he, Trump, “must be involved in the appointment.” Israel’s military warned it would target any successor.

The elder Khamenei apparently didn’t want this either. According to sources within the Assembly cited by the London-based Persian-language news outlet Iran International, he “was not pleased with the idea of his son’s leadership and never allowed this issue to be raised during his lifetime.” (Note: Iran International is Saudi-funded.)

The Washington Post reports Khamenei said as much in his will. Iran’s founding ideology rejects hereditary succession—the 1979 revolution toppled a dynasty. And yet the Guards installed the dead leader’s son, a mid-ranking cleric most Iranians have never heard speak, who lost his father, mother, wife, and a child in the same strike. One analyst told Time: “He is filled with an undying desire for revenge, and the Guards know this.” (The Signal)

A Compromised Fed Would Risk a Fiscal Crisis

By Bill Dudley, former president of the Federal Reserve Bank of New York:

(…) the CBO projects debt service will reach 4.6% of GDP in 2036, up from 3.3% in 2026. Large budget deficits are increasing the amount of federal debt and the interest expense needed to service the shortfall. In addition, the average interest rate on the debt continues to rise as the low-cost debt issued between 2009 and 2022 matures and is refinanced at higher interest rates.

The debt service problem is one reason why the Trump administration is so intent on seizing control of the Federal Reserve and cutting short-term interest rates. Lower rates help the fiscal outlook in three ways: lower debt service costs, faster economic growth that generates more tax revenue, and faster inflation that reduces the real debt burden.

Over the next decade, the CBO expects there will be a 2 percentage-point gap between the annual budget deficit (6%) and nominal GDP growth (4%). As a consequence, the federal debt-to-GDP ratio will rise by about 2% each year. But if growth and inflation were each a percentage higher, then nominal GDP growth would be 6%.

(…) if the inflation rate rose and the Fed’s independence were compromised, inflation expectations would increase, pushing up yields on longer-dated Treasury securities as well as the government’s debt service costs.

As the economist Herb Stein famously observed, “If something cannot go on forever, it will stop.” Markets are ignoring the nation’s increasingly unsustainable fiscal path and the absence of the political will to tackle it.

If the Fed’s independence is compromised, that could be the trigger that brings the bond market vigilantes back and, with them, the market turbulence that forces the administration and Congress to change course.

Chinese Exports Soared 22% Before Middle East War Broke Out

Exports soared almost 22% from a year earlier, compared with a 7.2% median estimate in a Bloomberg survey of economists. Imports jumped nearly 20%, according to a statement released by the General Administration of Customs on Tuesday, leaving a surplus of $214 billion — an all-time high for the period. (…)

China last year relied on outbound shipments to drive the economy, with net exports contributing almost a third to the overall expansion in gross domestic product — the most in decades. (…)

Already, the world’s largest container carriers are rerouting ships to avoid the Persian Gulf, while major e-commerce platforms are warning of longer delivery times to the Middle East. (…)

The US was the only major region to see a decline in Chinese exports in January-February, according to the latest data, with sales down 11%. Shipments to Africa surged nearly 50% during the period — the fastest increase globally — followed by a jump of over 29% to the Southeast Asian nations in the Asean group and a nearly 28% gain to the European Union. (…)

Exports of mechanical and electrical products soared more than 27% in the first two months, including a nearly 73% spike in sales of integrated circuits and a 67% increase in cars.

Imports of crude and refined products by volume rose almost 16% and over 43%, respectively, although the value of oil purchases slipped more than 5%.

China’s export growth probably benefited from a US Supreme Court ruling in February that struck down Trump’s reciprocal tariffs, according to Ding at Standard Chartered, because the verdict might have prompted companies to front-load orders in anticipation of other levies from the White House. (…)

BTW:

China purchased more crude in the first two months of the year as the country continued to hoard oil to guard against supply disruptions. (…)

China has about 1.4 billion barrels of crude — or 190 million tons — in strategic storage, according to Erica Downs, senior research scholar at Columbia University’s Center on Global Energy Policy. Even if all the country’s imports from the Middle East were cut off, those stockpiles could cover the lost supplies for six months, she said. (…)

Trump Doesn’t Understand His Enemy. That Gives Iran an Edge.

Iran’s appointment of Mojtaba Khamenei as supreme leader has been likely since the day US-Israeli air strikes “martyred” his father. It became inevitable the moment Donald Trump said he’d be an “unacceptable” choice for the US, better known to those doing the selecting as The Great Satan.

Trump’s tone-deaf demand was just the latest in an accumulating body of evidence that suggests the US president profoundly misunderstands his opponents in Tehran. That failure to “become your enemy,” as ancient China’s The Art of War advised, may now be threatening the future of the global economy.

It is hard to imagine a scenario in which Mojtaba’s ascent turns out to be a good outcome for America’s latest war of choice in the Middle East, or for Iranians. Far from regime change, his selection as supreme leader represents regime consolidation. It makes any transition to a less confrontational Iran — let alone a secular democracy — still less likely than it was before.

Mojtaba Khamenei is a cleric and political hardliner, who has deeper ties to the Islamic Revolutionary Guard Corps than his father did. (…)

To hear it from Trump, it’s all over bar the shouting. “You know, Iran was supposed to be this big powerful country; we’ve rapped the hell out of them,” he said in remarks to a Republican conference on Monday. “And you know, I don’t know when they cry uncle. They should have cried it two days ago, right? But they don’t have anything left.”

And yet, it seems they do. To “win” this war they now need just to survive it. And to achieve that they must stick together, which they seem to be doing. Their strategy is by now evident: To outlast Trump by inflicting pain on US allies and global energy markets. And from where they stand, they can still win.

Only a fortune teller can say whether the IRGC and other institutions of the Islamic Republic can endure the extraordinary levels of punishment that US and Israeli jets and missiles are meting out, and still be able to fight back, suppress domestic dissent and govern should this continue for weeks or months. Nor can we know how long Mojtaba Khamenei will survive his father, given the way Israel is hunting Iran’s political and security leaders from the sky. But what’s clear is that Trump has failed to understand their rules for the game.

Assuring the rise of the new supreme leader he didn’t want by demanding that the IRGC give him veto power over Mojtaba’s appointment was just Exhibit A. Exhibit B came from Steve Witkoff, Trump’s friend and envoy to everywhere, a week before hostilities opened. He told Fox News that the president was “curious” as to why the Iranians hadn’t caved to his demands, when they could see the sheer scale of the firepower he’d amassed to attack them. On Monday, Trump again seemed surprised they hadn’t yet folded.

Trump knows a lot about leverage. He spent a lifetime assessing when he had enough to prevail in a business deal and, when what’s at stake is money or property, that’s likely all he needed to know. But war is different; in contests between states, leverage can be asymmetric.

This misapprehension can be seen right back to Trump’s infamous White House clash with Ukraine’s Volodymyr Zelenskiy, where he kept repeating that Ukraine had no cards to play in its war with Russia. This is the same country that had already defied a dramatically stronger opponent for three long years and has continued to do so since. Clearly it had cards. In fact, Trump is now asking Zelenskiy to provide some of them to help shoot down Iranian drones in the Gulf. (…)

Asymmetry is a lesson the Iranians themselves learned the hard way, during their 1980-1988 war with Iraq, which at the time was backed by the US. That conflict ended in a stalemate, despite Iran’s near three-to-one advantage in population size. Everything about the way the Islamic Republic developed its security forces since has been based on the conclusion that it must never again fight such a toe-to-toe conventional war.

That’s one reason for lavishing resources on the IRGC and its elite Al-Quds units, rather than on the regular army, known as Artesh. So, too, constructing an arsenal of missiles, rather than an air force to compete with America’s or Israel’s. Likewise, Iran’s early mover status on large-scale attack drone production; the choice to build swarms of tiny speedboats as a naval strike force; the development and arming of proxy militias across the region as a so-called “forward defense” strategy, and of sleeper cells around the world.

In other words, Iran has been preparing for this fight since 1988. It expected to be outclassed in the air. It expected decapitation strikes and had succession and decentralization plans in place. Such a regime is unlikely to collapse or split. It is ready for a long war.

Trump needs to decide now if he is, too. Can he stomach the inflationary impact of a $100-plus oil price for months if need be? Or anger from Gulf allies as Iranian drones tear their energy and tourism infrastructure apart? Or attrition in critical munitions stocks that could for several years limit American security choices? If the answer is no, the time to declare victory and find an off-ramp is now. Maybe that’s what he was doing on Monday with his boasting and suggestion that the war was near an end. But he also said the US wouldn’t relent “until the enemy is totally and decisively defeated.” That could be a while.

If Trump really is willing to do whatever it takes to destroy the Islamic Republic, he needs know his enemy better and get ready to fight the IRGC on the terrain it prepared, which is everything from small boats to terrorism.

But there’s also Israel, which has clear goals on Iran and none of Trump’s domestic preoccupations. Trump’s off ramps may not suit Israel…

Ed Yardeni:

In effect, Trump said that the mission is almost accomplished. Not so fast, according to Secretary of Defense Pete Hegseth. In recent briefings at the Pentagon, he has shifted from his initial “short war” rhetoric. He recently stated that while the US is “winning decisively,” the military will take “all the time we need” to ensure success. Specifically, he noted the timeline could stretch to six or eight weeks—nearly double the President’s initial 4-week estimate—depending on how quickly they can achieve “uncontested airspace” over Iran.

Secretary of State Marco Rubio has also been more cautious about the “endgame.” He recently emphasized that the mission is about “denying Iran the ability to use ballistic missiles,” a goal that requires a sustained campaign of “finding, fixing, and finishing” mobile launchers that are difficult to track. He suggested this process would be ongoing rather than a one-time strike.

We feel better than we did over the weekend, sort of. We would feel much better (and more bullish) if we saw some ships sail through the Strait of Hormuz without getting attacked by Iranian suicide drones.

As a reminder:

Trump’s nod toward de-escalation was significantly different from what he wrote in the early hours of Saturday morning. In a social media post, Trump, 79, said the US will consider striking areas and groups of people in Iran that were not previously considered targets. “Today Iran will be hit very hard!” Trump said as the US and Israel were bombarding Tehran and other cities over the weekend. The attacks will continue, Trump wrote, “until they surrender or, more likely, completely collapse!” (Bloomberg)

What, Me Worry?

“I have a plan for everything, okay?” Trump said in a brief phone interview Monday on the 10th day of the joint US-Israeli war with Iran. “I have a plan for everything. You’ll be very happy.” (AP)

• Iran is a crucial test case for the American way of war The conflict in Ukraine seemed to cast doubt on a military model based on overwhelming air power

(…) The American way of war is long-range, precise and depends on overwhelming domination. The assumption is that quality — expensive technology and well-trained personnel — can achieve victory with limited risk to American lives. By targeting key leadership, bases and capabilities, well-executed precision strikes can induce changes in the enemy’s foreign policy, regime collapse or even surrender, all without ever having to face the adversary on the ground. (…)

Some wonder why the US hasn’t more fully absorbed the lessons of Ukraine. Why hasn’t it replenished its arsenal with cheap munitions and drones, abandoned its expensive platforms and redesigned its campaigns to support multiyear fights to take or defend territory? This is not merely the result of bureaucratic inertia, however. On the contrary, America has a deeply rooted belief in its own way of waging war and a distinctive understanding of how new technology (drones, AI and so on) can enable it.

Operation Epic Fury can, in many ways, be seen as a compelling counter-example to the dystopian vision of conflict that the war in Ukraine represents. On the first day, the US-Israeli operation decapitated the head of a despised regime. And it attacked more than 1,200 targets, with the loss of just six American military personnel. It has rebuffed one of the largest missile volleys ever launched and a US submarine destroyed an enemy warship with a torpedo for the first time since the second world war. 

But there are already cracks in this account. The US may have accidentally attacked a school, killing over 100 children. (As of the end of last week, defence secretary Pete Hegseth said the Pentagon was still “investigating”.) Three F-15s were shot down by friendly Kuwaiti fire. The Trump administration has been elusive on strategic objectives, the possibility of deploying ground troops or campaign timelines.

Meanwhile, American missile and bomb arsenals are dwindling and costs soaring. For nations watching and wondering whether to invest in the Ukrainian or American military model, Operation Epic Fury is an important test case. Should they be arming for wars of attrition or for the kind of technological dominance showcased over the past week?

How this all ends will shape Iran and the region, but it will also dictate the future of the American military. Imagine, for a moment, that the US is unable to achieve a decisive victory, and is instead drawn into a long, costly and complicated nation-building exercise or guerrilla war. If that happens, the failure of the ideal case will force the military to rebuild its arsenal and transform its strategy in order to equip it for a very different kind of warfare — one that looks a lot more like Ukraine than the first Gulf war.

• U.S. dismissed Ukraine deal for anti-Iran drone tech last year

Nearly seven months ago, Ukrainian officials tried to sell the U.S. their battle-proven technology for downing Iranian-made attack drones. They even made a PowerPoint presentation — obtained exclusively by Axios — showing how it could protect American forces and their allies in a Middle East war.

The Trump administration dismissed the Ukrainians, only to reverse course last week because of more-than-expected drone strikes from Iran.

Snubbing Ukraine’s offer ranks as one of the biggest tactical miscalculations by the administration since the bombing of Iran began Feb. 28, two U.S. officials tell Axios. (…)

Ukraine is the world’s most experienced country in combating Shaheds, which Russia has bought, reproduced and labeled as Geran drones by the thousands for its invasion of its western neighbor.

Ukraine has developed a low-cost interceptor drone, among other sensors and air defenses, to shoot down Shahed-style drones.

At a closed-door White House meeting on Aug. 18, the Ukrainians made a PowerPoint presentation to U.S. officials that displayed a map of the Middle East and had this prophetic warning: “Iran is improving its Shahed one-way-attack drone design.”

A U.S. official who saw the PowerPoint confirmed that Zelensky’s team showed the presentation to the administration and theorized the Ukrainian leader is seen by some in the Trump administration as too much of a self-promoter of a client state that doesn’t command enough respect.

“We figured it was Zelensky being Zelensky. Somebody decided not to buy it,” the official said.

On Thursday, the U.S. formally asked Zelensky for anti-drone help, according to The New York Times. (…)

On Friday, the U.S. announced plans to deploy its own Shahed-killing drone system, called Merops, amid complaints from regional allies about the attacks.

One U.S. official told the Associated Press that the response to Iran’s drones has so far been “disappointing.” (…)

The need for the technology is so great that Trump’s sons announced a new business venture Monday to supply the Pentagon with Ukrainian drone technology. (…)

Months later, in November, another U.S. official told Axios that military personnel have “been wanting to go to Ukraine and pull the tech and the tactics from the Ukrainian military … so that we’re innovating and learning.” (…)

While equity and commodity investors react to every Trump utterings:

Credit investors’ stress levels are far from healthy. Globally, measures of perceived risk continue to deteriorate. A weak US February jobs report is the latest catalyst in the Markit CDX North American Investment Grade Index’s spread widening by the most since last May:

The raging war in the Middle East has combined with cockroaches in private credit to make creditors’ lives unusually difficult. Their pain is slowly reverberating from Tokyo to New York.

Worse, the meltdown sparked by AI’s looming disruption of software firms is continuing to ripple through markets as investors scramble for safety and unwind crowded trades. The world’s largest alternative asset managers now face an uncomfortable dilemma: Block investors seeking to exit private-debt funds and risk reputational backlash, or honor the redemptions and undermine the industry’s promise of patient, locked-up capital. The recent episode at Blue Owl Capital is still fresh in investors’ minds, and press scrutiny of the asset class is continuing at a far higher level than for most of last year. (…)

These are tough conditions, although certainly nowhere near crisis. (…)

Across the Atlantic, the picture is less reassuring. Nearly 150 companies have already ceded control to direct-lending funds after they could no longer service their debts, according to Goldman Sachs Group, showing that private credit strains are spreading. On that basis, it is not surprising that Monday’s surge in the credit risk benchmark culminated in a pause in bond sales.

With oil prices soaring during the European session, there were concerns that this would weaken corporate balance sheets, and intensify repayment risks. A handful of corporate and financial-sector borrowers that had been looking to raise debt in Europe stood down. With deals already delayed last week, a pipeline of issuers is now waiting to tap the market when they get the chance. (…)

This is a fragile time for credit markets, but credit investors are no strangers to market stress. In the past, such incidents have often been followed by strong demand and a “buy-the-dip” mentality. That might yet happen this time — depending on just how deep the dip gets. (Bloomberg’s Richard Abbey)

White House readies executive order to weed out Anthropic

The White House is preparing an executive order formally instructing the federal government to rip out Anthropic’s AI from its operations, sources familiar with the matter told Axios.

The move would escalate the administration’s fight with Anthropic, which is already suing the Pentagon over its supply chain risk designation.

It would also formalize a broader push across agencies to remove Claude after President Trump said his administration would not use “woke” AI. (…)

• Microsoft and Anthropic team up to bring Claude Cowork to Microsoft 365

Microsoft is bringing Anthropic’s Claude Cowork to its Microsoft 365 Copilot AI platform. Called Copilot Cowork, the update arms Microsoft with the AI platform that rocked the software-as-a-service industry last month. (…)