NY Fed’s Services Business Survey

 

 

IMPORT PRICES IMPORT

Prices for U.S. imports advanced 1.9% MoM in May following increases of 2.0% in April and 0.9% in March. Prices for U.S. imports rose 6.7% YoY in May, the largest advance since the index increased 7.7% in August 2022.

Prices for nonfuel imports increased 0.8% MoM in May, after +0.6% in April. “In May, higher prices for capital goods; nonfuel industrial supplies and materials; consumer goods, excluding automotives; and automotive vehicles, parts, and engines more than offset lower prices for foods, feeds, and beverages.”

Nonfuel import prices increased 3.7% YoY in May, the largest since the index rose 3.9% in August 2022.

• All imports excluding food and fuels rose 0.9%, +3.7% YoY but +8.0% annualized in the last 4 months.
• Industrial supplies & materials ex-petroleum rose 2.2%, +10.4% YoY but +7.1% annualized in the last 4 months. 
• Capital goods rose 1.3%, +5.6% YoY but +12.8% annualized in the last 4 months.
• Manufacturing rose 0.9%, +4.7% YoY but +11.5% annualized in the last 4 months. 
• Consumer goods, excluding automotives rose 0.2%, +1.7% YoY but +3.3% annualized in the last 4 months.
• Import prices for computer peripherals and parts rose 8.9% MoM and 39.7% YoY.

Import prices from China increased 0.9% in May and rose 1.1% YoY. The increase in May was the largest 1-month advance since the index rose
0.9% in January 2008.

Charts from Ed Yardeni:

Goldman Sachs estimates that “the core PCE price index rose 0.31% in May (unchanged from our expectation prior to today’s import prices report), corresponding to a year-over-year rate of +3.38%. Additionally, we expect that the headline PCE price index increased 0.45% in May, or increased 4.04% from a year earlier.”

Nobody cares about inflation, more so since the apparent cease fire. Will the Fed care?

While on inflation:

“And now what’s happening is the cost of tokens are far higher than the actual value that these tokens are generating at scale. And so what ends up happening, and the big risk in the market is, if you don’t create an equilibrium there, then people just pull back on using tokens, and that’s actually not good for anyone.” – Cisco President Jeetu Patel

China Moves to Boost the Use of Yuan Globally China will launch pilot program for offshore yuan foreign exchange trading

Chinese authorities rolled out more measures to promote the use of the yuan globally, their latest effort to build more resilient financial infrastructure to shield its economy from external shocks.

Pan Gongsheng, head of the People’s Bank of China, announced Wednesday that Beijing will set up a new repo facility. This facility will let foreign monetary authorities, including sovereign-wealth funds, obtain yuan liquidity from the Chinese central bank with bonds as collateral.

He also revealed that China will launch a pilot program for offshore yuan foreign exchange trading in the Shanghai Free Trade Zone, as he spoke to financial executives at Shanghai’s Lujiazui forum on Wednesday. This program is aimed at turning the coastal city into a global hub for yuan-denominated asset allocation and risk management. (…)

AI CORNER

Why Does Trump Hate Anthropic? The de facto ban on its Fable 5 model is a dangerous precedent.

The WSJ Editorial Board:

Which is a greater threat—China or Anthropic? The Trump Administration can’t seem to decide judging from its order to restrict access to Anthropic’s frontier artificial intelligence models. The fallout could undermine America’s AI lead and cyber defenses.

The White House’s simmering feud with Anthropic erupted again last week after the company released its new advanced Fable 5 model. Trump officials have demanded that Anthropic restrict access to its powerful Mythos model over concerns adversaries could exploit its tools for cyber warfare. Fable 5 is Anthropic’s attempt at a compromise.

Fable 5 boasts advanced coding, research, analytic, agentic and other capabilities similar to those of its Mythos model, but it also includes safeguards to prevent its use for cyber. The goal was to provide enterprise customers more powerful tools while assuaging the White House’s concerns that they could be weaponized by bad actors.

At least that was the idea. But on Friday evening the Administration abruptly ordered the company to restrict Fable 5’s access to foreigners after Amazon flagged that users could trick the model into bypassing its cyber safeguards. This is what the industry calls a jailbreak.

The export control amounts to a de facto ban on the model since Anthropic has no way of ascertaining the nationality of its users. Even its U.S. customers employ foreigners. The Administration appears to have overreacted to the Amazon report or used it as a pretext to renew its feud fight with Anthropic.

Trump officials and Anthropic disagree about the seriousness of the jailbreak. (…) Anthropic also stressed it’s probably not possible to build a 100% fail-safe model (…).

President Trump lambasted Anthropic as “some out-of-control, Radical Left AI company,” echoing comments by AI adviser David Sacks, who criticized the company for hiring former Biden officials and supporting “Woke AI.” (…)

Trump officials overlook that it will also impede U.S. AI innovation by setting a precedent that the government can at any moment order a model off the market. (…)

The NYT’s Ross Douthat sees broader consequences (my emphasis):

(…) the battle over Anthropic’s cutting-edge artificial intelligence models, is the beginning of a new kind of conflict, with private powers and national governments struggling to determine who actually rules an A.I.-dominated world. (…)

It’s a conflict rich in ironies. A White House that sees itself as favoring a free-market approach to A.I. has now twice used heavy-handed regulatory weapons against America’s leading A.I. company. (…) Meanwhile Anthropic sees itself as the A.I. company that’s most attuned to safety issues and eager for democratic oversight, but each move from the Trump administration has prompted the company to shout, “No, not like that!”

(…) the kind of conflict we’re seeing here is overdetermined by the trajectory of the A.I. models: There is too much potential power here not to have ongoing, escalating struggles over who actually gets to rule. (…)

There is a path here that leads to nationalization in all but name and a path that leads to a kind of de facto corporate takeover of the government, or at least a too-big-to-fail symbiosis. And along the way there may be not just conflicts between presidents and A.I. executives but also increasingly ruthless corporation-on-corporation action, out of fear that the A.I. landscape is winner-take-all to an extent we’ve never seen in capitalism before. (…)

Then alongside the struggle to control A.I. power within American borders, there is the geopolitical struggle to maximize global power (where the only real players are probably the United States and China) and maintain sovereignty (where everyone else is likely to be scrambling to maintain some independence).

The use of export controls to shut down Fable presumably reflected U.S. fears of Chinese access to a jailbroken version of the model, but it was also a warning to every other country in the world: If we end up with economy-permeating A.I. models that are made and regulated in America, the American government will control the on-off switch.

One possibility for what that means is spun out in “Europe 2031,” a futurist scenario written by European A.I. researchers and investors in which the European Union ends up choosing political and economic vassalage to either the United States or China, because it lacks sufficiently powerful A.I. models that are under its own control. (…)

But at the very least, American and Chinese A.I. dominance is going to create new issues for sovereignty, new forms of dependence and coercion, that will weigh heavily on middle powers as their economies become more and more dependent on specific models and access to computing power. (…)

This “winner-takes-all or almost all” potential of AI is why so many companies are hastily spending so much money. “There is more risk in underspending then in overspending”. Good for economies and investors but, eventually, a few big winners will kill several also big losers.

There is just no way that all that capital deployed will earn a reasonable return. There will be blood.

How to deal with or control the winners’ huge power? “There is a path here that leads to nationalization in all but name”. Yes, and that possibility has immediate consequences.

How do companies/governments justify using a particular LLM model/application if models and their apps can eventually be “nationalized”, controlled or even banned in some ways, shape or forms by governments worried of a loss of sovereignty or regional/global power?

How can investors properly value AI developers if even an assumed free-market government can step in and regulate in ways that can jeopardize the business model?

Holman W. Jenkins, Jr., also in today’s WSJ:

Government vs. AI Profits?

(…) All this will be magnificently beside the point, moreover, if the latest AI models, after billions invested, can’t be released to the public because they’re too dangerous—or if they’re swallowed up in a standardless, jury-rigged licensing system run by the Trump administration.

Suddenly the barriers to America’s AI companies getting paid for their innovations seem daunting. Ditto America maintaining its technology lead.

Blame is dished by some at a chaotic administration, seen as abandoning its pro-innovation “let it rip” attitude. But it’s the CEOs of the leading companies, OpenAI and Anthropic, who’ve told us for years their products were dangerous, who called for prescriptive regulation, not least, some suspect, to lock in their dominance. Be careful what you wish for. (…)

By June 12, the administration was reaching for draconian export controls to prevent a supposedly safer version, known as Fable 5, from being accessed even by Anthropic’s own non-U.S. employees, much less the 96% of the potential market consisting of non-U.S. users. (…)

Experts debate how serious these risks really are but the momentum toward government control is unmistakable. Waiting in the wings is the Defense Production Act of 1950, enabling stringent U.S. authority over industries deemed vital for national defense.

This holds out a troubling prospect: Either AI progress will stop as investors abandon it, or progress will be funded by government, the only user allowed access to cutting-edge models—essentially confiscation by other means.

For small investors, the debate arrives at an inconvenient moment. Never mind whether last week’s SpaceX IPO was really as AI-centric as Mr. Musk claims. On the same day it began trading, the administration imposed its sweeping export ban on Fable 5. (…)

Will SpaceX’s now be the last AI IPO? It isn’t impossible at the rate top-tier developers find themselves caught in an avalanche of national-security attention. OpenAI co-founder Greg Brockman was recently reported to have mused puckishly about the company offering its services to the highest bidder among America’s geopolitical rivals. His impolitic remark is seen now as a dark reflection on the national-security trap AI was about to fall into.

Anthropic founder Dario Amodei warns incessantly about a Chinese AI threat even as his company attracts a trillion-dollar valuation that makes sense only if it will be free to commercialize its innovations rather than see them absorbed into an all-embracing military-cyber-industrial complex.

Hang on. It’s going to be a bumpy ride.

And bloody.

Trump Invokes Cold War-Era Law to Boost Munitions Production Concerns have grown that the U.S. has burned through a lot of weapons during the war with Iran

Great timing, no?

Trump Stages an Iran Retreat The regime gets financial relief to reopen Hormuz and hold more nuclear talks.

The WSJ Editorial Board (my emphasis)

President Trump is touting his latest cease-fire deal with Iran as peace in our time, but the world is more likely to see it as a strategic retreat short of achieving his war aims. To reopen the Strait of Hormuz, Mr. Trump is accepting Iran’s promises merely to negotiate over its nuclear program.

(…) we’ve supported the President’s Iran policy. We’ve done so because a nuclear Iran would be an existential threat, and because we want Presidents to succeed when they go to war ().

(…) The result isn’t “Obama deal 2.0” because, unlike in 2015, Iran’s key nuclear facilities are in rubble and its enrichment of uranium has been halted for the first time in 20 years. The media critics and Democrats who now savage the President would have stood by while a nuclear bomb became a fait accompli, as in North Korea.

But there’s no denying that Mr. Trump is retreating from his main goals as political pressure has built at home and finishing the job requires greater military risk. (…) Mr. Trump simply didn’t want to endure higher oil prices for longer. This is his choice, not a strategic imperative. (…)

The U.S. blockade will end, as Iran de-mines the Strait on a timetable so traffic can be unrestricted. This seems to be Mr. Trump’s main goal, which will mean lower gasoline prices before the midterm elections. But Tehran says Hormuz won’t return to the status quo ante, and it claims it will charge “fees” not tolls, as if that’s more than a semantic difference.

The full memorandum of understanding text hasn’t been released, and Mr. Trump says some of it is “a little conceptual.” Which is the problem. It would defer most matters of the nuclear program to 60 more days of talks, with oil and other sanctions relief along the way in exchange for diplomatic progress.

This linkage is crucial, but pushing off the most difficult nuclear issues in talks with “dishonorable people” who don’t deal “in good faith,” as the President called them on Friday, doesn’t inspire confidence. (…)

Meanwhile, allowing oil exports will rescue the regime financially, and resuming sanctions enforcement won’t be easy when Iran can threaten the deal—and the Strait—in reply. Granting the regime access to billions of dollars in frozen funds before nuclear negotiations would be another bailout. Mr. Trump’s talk of investing in Iran suggests he’s making the Barack Obama mistake of thinking the revolutionary regime wants Iran to be a normal country. There’s no evidence it does.

The deal also includes no Iranian commitments on its missiles and terror proxies. These will be put off to “regional discussions” from which no one expects much. This poses risks to Israel from Hezbollah, which the deal could protect in Lebanon, as well as to the Gulf Arab states that bore the brunt of Iran’s attacks. An irony of this deal is that the Gulf states will need greater U.S. defense commitments if Iran is allowed to rebuild its missile arsenal—or they will make their own accommodations to Iran.

The biggest risk is if Mr. Trump sees this deal as a de facto partnership with Iran’s regime. Like Mr. Obama, he might overlook violations to strike the final deal or preserve it once it is signed. The people of Iran, whom Mr. Trump promised to help, would be the big losers.

Iran’s new leaders are likely to conclude that Mr. Trump has no desire for more conflict, and they will negotiate accordingly. Congress should scrutinize any final agreement Mr. Trump makes with Iran—and reject it if it props up a regime that still says “death to America.”

The Guardian:

(…) Of a dozen analysts and experts consulted by the Guardian since the news of a potential end to hostilities broke at the weekend, not one suggested the interim deal to be signed on Friday by representatives of Iran and the US would be any more than a temporary solution.

“It’s just a big Band-Aid and future conflict is like to come at some point,” said Neil Quilliam, a Middle East expert at London’s Chatham House. (…)

The interim deal now agreed does little more than commit both sides to further talks, while obliging Washington to lift its naval blockade of Iran and making Tehran allow free passage to all shipping in the strait of Hormuz, which usually carries a fifth of the world’s oil and liquid gas supplies but was blocked by Iran early in the war.

To the great displeasure of Israel, a ceasefire has been imposed once again in Lebanon as part of the interim deal and appears for the moment to be holding.

But such ceasefires count for little these days, said several experts, pointing to Gaza as an example, where almost 1,000 Palestinians have been killed since Donald Trump brokered an end to the war there last year. Israel has occupied more than 60% of the territory, Hamas has not given up its weapons, and there has been almost no progress towards a projected second phase of the deal, let alone the third, which was to have brought a massive reconstruction effort.

“Gaza is a case in point. The deal there didn’t contend with the past: the war crimes that had been committed. Nor the present: how to disarm Hamas. Nor the future: a pathway to a viable Palestinian state and a resolution of the conflict,” said Alia Brahimi at the Atlantic Council in Washington. “It’s almost as if … you can use the cover of a ceasefire to continue to achieve your aims, including military ones.”

But this was not possible in the Gulf, Brahimi said, because the strategic geography was different. (…)

The sharpest shock, however, is being felt in the Sunni Arab Gulf states, where the stability behind decades of economic growth and growing diplomatic heft has been sharply challenged. (…)

Washington’s clear unwillingness to accept significant losses, months of potential economic pain or domestic dissatisfaction send a clear message.

“A ‘superpower’ that is not ready to bear 100 casualties is not a superpower,” said Orbach. (…)

“The realisation that they can’t rely on the US is the point of consensus but otherwise [Gulf states] have all got different views of the best strategy going forward,” Hellyer said. “The Arab world has important and legitimate grievances with how Iran projects power and influence and none of these are being addressed.” (…)

“We know that Hormuz can be closed again, the Iranians have carried out strikes on Gulf states, and we have seen that whatever Israel and the US can do, Iran will take it. All the previous thresholds have been passed now.”

• Trump declares US-Iran peace deal ‘all signed’ as G7 leaders battle to tie up loose ends 
• Vance says details of US-Iran agreement still to be worked out amid scepticism from Republicans Senate Republicans say there are many unanswered questions about the deal and question inclusion of funds for Iran
• “President Trump knows this regime stalls and uses talks to buy time. He will not allow it,” according to a document seen by Bloomberg. “The pressure that brought Iran to the table stays fully loaded, and every option is still on the table.”

As to the “dishonorable people” who don’t deal “in good faith”, the WSJ should make a list of the numerous landmark international treaties, multilateral agreements, and organizations Trump has unilaterally withdrawn the United States from.

Stocks Have Even More Room to Fly if Hormuz Reopens

Front page of the WSJ:

(…) The latest Middle East developments added to the ledger of optimistic news and capped the market’s best three-session stretch since the May 2025 tariff de-escalation with China. Wednesday’s readout on lower inflation, followed by Friday’s blockbuster stock debut by Elon Musk’s SpaceX, had left investors feeling good about stocks heading into the weekend. (…)

“The market is interpreting this as the economy is going to get stronger,” said Joseph Brusuelas, chief economist at RSM. (…)

• “A potential US–Iran agreement could catalyze a broad risk-on impulse across equities, supported by strong fundamentals,” Andrew Tyler, the bank’s head of global market intelligence, wrote in a Monday note.9Bloomberg)

The economy needs to get stronger fundamentals if one believes the most recent Fed Beige Book which compiles anecdotes from business contacts across the US. From the June 3 report: (my emphasis)

Weak labor market:

• “Employment continued to decline somewhat. Wage inflation held steady at a modest pace—typical of its long-run average. Contacts reported less upward wage pressures over the period, but a few contacts shared that some staff are requesting wage increases because of higher fuel prices. Generally, firms’ expectations for future wage and compensation cost inflation remained steady” (Philadelphia)
• “Employment in the Fifth District was unchanged in the recent period. Some firms reported improvement in labor availability.” (Richmond)
• “Employment levels in the District were flat to slightly down over the reporting period as most firms continued to keep head counts even or adjust downward through attrition.” (Atlanta)
• “Employment overall was mostly flat during the reporting period. Wage growth remained modest in the service sector but moderate in manufacturing. A services contact noted some relief in terms of pay demands from job candidates. Labor costs for homebuilders remained flat or declined due to reduced work volume in the single-family housing market” (Dallas)
• “Labor market conditions have shown little to no change in the Tenth District, with employment remaining stable and wages increasing modestly.” (Kansas City)
• “Employment levels were generally unchanged, with most employers holding head counts flat and hiring selectively. Wages rose slightly.” (San Francisco)
• “Wage growth eased somewhat and remained modest.” (New York)
• “Wage growth has been moderate.” (St. Louis)
• “On balance, wage pressures remained moderate. Meanwhile, across sectors, multiple contacts noted easing wage pressures amid cooling labor demand. One construction contact noted that employees were ‘nervous and stressed’ and believed employees were reluctant to ‘risk’ leaving for higher-paying opportunities.” (Cleveland)
• “Wage growth was modest to moderate, with some signs of softening.” (Minneapolis)

Very different from what the last BLS employment report suggested, in line with my own analysis (see Soccer Punch on June 8 and on June 10).

Weak consumer demand:

• “(…) consumer-facing businesses reported decreased confidence.” (Boston)
• “Retailers (nonauto) reported a modest decline in sales over the current period, after sales held steady last period.” (Philadelphia)
• “Consumer spending declined slightly in recent weeks. Many retailers reported that higher fuel costs and related inflation had further dampened consumer spending, leading to decreased sales across various retail sectors including convenience and grocery stores, auto dealerships, and restaurants. One national retailer noted that consumers have become ‘extremely price sensitive’. Another contact noted an uptick in credit card use among customers, a situation which they believed to be a sign of financial stress.” (Cleveland)
• “Consumer spending grew at a modest pace. (…) retailers and other consumer-facing businesses noted continued financial stress among middle- and lower-income households. Persistent price sensitivity contributed to slower restaurant traffic, increased promotional activity, and constrained demand even for lower-priced discretionary services. New auto sales were below expectations amid elevated MSRPs, interest rates, and gas prices.” (Atlanta)
• “Luxury travel remained resilient, while more budget-conscious segments experienced a pullback. Additionally, groups and business travelers shortened their stays to manage costs.” (Atlanta)
• “Consumer spending was flat since the last report.” (Minneapolis)
• “(…) consumer-facing firms continued to report softer demand and margin compression. […] Consumer-facing contacts described growing behavioral adjustments among middle-income households, including reduced frequency and lower per visit spending at sit-down restaurants. One contact noted that ‘middle-income households are squeezing more life out of every dollar before deciding to spend it.’” (Kansas City)

• “Retail sales weakened over the reporting period. Auto sales softened further in April and May, with dealerships experiencing a significant slowdown in customer traffic that they partly attributed to high gasoline prices and the resulting pullback in non-essential spending.” (Dallas)

• “Retail sales were roughly flat over the reporting period.” (San Francisco)
• “On the consumer side, one banker mentioned that credit card applications increased as consumers covered essential purchases like gasoline and groceries.” (Cleveland)

Inflation vs profit margins:

• “Output prices rose slightly on average, although many firms left prices unchanged. Input prices increased modestly overall, but some contacts reported significant cost pressures.” (Boston)
• “Most contacts did not plan to raise their output prices in the near term, even though many were concerned that cost pressures linked to the Middle East conflict could persist for a while.” (Boston)
  “Firms continued to report moderate increases in prices received for their own goods and services. However, a dichotomy has emerged. Increases in prices received by consumer-facing firms have held steady at about 2.0 percent for the past six months.” (Philadelphia)
  “Most contacts across many sectors reported a reluctance to raise prices, citing consumer price sensitivity and softening demand.” (Philadelphia)

US Manufacturing Output Stalls for the First Time This Year

US manufacturing production stalled in May after four months of gains as a drop in chemical and petroleum output masked ongoing strength in categories tied to the data center boom.

Factory output was little changed last month after an upwardly revised 0.7% advance in April, Federal Reserve data out Monday showed. The median estimate in a Bloomberg survey of economists called for a 0.3% advance.

The data showed a split between durable goods manufacturing, which continued to advance, and nondurable goods manufacturing, which was dragged down by declines in chemical and petroleum products. Output of synthetic dyes and pigments dropped 5.5% over the last three months, possibly reflecting supply-chain problems created by the war. (…)

“But far from representing a manufacturing renaissance, we estimate that factory output increased only in about one-third of categories.” (…)

Separate data Monday showed factory activity in New York state expanded only modestly in June after a strong advance in May. An index of future selling prices rose to the highest level since 2022, “suggesting that firms widely expect to raise their prices over the next six months,” according to the Federal Reserve Bank of New York report.

Goldman Sachs: “recent inflation readings and corporate commentary have signaled the risk to profit margins from input cost pressures. Our top-down macro model for the median S&P 500 company points to limited margin expansion through 2027.”

 

 

Note how the 18x median P/E, while lower than the aggregate P/E is still historically high. Here’s the composition of the median P/E:

From various GS recent write-ups:

• “From a macro perspective, slowing economic growth and rising interest rates put pressure on equity valuations, but elevated corporate profitability helps justify elevated multiples.”
• “From a bottom-up perspective, much of the earnings tied to AI investment spending warrants a below-average multiple. Compositionally, the Memory stocks driving a large share of S&P 500 earnings growth this year typically trade at low valuation multiples due to the cyclicality of their earnings. More broadly, earnings driven by a temporary investment boom should boost current equity valuations far less than earnings expected to be generated indefinitely. While some investors believe the AI investment boom is likely to last long enough that the associated earnings should be treated as secular, rather than cyclical, profit streams, enough investors remain skeptical that a major increase in valuation multiples seems unlikely.”
• “The persistent gap between earnings and cash flows for some of the largest tech stocks should continue to weigh on their earnings multiples as well. The mega-cap hyperscalers AMZN, GOOGL, META, and MSFT trade at a collective P/E of 24x, near the low end of their range during the past decade, but at a price/FCF multiple greater than 150x. While last quarter’s reports appeared to give investors incremental confidence in the likely returns to hyperscaler capex spending, the likelihood of continued capital intensity in coming years suggests uncertainty around long-term future free cash flows will remain elevated.”
• “The outlook for AI investment spending and earnings creates two-way risk to valuation multiples. While valuation multiples for many semiconductor companies have recently expanded, valuations in other parts of the AI infrastructure complex reflect a healthy skepticism regarding the persistence of current earnings strength. As the processes of AI build-out and AI adoption continue, a widening pool of companies perceived to be future winners will likely enjoy large boosts to their valuations, but it seems likely that many others will experience declining valuations as they are affected by AI disruption risk.”
• “The biggest question for the valuations of most stocks in the market is the impact of AI on long-term earnings growth, but that question is unlikely to be resolved any time soon. One consequence is that near-term earnings will likely continue to be the primary driver of near-term equity returns. Most of the current value of an equity is attributable to earnings far in the future. The uncertainty surrounding which companies will experience long-term earnings uplifts from AI helps explain the practical focus of most investors on the near-term earnings impact from AI, even if the focus on near-term earnings creates the risk that investors overvalue the likely long-term earnings benefits of some AI infrastructure stocks.”

Understand?

Energy Shortages Loom Despite Peace Deal

John Dizard ia a veteran financial journalist and columnist known for his in-depth analysis of global macro investing, commodities, and currency markets, most notably for his 21-year tenure at the Financial Times. This is an excerpt from a long interview by Chris Whalen of the Institutional Risk Analyst. Instructive on what’s going on below the surface.

(…) We already have diesel prices that are going to be going up. If not hyperbolically, you know, very, very aggressively. And in the case of the Group III lubricants and even Group II lubricants that I’ve been obsessing about, we have an availability problem starting now.

Consider high-end lubricating oil. You take what’s called a base oil, which comes from a refinery, and then you put in additives for, say, winter or to avoid corrosion and oxidation. But they’re simply not there.

The shortages are hitting the formulators, the blenders right now. They just simply can’t get supplies of high-end lubricating oil. It’ll hit consumers over a lack of availability by the end of this month or beginning of next month.

Group III base oil is already, when you can get it, it’s at least $10 a gallon, but really, it’s on allocation. (…)

The diesel price increases that have happened so far are enough to increase prices all kinds of consumer goods already. That will now accelerate over the summer. (…)

The U.S. has become highly dependent on imported lubricants. For the higher end lubricants, Group III. as they’re called, or Group IV, the U.S. imports about 70% of its requirements. Of that. 40%, between 40 and 50% has come—- until March—- from the Gulf, from refiners in the Gulf, and about 30% has come from South Korea.

Neither of them are shipping product to the United States now. The Koreans have redirected their production to either domestic use and domestic OEMs, or maybe to some Korean OEM assemblers in the States.

The Gulf producers simply aren’t producing lubricants and other refined products. It’s almost as if the Iranians knew what the precise pressure point to strike because they knocked them all out. The Iranians seem to be better informed than the US government.

Let’s say that Trump’s peace deal sticks, will this solve the supply problem? No.

We’re going to be on allocation this year and into 2027. The trouble is that nobody we know— at the supplier level— is receiving any guidance from Washington. There’s no coordination of how that’s to be done. But the shortfall in supply is so severe, it looks as though it could impact the auto manufacturers as well.

These high-end lubricating oils are required for hybrid engines and many other products. For CVT transmissions, for compressor lubricant. For turbine lubricant. Aircraft engines. Where you have aircraft, where you have high temperatures, high pressures, continuous use. (…)

Production [of lubricants] has actually been reduced in the past couple of months globally, even after the knockout of the Gulf suppliers, because refiners have seen such a rapid increase in diesel prices that they committed to producing diesel and jet fuel rather than other products. The Koreans, for example, committed their feedstock supplies to producing diesel rather than producing lubricants. (…)

Diesel and jet fuel are both going to be problems. The government and the Trump administration has been taking credit for our high oil exports. Those export numbers include both oil and oil products. We’ve been exporting not only our excess sweet light crude and condensate from shale oil. We’ve also been exporting our inventories of diesel and diesel, and jet fuel in particular. (…)

You can’t even really start on rebuilding facilities like, say, Shell’s gas-to-liquids synthetic lubricant plant in Qatar, or repairing the Bahrain refinery or the Adnoc’s Abu Dhabi refinery, until you know the missile and drone attacks have really stopped. The Gulf States have set up— you know, warehousing for parts, and they’ve done surveys, they’ve done ordered parts, but to really start repairing these vast plants, they can’t even start yet. It’s at least a $50 billion to $60 billion repair bill. Again, it’s almost as if the Iranians knew more about our oil supply and our, you know, our oil product supply chain than the Trump Administration.

(…) what was really destroyed in the Gulf, it’s not just a matter of escorting ships to the Strait of Hormuz. It’s the disruption of the productive plant. And that’s the problem.

The Korean refiners can get up and running again with maybe four months delay. But the Gulf plants are offline until they get fixed. I think that supply disruptions of fuel and lubricants is going to be an acute issue going into the Fall elections. (…)

BTW:

but:

 

Chinese Economy Stalls as Spending, Investment Drop to Covid-Era Levels

Retail sales declined 0.6% last month from a year ago, posting a worse-than-forecast drop that was their first fall since the reopening from Covid lockdowns in late 2022.

Home prices fell at a quicker pace in May and fixed-asset investment shrank a deeper-than-expected 4.1% in the first five months from a year ago, according to data released by the National Bureau of Statistics on Tuesday.

In contrast to weakness on the demand side, industrial production climbed 4.5%, up from 4.1% in April and slightly better than forecast. The surveyed urban jobless rate eased to 5.1%. (…)

 

An export boom driven by artificial intelligence has become a new source of economic imbalance in China, lifting production as domestic consumer spending sags under the weight of a housing crisis and a fragile jobs market.

But without stronger demand at home, the economy is at risk of a deeper slowdown even as the US-Iran deal to reopen the Strait of Hormuz holds out the promise of stabilizing global shipping and energy prices. (…)

The services production index, which inched up to 4.4% on year in May, has a stronger correlation with the pattern of growth in gross domestic product than retail sales, which comprised mostly goods, according to Yu Song, chief China economist at UBS Securities. Inconsistency in the fixed-asset investment data that became apparent last year also mean it might exaggerate the weakness, he said. (…)

Within investment, private capital expenditure slumped 7.1% in the first five months of 2026 from a year ago, the worst pace since 2020. Manufacturing investment declined for the first time in six years.

Further evidence emerged indicating a growing divergence in the economy. Investment in high-tech industries expanded 4.5%, with capital expenditure of semiconductor and lithium battery makers up 11% and 25%, respectively.

NBS spokesman Fu Linghui attributed the slump in investment and retail sales to factors including heavy rainfall. Fu also pointed to last year’s high level of spending driven by subsidies as well as the economy’s transition to new growth drivers. (…)

Car purchases, which make up about 8% of the overall figure, plunged 16% in May from a year ago. Excluding autos, retail sales grew 1.1% in May.

Sales of home appliances as well as construction and decoration materials also contracted at a double-digit pace.

A faster fall in home prices last month doesn’t bode well for consumer sentiment. Both new and second-hand homes declined in price at a quicker pace compared with April. (…)

The spurt of export growth this year has still been sufficient to keep China’s economy from cooling off too much. A global investment supercycle in artificial intelligence is driving up prices and demand for hardware made by the world’s manufacturing powerhouse.

Outbound shipments soared in May at their fastest pace in three months. Chips and computers contributed to about half the growth in both exports and imports, with overseas sales of semiconductors soaring 111%. (…)

The latest China Beige Book foresaw the slowdown: “China’s economy slowed across the board in April with investment resuming declines while retail sales and industrial output fell short of forecasts, underscoring the economy’s vulnerability in the face of a global energy crisis.”

SpaceX’s IPO was just the start

The IPO on Friday was just the beginning — over the next days and weeks, Wall Street is launching all kinds of ways to invest in the company and speculate on the direction of its stock price.

On Sunday night, Asian investors — mostly asleep on IPO launch day — started buying, pushing up the stock price in after-hours trading.

• Then yesterday, the leveraged ETFs launched.
• Today, SpaceX options are set to begin trading. Those give investors the ability to make leveraged bets on which way the stock moves.
• And then, as we’ve reported, there will be the inclusion in stock indexes in the coming days and weeks.

This includes a lot of fanfare and product launches for an IPO — it’s not typical.

More ways to make money also means that there are more ways to lose money. All these products amplify risks in the market.

The stock closed at $192.46 yesterday and is now up nearly 43% from its initial offer price of $135. (Axios)