CONSUMER WATCH

Americans are spending faster than they earn it

The personal saving rate fell to 2.6% in April, down from 3.2% in March and 4.3% in January — a sharp slide that brings it to its lowest level since mid-2022.

• Consumer spending rose 0.5%, even as disposable personal income fell 0.1%, the Commerce Department said Thursday morning.
• That gap between how fast consumer incomes are rising and how quickly they are spending is driving the drawdown in the saving rate.
• Gasoline and energy goods were the single-largest driver of spending increases in April, one sign of how the war’s energy impact is registering in household budgets.

The Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred inflation gauge, rose 0.4% in April, cooling from 0.7% in March at the height of the energy shock.

• There is still little evidence of the shock spilling over into non-energy-related categories. Core PCE, which excludes food and energy costs, gained 0.2% — cooling slightly from March.
• Still, compared with the prior year, core PCE ticked up to 3.3%, its highest level since 2023. As Fed governor Lisa Cook put it in a speech Wednesday: “Inflation is clearly moving in the wrong direction.”

Before the pandemic, Americans were saving at roughly double today’s rate, though that cushion has been eroded by two consecutive inflation shocks in the span of four years.

Real per capita disposable income — the money consumers can spend after accounting for taxes and inflation — declined 1.4% in April from a year ago. It also dropped 0.4% in March.

Also:

Quarterly results from Dollar Tree, Best Buy and Kohl’s suggest that consumers are still willing to spend on bargains and small indulgences — yet are becoming increasingly selective as higher gas prices and other everyday costs put pressure on household budgets, Axios’ Kelly Tyko writes.

• Their stocks surged today: Dollar Tree (up 17.9%), Best Buy (up 15.8%) and Kohl’s (up 20.5%).

After the market close, Costco reported results that supported the trend, showing 9.8% comparable sales growth.

Goldman Sachs:

Real GDP growth was revised down by 0.4pp to +1.6% (quarter-over-quarter annualized) in Q1.

Consumer spending growth was revised down 0.2pp to +1.4%, largely reflecting downward revisions to healthcare spending from the incorporation of Quarterly Services Survey (QSS) data.

Business fixed investment growth was revised down slightly (-0.4pp to +10.1%), while housing investment growth was revised up (+1.7pp to -6.3%).

Domestic final sales growth was revised down 0.1pp to +2.7%. The contribution of inventory accumulation to GDP growth was revised down 0.3pp to +0.1pp.

Real gross domestic income, an alternative measure of economic activity based on different source data than GDP, grew +0.9% (quarter-over-quarter annualized) in Q1.

Personal income was flat in April, below expectations and partially reflecting a 0.2pp drag from a decline in payments from the Farmer Bridge Assistance program, which had boosted personal income in March. Employee compensation rose 0.2%.

Year-over-year real disposable personal income growth now stands at -1.1%, or -0.4% after excluding the volatile farm income component and the negative base effect from a large increase in Social Security payments last year.

Personal spending rose 0.5% in April, in line with consensus expectations. Real personal spending rose 0.1%, reflecting a 0.2% increase in real services spending but a 0.1% decline in real goods spending.

The core PCE price index increased 0.24% in April, slightly below expectations. Monthly core PCE inflation was revised up by 0.01pp to 0.30% in March and by 0.03pp to 0.40% in February.

Year-over-year core PCE inflation ticked up to 3.29% in April. Headline PCE increased 0.40% in April, and the year-over-year rate increased to 3.77%.

U.S. consumers are seeing prices climb, and not just for fuel

Consumers in the United States are feeling the crush of rising prices. But while the war with Iran gets much of the attention, when volatile products such as food and energy are stripped out, core goods prices are climbing at the fastest pace since Ronald Reagan was on his way out of the White House.

The personal consumption expenditures price index, the measure of goods and services inflation most closely watched by the U.S. Federal Reserve, jumped 3.8 per cent in April from the year before. That was the fastest rate in three years, and it was heavily driven by soaring gasoline prices.

But below the surface, prices for core goods have risen spectacularly.

Two things appear to be at play: tariffs and the artificial intelligence boom. (…)

In a note published by the U.S. Federal Reserve last month, researchers analyzed the impact of tariffs on core goods categories and determined import duties explained much of the increase in prices up to February, 2026. That pressure is set to ease, at least for now, after the U.S.’s top court overturned Mr. Trump’s emergency tariffs, though other tariffs remain in place.

Yet tariffs aren’t entirely to blame, either. Another report published last month by researchers at the Federal Reserve Bank of Minneapolis found prices for some goods are surging more than can be explained by tariffs alone and they pointed to AI-induced demand for electronics equipment, in particular.

Indeed, in Wednesday’s PCE report, the tech category of goods jumped 10 per cent annually. (…)

Here’s Ed Yardeni’s chart on goodsflation. Ed writes: “In his final press conference, Fed Chair Jerome Powell stated he expected the inflationary impact of tariffs to fade within two quarters. That’s not happening yet.”

PCED services is up 3.5% YoY, stubbornly high. The wage-sensitive super-core measure of PCED services (ex energy and housing) also rose 3.5%.

The latest Redbook Retail Sales Index confirms that consumer spending remained strong through May. It rose 8.9% y/y during the week ending May 22, well above the 2025 full-year average of 5.8% (chart).

Chevron CEO warns oil prices to jump over summer as supplies dwindle

(…) “The buffers and the shock absorbers are being steadily drawn down, and the ability for the market to absorb this imbalance is drastically diminished today versus where we started,” he said at a conference organised by the investment bank Bernstein on Thursday.

“Over the next few weeks, we’re likely to see those pressures flow through more directly to physical prices and there’s more upwards pressure that I would expect as we get into June and certainly into July.”

Wirth’s comments follow a 10 per cent fall in oil prices over the past week amid optimism that the US and Iran can agree a deal to end the three-month-long conflict that has closed the Strait of Hormuz (…).

They highlight growing concern among economists that the war’s impact on energy prices will continue to be felt for many months after any deal is agreed to end it. The conflict has removed 12mn-13mn barrels of oil a day from global markets.

The comments by Wirth echo a growing chorus of warnings from other oil executives, including the head of the United Arab Emirates state oil group Adnoc, who cautioned last week that full oil flows through the Strait of Hormuz were unlikely to return before next year even if the conflict is resolved.

“It will take at least four months to get back to 80 per cent of pre-conflict flows, and full flows will not return before the first or even second quarter of 2027,” Adnoc chief executive Sultan al-Jaber said during an Atlantic Council event on May 21. (…)

Wirth said the energy crisis would force governments to focus more on “an insurance policy” by building up oil reserves to insulate them from shocks such as the pandemic and wars in Iran and between Russia and Ukraine. (…)

“If this goes on for long, it tips us into an economic slowdown or a recession, you might have an offset on the demand side, which you can’t rule out.”

• Exxon Mobil warns global oil stocks may hit critical lows within weeks

Exxon Mobil has warned that global crude oil inventories are set to fall to their lowest level on record in the next few weeks, a situation that would force oil prices sharply higher and put pressure on energy markets.

“We are approaching oil inventory levels that have never been this low before,” Neil Chapman, senior vice-president of Exxon, said at a conference hosted by Bernstein in New York.

Chapman warned with concern: “I mean very, very low levels, extremely low. You can debate whether levels that critical will be reached in 2 or 3 weeks, but whenever we get there, you will see oil prices shoot up immediately.”

The executive added that Dated Brent prices in the physical market would jump to US$150 to US$160 a barrel when oil stockpiles fall to record lows in the coming weeks.

He said that once prices rise to a certain level, demand destruction would help pull the market mechanism back into balance. (…)

Americans Are Falling Behind on Their $1.25 Trillion Credit-Card Bill Soaring interest rates and stubborn inflation have led to highest delinquencies since the financial crisis; ‘a pattern of survival debt’

(…) In the first quarter of this year, the percentage of credit-card balances that were at least 90 days delinquent rose to 13.12%, according to data released in May by the Federal Reserve Bank of New York. That’s the highest level in 15 years, and the most since the period following the 2008 financial crisis. (…)

 

America’s total credit-card balance stood at $1.25 trillion in the first quarter, according to the New York Fed, up from $1.18 trillion [+5.9%] in that quarter last year. That’s the highest first-quarter balance since the New York Fed began recording the measurement in 1999. (…)

Americans straining to pay off their debt have flooded credit-counseling agencies. The National Foundation for Credit Counseling, a network of nonprofits that helps people reduce credit-card debt, said it had 24% more clients in January than a year earlier. Its average number of monthly clients was 60% higher this year than in 2018. (…)

Americans carry, on average, about $6,500 to $6,700 in credit-card debt, according to credit-reporting agencies. The percentage of cardholders with balances of more than $10,000 has risen in communities across different income levels since 2018, analysis from the Urban Institute data shows. Last year, 17% of cardholders in low-income communities held balances greater than that amount, 20% in medium-income communities and 25% in higher-income communities. (…)

Middle-class households in particular are struggling to pay down balances as more families “shift to a pattern of survival debt,” said Bruce McClary, spokesman for the foundation. (…)

Bloomberg:

As the graphic below shows, the fortunes of real estate and stocks do a shockingly good job of explaining why some consumers can throw caution to the wind and continue to spend even as savings dip perilously close to zero. Ballooning 401k accounts give people a false sense of security that their retirement financing is ahead of schedule and that they can spend most of their income and even run up debt. Market crashes, in those instances, exacerbate economic pain.

In the extreme cases, the results were recessionary. Wealth is easy-come, easy-go, and an economy that’s sustained by home equity or the stock market is inherently flimsy.

Corporate America Is Starting to Ration AI as Cost Skyrockets Executives are scrambling to track returns on AI investments as the bill for massive computing needs comes due

(…) Some enterprises have hit their annual budget in just three months or reported seeing their AI spending bills double or triple. (…)

But a number of investors and tech executives cautioned against betting on a pullback, noting that sales and usage by corporate AI customers have climbed far faster than forecasts. (…)

Just a few months ago, the prevailing sentiment around AI use at many big companies was the more, the better. All-you-can-eat subscriptions amounted to a subsidy by the model-makers, which often lost money on the intensive activity of power users. Exhorted to embrace the wave of change, employees at some companies engaged in tokenmaxxing, or using as much computing as possible in order to be seen as AI-forward—a practice that continued even as the model companies shifted to usage-based pricing. (…)

Higher costs may eventually steer users toward cheaper models that cost a fraction of the price, but many companies remain wary of such AI systems because several of the cheapest options were developed in China, according to executives. Anthropic, OpenAI, Google and others also offer cheaper versions of their flagship models, and Factory and others have developed systems to help companies triage queries and steer some tasks to cheaper options.

Token use continues to grow immensely. Google said at a recent event that it now processes over 3.2 quadrillion tokens a month, seven times as much as a year ago. The company and others are seeking to reduce the cost of AI use in a variety of ways, including increasing computing efficiency.

That shift to usage-based pricing has forced enterprise customers to reckon with their consumption. An Uber executive said by March, the company had blown through its annual budget for agentic, or autonomous, AI use. Microsoft limited access to an Anthropic program for some employees who can use an internal coding assistant instead. Salesforce introduced a system for tracking how token use ultimately contributes to positive business outcomes. (…)

An Anthropic spokeswoman said the company’s models help customers achieve greater productivity, such as completing complex tasks in less than two weeks that would have taken more than seven months in the past.

“As with any new technology and way of working, teams are still discovering where the biggest gains are and how best to measure them,” she said. “We’re working with customers to give them the tools to make sure the return is something they can see, not just feel.”

Software engineers and startup executives warn that even though it is possible to complete tasks far more quickly, spending on debugging, reviewing and rewriting AI-generated code remains high, indicating that the models still need to be improved.

For companies using advanced AI coding tools, only 18% of spending on tokens is translating into shipped coding products that reach real users, according to EntelligenceAI, a startup that aggregated data on more than 2,000 companies using advanced AI tools for coding.

• Amazon scraps AI leaderboard to stop workers chasing usage scores Senior executive Dave Treadwell tells staff ‘don’t use AI just for the sake of using AI’ as costs rise

Amazon has shut down an internal leaderboard that tracked employees’ use of AI tools after workers tried to boost their scores with unnecessary activity that increased the company’s computing costs.

Employees at the $2.9tn group were told this week its “Kirorank” service — which scored users of Amazon’s Kiro developer platform based on their AI activity — had been taken offline, according to two people familiar with the matter. (…)

Meta employees have similarly sought to boost their position on internal tables by driving up token consumption. (…)

AI labs such as Anthropic have recently shifted to a consumption-based pricing model away from monthly flat fees, in a move that significantly increased the costs of some customers. Amazon uses Anthropic’s AI models extensively.

Amazon had started to use a metric called “normalised deployments”, evidence of engineers regularly using AI to create useful code, to measure the success of its AI tools and adoption of the technology rather than outright token consumption, the people added.

Treadwell told staff that he did not want workers to focus on token use and instead instructed them to focus on building better products.

Compute usage and cost will likely follow patterns similar to the internet in the 1995-2005 period. When internet use became widespread in the 1990s, there was both an immediate problem with individual overuse and a massive consumer cost explosion known as “bill shock”. Because early internet infrastructure was priced by the minute or hour rather than as a flat rate, staying online too long resulted in astronomical, unexpected bills for ordinary households.

The technological novelty combined with the sudden ability to talk to strangers globally triggered immediate societal patterns of overuse.

It was common for families to receive unexpected monthly phone and internet bills totaling hundreds or even thousands of dollars because children or teenagers left the dial-up connection running to browse early websites or use chat rooms.

The cost explosion ended abruptly when AOL shifted to a flat-rate pricing model of $19.95 per month for unlimited access. While this saved consumers from ruinous bills, it created a new infrastructure crisis.

Demand for faster internet services soared as the capabilities and offerings of online services expanded. With the advent of online shopping, streaming media, and an array of cloud-based services, dial-up connections quickly became obsolete. Users required more bandwidth to support these activities—broadband was the solution to this ever-growing demand.

The growth of broadband and e-commerce became deeply intertwined. Each fueled the other’s expansion; e-commerce companies needed customers to have fast and stable internet connections to access their services, while the expansion of broadband opened new markets and opportunities for these companies to reach wider audiences.

• DeepSeek Makes 75% Price Cut on V4 Pro Permanent

From Business Analytics Newsletter:

For the past 18 months, enterprise AI budgets have been locked in a predictable pattern: pay frontier prices, accept frontier performance, negotiate volume discounts. DeepSeek just changed the floor permanently.

The original 75% promotional discount on V4 Pro was set to expire May 31, 2026. Instead, DeepSeek announced the rates are now the standing price, not a promotion. The reason: architectural efficiency, not market pressure.

Long-context inference is expensive. As enterprise AI workloads grow RAG pipelines with large retrieval prefixes, code review agents scanning full repositories, legal document analysis token costs compound fast. A team running 500M input tokens/month at standard frontier rates could pay over $1,000/month in input costs alone, before output.

V4 Pro was engineered from the ground up to cut long-context inference cost, using a Mixture-of-Experts design that activates only 49 billion of its 1.6 trillion parameters per forward pass. Combined with a 1M-token context window and aggressive caching (cache-hit input now at $0.003625/M), the architecture makes the price cut structurally sustainable.

In plain English:

• Baseline: GPT-5.5 estimated at ~$30/M output tokens; V4 Pro original price at $3.48/M output

• After Optimization: V4 Pro permanent pricing at $0.87/M output tokens (75% reduction from original)

• Business Impact: At 1B output tokens/month, switching from GPT-5.5 to V4 Pro saves approximately $2.4M/year; enterprise deployments with cache-heavy workloads can realize even greater savings via the $0.003625/M cache-hit rate

At 34x cheaper than GPT-5.5’s estimated output pricing, this permanently shifts the cost calculus for enterprise AI workloads teams running high-volume RAG pipelines, code review agents, or long-context inference can now achieve seven-figure annual savings compared to closed-source alternatives, while self-hosting the open weights for full data sovereignty.

If your team is still defaulting to GPT-5.5 or Claude Opus 4.7 for cost-sensitive batch workloads, benchmark DeepSeek V4 Pro this week the 80.6% SWE-bench score means coding and reasoning quality is now within striking distance of frontier models at a fraction of the cost.

Anthropic Rockets to $965 Billion Valuation, Topping OpenAI in AI Showdown

The company has emerged as the front-runner in the AI race and is on track next month to hit $50 billion in “annualized revenue”—a metric startups use that employs short-term sales to forecast a yearly figure. That figure grew 80-fold in the first quarter. (…)

The $965 billion valuation more than doubles Anthropic’s previous value. The company’s valuation growth is the fastest in venture-capital history, according to PitchBook Data. Anthropic reached its latest valuation roughly 3 years and 2 months after launching its first product, per PitchBook. (…)

The company’s revenue is set to more than double to $10.9 billion in the second quarter, an explosive rate of growth that will help it turn an operating profit for the first time, The Wall Street Journal has reported. (…)

Instead of chasing chatbot use, Anthropic focused on business customers, especially coding automation, viewing semiautonomous software-writing as a potential takeoff point for more advanced AI capabilities. (…)

OpenAI, which closed a $122 billion funding round earlier this year, has released a competing tool called Codex, and the two companies are locked in a ferocious competition for business users. (…)

The Information says that OpenAI generated $5.7 billion in first-quarter revenue, boosted by demand for Codex.

The FT adds:

Anthropic initially targeted a $30bn raise from financial institutions. The company exceeded that total in part thanks to the participation of infrastructure partners. This added to $15bn in previously committed funding from Big Tech “hyperscalers”, including $5bn from Amazon, to fill out the $65bn raising. (…)

The round comes as private investment giants Apollo and Blackstone were putting together a roughly $36bn debt deal to purchase custom chips designed by Google and Broadcom, which Anthropic intends to lease.

The two firms are sounding out rival investment groups as they prepare one of the largest private credit deals of all time. The loan will be split into multiple tranches, with Broadcom agreeing to step in to make payments to senior lenders if Anthropic misses a payment.

Broadcom’s support means the senior portion of the loan is expected to offer a spread of 1.5-1.75 percentage points above a benchmark compared to a yield of about 8-8.5 per cent on the portion that relies on Anthropic’s ability to meet the chip payments.

Anthropic recently struck a multibillion-dollar deal with Elon Musk’s SpaceX to use one of its data centres, as well as long-term agreements with Google, Broadcom and Amazon potentially totalling hundreds of billions of dollars.

Consumer debt, Investor debt:

Investors are using a record amount of borrowed money to bet on stocks.

Through the end of April, net margin debt hit more than 1.25% of U.S. market cap, near the highest level in records stretching back to 1997. (Axios)

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

Not a timing tool, just a potential fire accelerator.

Speaking of buying on margin: An increasing share of regular folks in South Korea are going all in on the country’s stock market — borrowing money so as not to miss out on the AI-fueled stock boom there.

South Korea’s KOSPI index, which crossed 8,000 for the first time on Tuesday, is up 207% from a year ago. A few big, newly minted trillionaire chipmakers are behind the surge, including SK Hynix and Samsung.

Data: Financial Modeling Prep; Chart: Emily Peck/Axios

Margin loans are at a record high, according to reporting earlier this month in the Korea Times. Middle-aged and older Koreans are increasingly getting in on this — borrowing money so as not to miss out, “mirroring” younger generations but “often with larger sums at stake.”

Some of these folks are risking retirement money with leveraged bets — Korea already has a high poverty rate (40%) for older adults.

• If the AI trade falters, the country’s entire economy is on the line, writes Ed Yardeni at Yardeni Research.
• “Asia’s fourth‑largest economy increasingly resembles a giant leveraged bet on AI.” (Axios)

FYI:

Trump appointees push $250 banknote with his portrait

The director of the Bureau of Engraving and Printing who resisted the effort was reassigned last month. “The buck stopped here,” she wrote in her goodbye email.

CEO Confidence Tumbled in Q2 2026

“CEO confidence fell back into negative territory in Q2 2026, reversing the surge in optimism in the first quarter,” said Dana M Peterson, Chief Economist, The Conference Board. “CEOs reported that the economy is materially worse now than it was six months ago and expected economic conditions to weaken further over the next six months. Regarding their own industries, CEO assessments about current conditions and expectations in six months deteriorated since last quarter.”

• 15% of CEOs said economic conditions were better than six months ago, down from 39% in Q1 2026.
• 47% said economic conditions were worse, up from just 8% last quarter.

• 33% of CEOs said conditions in their own industries were better than six months ago, down from 42% in Q1.
• 33% said conditions in their own industries were worse, up from 14% last quarter.

• 24% of CEOs expected economic conditions to improve over the next six months, down from 43% in Q1 2026.
• 40% expected economic conditions to worsen, up from 13% last quarter.

• 38% of CEOs expected conditions in their own industry to improve over the next six months, down from 51%.
• 22% expected conditions in their own industry to worsen over the next six months, up from 14%.

31% of CEOs expected to reduce their workforce, up from 27% in Q1 2026. This was higher than the share expecting to expand their workforce (28%, down from 31%). 40% of CEOs anticipated no change in their workforce.

The distribution of planned wage hikes concentrated in the 3-4% range, pulling from higher and lower ranges.

Fed’s Goolsbee Warns U.S. Economy Heading in ‘Stagflationary’ Direction

The energy crisis caused by the Middle East war has central banks in a dilemma: hike rates to fight inflation while imperiling growth, or wait and risk being too late.

In an interview on Thursday, Chicago Federal Reserve President Austan Goolsbee warned that the persistent combination of energy shocks and stubborn inflation could push the U.S. economy into a “stagflationary” direction characterized by a simultaneous rise in unemployment and price growth. (…)

I don’t think that tariff-driven inflation on goods has gone down nearly as rapidly as people wanted. And if you look at services inflation in the U.S., it’s high and rising — and that can’t be from tariffs, and that can’t be from oil. So there are some concerning aspects even separate from the war. (…)

I’m worried about the stagflationary direction—meaning inflation and unemployment going up at the same time. That is entirely possible and the worst-case scenario. That is among the most challenging situations that a central bank can face because raising, cutting or holding rates doesn’t fix the problem.

The more stagflationary shocks we get, the more we’re going to be put in this difficult position as a central bank where we have to choose which is worse: the beginning of a recession or igniting more inflation and expectations becoming unanchored. (…)

For me, the inflation danger is the more immediate threat right now. (…)

• Warsh’s New Challenge: Containing Fed Hawks as Inflation Simmers

The challenge may grow Thursday when new data is expected to show the Fed’s preferred gauge of inflation rose 3.8% in the 12 months through April — almost two full percentage points above the central bank’s 2% target. (…)

While President Donald Trump has said he wants Warsh to act independently as Fed chair, political pressure to bring rates down isn’t far from the surface.

Just hours after hosting Warsh’s swearing-in last week, Trump said he expected rates would come down “very quickly.” (…)

Long-term inflation expectations have taken a hit too. Looking ahead five to 10 years, consumers expect prices to rise an annualized 3.9%, up from 3.5% in April and the highest in seven months, according to the University of Michigan’s consumer survey for May. (…)

Home Alone: inflation and the new Fed chair

Michael Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan Asset & Wealth Management

The new Fed chair Kevin Warsh, like Kevin McCallister in Home Alone, faces a lonely vigil: survive until the adults get home again.

The new Fed chair has highlighted an inflation measure that sends an all-clear signal on easing: “trimmed” PCE inflation. Good luck with that; trimmed inflation did a very poor job identifying the 2021 Biden-flation surge which the GOP understandably cites as a policy failure.

In this Eye on the Market we look at inflation signals Warsh faces as he deals with pressure from Trump, who stated that the Fed should cut rates ASAP and that the US should have “the lowest rates in the world”.

Similarly, when asked last December where rates should be a year from then, Trump responded by saying “1% and maybe lower than that.”

Before getting into the details, three big picture charts below:

• the surge in US commodity prices which may feed into core consumer and producer price inflation, at least temporarily;
• the rising sensitivity of the US business cycle to changes in inflation;
• and deteriorating US public finances.

 

During Warsh’s term (if he lasts as long as prior Fed chairs), he will preside over the dreaded crossover point: in 2031 entitlements, interest and other mandatory outlays are projected to permanently exceed Federal tax revenues for the first time. In other words, the scope for a monetary policy mistake is getting narrower by the day, and rising Treasury yields are rapidly shrinking the equity risk premium earned by investors.

Inflation indicators the Fed watches include labor market tightness, price pressures in the manufacturing sector, supply chain tightness and the “output gap” which measures how far actual growth is above/below potential growth. (…)current values are much closer to conditions that have historically prompted the Fed to raise policy rates rather than to lower them.

That may be why the futures curve is now pricing in Fed hikes instead of the cuts that were priced in at the start of the year.

Superwonky: averaging several different monetary rules of thumb (Taylor rules, inertial, alternative r*, forward-looking) yields a Fed Funds range of 4.00% – 4.85% compared to the current range of 3.50% – 3.75%.

Inflation expectations can be derived from household surveys and from inflation-linked bond markets. Both have risen a small amount since the war began. (…)

I’m not going to torment you by listing all the differences between PCE inflation and CPI inflation; the Fed looks at both but reportedly has a preference for the former. One major difference: housing inflation is more heavily weighted in CPI while computer software and accessories are more heavily weighted in PCE. Since March 2025, software inflation has exceeded housing inflation by 9% (12% vs 3%).

Producer prices are rising for several reasons: rising transport costs due to higher energy prices; copper and aluminum demand for energy storage, solar panels and EV production; soaring costs for electronic components and memory chips due to the AI boom; rising costs for application software (at least until the Agentic AI shock shows up in the data); higher US tariffs; and new export controls from China on rare earths and medical equipment.

Silver lining: core PPI is often a poor predictor of future PCE inflation.

While it’s impossible to know the precise reasons for it, US productivity has picked up since the launch of GPT in the fall of 2022 with even larger gains in the information sector and in the IT data processing subset. The Warsh view on AI focuses on its potential to boost the supply side of the economy which would argue for lower rates.

This differs from the Powell view that in the short run, AI capital spending is likely inflationary on the margin.

JP Morgan’s economists believe that the FOMC staff and much of the rest of the committee are likely more aligned with Powell on this issue, and do not foresee a scenario where the committee gets enough clarity on productivity gains (which generally come with a multi-year lag) to justify lower rates in the near term.

It’s also worth remembering that productivity gains often don’t get recognized by the Fed until years after the fact. In 2019, Fed researchers recalculated deflation in the Information and Communication Technology sector in the 1990’s and found roughly double the ICT deflation than levels reported in official statistics for both software and equipment. They also recomputed PCE inflation for consumer digital services (data, voice and video to households over internet, mobile and cable networks).

Even though the consumer digital access basket is only 2.5% of consumption, the revision was large enough to cut ~50 basis points from overall PCE inflation from 2008 to 2018. End result: in both cases, real growth and productivity gains were understated.

US 30-year Treasury yields have not consistently exceeded 5% since 2007 but have just crossed that threshold. The US equity risk premium (the estimated excess return in equity markets over bond markets) has been falling and now stands at its lowest level since the early 2000’s.

Also shown below: investor complacency is rising as illustrated by the declining price for downside protection on the NASDAQ.

A lot is riding on normalization of energy prices and an end to the Iran war, since fossil fuel energy independence hasn’t insulated the US from sharply rising US commodity prices.

Productivity gains from AI will be important to track since they might be the crux of Warsh’s argument that the Fed avoid hiking rates even if economic indicators suggest they should.

There’s also pressure that will come from the White House to ease, which might end up being the defining act of Warsh’s tenure at the Fed. Let’s hope for his sake that he does not end up like Arthur Burns, for whom the adults did not return in time.

What Could Possibly Go Wrong?

Ed Yardeni:

The bull case for the stock market remains intact. The S&P 500 rose to yet another record high today. The economy and the labor market remain resilient. Consumers are spending. The AI boom is boosting capital spending. Corporate earnings are soaring on strong revenues growth and higher profit margins. The odds of a recession in 2026 fell to 19% today, the lowest reading of the year. Stock prices are rising on FEMO (fabulous earnings momentum) rather than FOMO. (…)

But a disciplined bull monitors the risks. Here are the ones we’re watching:

(1) Elevated valuation.

(2) Earnings exuberance.

(3) Bond Vigilantes and hawkish Fed. An unexpected rate hike at the July meeting (which we are expecting) could unsettle the stock market.

(4) The war and oil prices.

(5) Concentration. Micron alone accounts for a staggering 51% of S&P 500 EPS growth revisions since February 27.

(6) Mixed sentiment. 54.8% of consumers expect stock prices to be higher in 12 months, well above the long-run average of 35.5%. That’s the most bullish reading on equities outside of the recent highs. From a contrarian perspective, that’s bearish. With household wealth increasingly tied to equity portfolios, a market sell-off would trigger a negative wealth effect more quickly and sharply than in prior cycles. That could cause consumers to retrench, resulting in a recession.

(7) Funky private credit.

(8) Monster IPOs. The deal’s 4.29% float is deliberately small, generating an estimated $42 billion shortfall between index demand and available float as SpaceX seeks fast-track index inclusion. Passive and active managers benchmarked to the S&P 500 would need to sell existing large-cap holdings to make room for that deal and for the gigantic IPOs of OpenAI and Anthropic.

(9) AI is too expensive. Our main concern currently is that agentic AI is a budget buster. AI is supposed to cut labor costs, increase productivity, and boost profit margins. There is another side to this story.

Ed could add to his long list “The war and input supplies”. It’s not just prices, it’s the availability of critical inputs to sustain world production.

One Million New-Car Buyers Are Gone and They’re Not Coming Back Soon High gas prices, rising interest rates and stubborn inflation are keeping buyers at home and cars on the lots

(…) consumers—stung by persistent inflation, rising fuel prices and high interest rates—are balking at prices that have risen to around $50,000 on average.

Americans were buying around 17 million cars and trucks a year before 2020; industry analysts don’t expect the market to return to that level until the end of the decade or later. They now forecast total annual sales of about 16 million vehicles or fewer this year, and that outlook has grown even dimmer as the conflict in Iran keeps gas prices high. (…)

While around one-quarter of models in the U.S. go for between $25,000 and $35,000, an even bigger share tops $55,000, according to data from the car-shopping website Edmunds.

Executives at the world’s biggest automakers say they recognize that a new car is out of reach for more Americans. Some have promised to bring out more affordable models. But no one predicts significant relief soon.

Historically, stagnating sales led automakers to juice demand by rolling out deals and incentives that eroded their profit margins. That isn’t the case this time, particularly as America’s automaking giants, GM and Ford, are making solid profits selling fewer vehicles.

“I don’t want to say automakers are OK with this level of sales, but they kind of are,” said Ivan Drury, an Edmunds automotive analyst. “It’s not like back in the day when they’d be hacking away at the price to lift sales.”

That’s because selling big trucks and SUVs that dominate those automakers’ lineups is more lucrative than selling larger volumes of cheaper cars. (…)

“For now, things are going well. But what happens if we hit another recession?”

Buyers are left with few options. They could turn to used cars, but those are similarly climbing in price. Many choose to keep their old cars running longer. The average car on U.S. roads is now about 13 years old, a historic high, according to S&P Global. 

Profits from more-expensive vehicles are helping offset the higher costs of doing business in the auto industry in the 2020s. Nearly every automaker is paying billions of dollars more each year to foot the bill for President Trump’s tariffs. Ford incurred about $2 billion on tariffs last year. Car companies are also erasing billions from their balance sheets as they walk back costly electric-vehicle investments. (…)

Yet introducing new cheap models isn’t part of GM’s plan. A spokesman said the company is “very comfortable” with its portfolio as it stands today, noting that developing a new vehicle is costly and money the company should spend only if a model will add value over time. (…)

John Murphy, a longtime auto analyst and corporate adviser, for years had been certain that the auto market would return to its 17-million-a-year days. He doesn’t think that anymore.

Reaching that level would require a big surge in vehicles available for less than $40,000, which doesn’t appear in the cards.

“Automakers are more disciplined,” Murphy said. Covid-driven supply-chain shortages showed automakers that they could make a lot of money selling fewer vehicles at higher prices. Before then, companies would slash prices to outsell one another, afraid of losing market share.

“It’s great for investors, great for stock prices and good for cost of capital,” he said. “They’re actually running the business in a much more focused way.” (…)

Elsewhere in today’s WSJ:

Several dozen Democratic lawmakers recently urged Trump to bar Chinese automakers from building cars in the U.S. and called for a ban of Chinese carsmade in Mexico or Canada, saying, “We must not cede the American auto industry to a strategic competitor intent on global dominance.” (…)

Some policymakers believe the investments could help reinvigorate local manufacturing industries. When Japanese carmakers expanded in the U.S. in the 1980s and 1990s, it forced U.S. carmakers and suppliers to adopt new approaches that ultimately made those companies more resilient and benefited car buyers. (…)

In yesterday’s Daily Edge:

EV sales are growing as more affordable models are available both from domestic manufacturers including Volkswagen AG and Stellantis NV, as well as Chinese brands led by BYD Co. In Germany, Europe’s largest market where a new subsidy is in place, EV sales jumped 41%.

FYI:

Entry-level electric cars like the BYD Seagull sell for under $10,000 USD, and there are over 200 EV and hybrid models available for under $25,000 USD. For comparison, the average price of a new car in the US is roughly $51,456 USD.

FYI #2 but unrelated:

• Asked whether he would be open to a deal under which Iran and Oman were handed control of the Strait of Hormuz, Trump said: “Nobody is going to control it. It’s international waters, and Oman will behave just like everybody else, or we’ll have to blow them up.”
• Trump again appeared to seek to pressure Washington’s Arab allies, including Saudi Arabia and Qatar, to normalise ties with Israel, suggesting it should be a condition for the US reaching a deal with Iran. “I think they owed that to us,” he said. “I’m not sure we should make the deal if they don’t sign.”

Remind me what were the objectives of that war again?

FYI #3 and also unrealetd:

The DOJ Wants to Know Who on Reddit and X Is Criticizing ICE’s Tactics In seeking identities of those behind anonymous social media posts, the Trump administration is intensifying its pursuit using grand jury subpoenas.

The US Justice Department is seeking the names, addresses, and banking information of Reddit and X users, ratcheting up efforts to identify social media critics of government deportation efforts.

The US Attorney’s Office for Washington, led by Jeanine Pirro, a close ally of President Donald Trump, has subpoenaed the social media companies as part of criminal investigations, asking for personal information on at least two anonymous posters behind accounts that have chided immigration enforcement efforts, according to records shared by attorneys for the users. (…)

Even if no charges ultimately are filed, the attorneys contended in interviews that rooting out identities of dissenters is at the very least an intimidation tactic. (…)

Anonymous speech is a bedrock of the US political system, said First Amendment Coalition Executive Director David Snyder. He pointed to The Federalist Papers, which are 18th century essays written to encourage ratification of the US Constitution by some of the nation’s founding fathers. They used the pseudonym “Publius.”

“They understood at a very visceral level that in order to speak your mind, sometimes you need to be able to do so anonymously,” Snyder said, “so the government doesn’t come after you.”