Month: May 2025

ECONOMY WATCH

The May 11 liberation from April 2nd “Liberation Day” cheered equity investors. The relief from a de facto China-USA goods embargo caused most economists and strategists to reduce their recession odds, critical after looking at this chart:

My usual digging below the surface everybody sees reveals early signs of economic stress from hard and soft data:

• US Consumer Sentiment Nears Record Low on Inflation Concerns

The preliminary May sentiment index declined to 50.8 from 52.2 a month earlier, according to the University of Michigan. That was lower than all but one estimate in a Bloomberg survey of economists.

Nearly three-fourths of respondents spontaneously mentioned tariffs [from 60% in April], indicating trade policy continues to dominate consumers’ views of the economy. The topic crosses partisan lines, including a notable share of Republicans bringing it up.

The survey was conducted between April 22 and May 13, a period that ended just after the US and China agreed to temporarily reduce tariffs on each other while they negotiate a trade deal. (…)

Consumers expect prices to rise at an annual rate of 7.3% over the next year [+6.5% in April], the highest since 1981, data released Friday showed. They saw costs rising at an annual rate of 4.6% over the next five to 10 years, the highest since 1991. (…)

The contrast between sentiment and actual spending is also showing in some parts of the survey. The measure of buying conditions for large items improved slightly, although only a small share of consumers expect to continue to spend as usual if prices increase further.

The survey also showed the expectations index declined nearly a point to 46.5, an almost 45-year low. The current conditions gauge retreated 2.2 points to 57.6.

Consumers’ views of their current personal finances dropped to the lowest since 2009. Financial expectations slid to a fresh record low.

While nearly two-thirds of Republican respondents offered unsolicited comments about tariffs, their overall sentiment remains elevated in comparison to Democrats and political independents.

• Job postings on Indeed through May 9 keep declining, down 2.8% since the last JOLTS data (March) suggesting the recent pause in JOLTS decline may have ended. Postings are down 4.6% YtD. The latest NFIB survey revealed that “the proportion of small business owners expecting the economy to improve dropped six points on month, as did job openings at surveyed firms, highlighting the growing economic uncertainty and weakening labor market.”

• Americans are particularly worried for their job, and that should worry us, not only because it often leads hard employment data, but it also can incite spending caution:

Households expect unemployment will climb

Source: Macrobond, ING

• The April jobs report was reassuring at the establishment level but the household survey showed signs of deterioration. The median duration of unemployment continues to rise, and the share of long-term unemployed workers rose to 23.5% in April, the highest share in three years. It is taking longer for unemployed workers to find new jobs.
• Internship postings are 11% below their April 2024 levels.
• “The Federal Reserve believes that there has been a breakdown in the relationship between sentiment and spending, but the chart below of the Conference Board measure suggests it is still pretty good. Moreover, the scale of the falls in confidence are significant and we would have to say the risks to spending are going to be skewed to the downside for a while.” (ING)

Spending and sentiment link remains robust



Source: Macrobond, ING

• AI may not be helping currently (Axios)

Alphabet and Microsoft have both said that AI now writes or assists 30% or more of their code. “I might argue we’ve seen peak employment in the Magnificent 7,” Jeffrey Bussgang, a venture capitalist at Flybridge Capital Partners, told me in April. “We may see that all of these companies never grow headcount again. That they just grow 20-30% a year of revenue with flat headcount.”

It’s clear from mentions of generative AI in recent earnings calls that a lot of companies are already using the technology to make their operations more efficient, especially for coding, research, customer service and marketing.

A few examples:

• Intuit in February: “We’re also seeing improved coding productivity with up to 40% faster coding using GenAI code assistance.”

• Expedia in May: “Our marketing team is using generative creative AI both to make their marketing more effective, and also to save time.”

• Coca-Cola in February: “This year, for the first time, our Coca-Cola Christmas ad was created with generative AI, combining emerging technology with human creativity, which allowed us to produce the ad faster and at a lower cost.”

• Palantir in May: “We’re not talking about co-pilots that make you 50% more productive, we’re talking about agents that make you 50 times more productive.”

Global uncertainty around tariffs and the macroeconomy could further speed this kind of AI adoption. Uncertainty tends to weaken hiring and some research suggests that downturns prompt firms to invest more in IT — both because they have more spare capacity and because they want to make their operations more efficient. Companies that might otherwise be expanding and hiring may opt to keep their options open, and pursue the relatively cheap, flexible path of pushing AI efficiency.

“Talking to tech firms I have repeatedly heard discussions about reducing hiring or absolute headcount because of AI,” says Nicholas Bloom, an economist at Stanford. “Absolutely the macro situation will make this worse. Business sentiment has taken a dive with the tariff chaos and broader DOGE churn. So firms are slowing on hiring.”

It’s too soon to know whether automation is proceeding faster because of macro uncertainty, and what that would mean for jobs like coding. But if AI proves capable of automating work cheaply and is spurred on by companies’ reluctance to hire in the face of uncertainty, it could amount to a sort of perfect storm for some segments of the labor market. “Winter is not coming yet,” says Bloom. “But this is a worrying few whiffs of snow.”

Microsoft CTO Kevin Scott previously said he expects 95% of all code to be AI generated by 2030.

• The Atlanta Fed Wage Growth Tracker has stabilized at the 4.3% level. Job switchers are no longer getting premium wages. Indeed Wage Tracker was at 3.0% in April down from 3.4% in January.
• NY Fed’s Business Leaders Survey:

  Business activity continued to decline in the region’s service sector in May, according to firms responding to the Federal Reserve Bank of New York’s Business Leaders Survey. The business climate index remained firmly negative at -51.7, suggesting the business climate continued to be considerably worse than normal. Employment held steady, and wage growth slowed. Supply availability worsened significantly. Firms were again quite negative about the outlook, with nearly half expecting activity to decline in the months ahead.

Note how expectations (black) have dropped well below zero. Very rare for services… The survey was conducted between May 2 and May 9, before Trump’s major backtrack on China. Was it enough to alleviate fears? Only 21% of surveyed firms expected activity to increase. The index for employment and capex were negative.

Expectations were for prices paid to rise faster than prices received:

• Import prices rose 0.1% in April, against consensus expectations for a decline. Import prices ex-petroleum rose +0.4%, also above expectations. Note teh numerous changes in price trends:

Prices for nonfuel imports increased 0.4% in April following a decrease of 0.1% in March. Higher prices for capital goods, nonfuel industrial supplies and materials, consumer goods, and automotive vehicles drove the advance.

All imports excluding food and fuels rose 0.5% in April.

Import prices for nonfuel industrial supplies and materials
increased 0.8% in April, after ticking up 0.1% in March. Higher prices for major nonferrous metals, finished nonmetals, and finished metals shapes and advanced manufacturing more than offset lower prices for chemicals in April.

Prices for the major finished goods import categories were up in April. Import prices for capital goods increased 0.6%, the largest monthly advance since the index rose 0.9% in January 2022. The April advance was led by higher prices for computers, peripherals, and semiconductors and for scientific and medical machinery.

The price index for automotive vehicles rose 0.2% in April, the largest 1-month advance since October 2024.

Import prices for consumer goods increased 0.3% in April, the first monthly advance since October 2024.

All these increases were in spite of import prices from China decreasing 0.1% in April, the fifth consecutive monthly decline. The index last increased on a monthly basis in October 2022. The decrease in April was driven by lower miscellaneous manufacturing prices.

Import prices from the European Union increased 0.6% in April.

April’s core PPI declined 0.1% but core goods PPI rose 0.4% after +0.3% in each of February and March. Last 3 months annualized: +4.1% following +2.0% in the previous 8 months when monthly gains were limited to 0.1-0.2%.

There are clear price pressures in the pipelines.

Walmart, the king of low prices and a Goliath negotiator, warned last week that it plans to raise prices this month and early this summer, when tariff-affected merchandise hits its store shelves.

“The magnitude and speed at which these prices are coming to us is somewhat unprecedented in history,” Walmart Chief Financial Officer John David Rainey said in an interview.

Shoppers could see prices rise by the end of May, “and then certainly much more in June,” Walmart CFO John David Rainey said today in a CNBC interview.

“We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb,” Walmart CFO John David Rainey told CNBC today.

“Well, if you’ve got a 30% tariff on something, you’re likely going to see double digits [in price increases],” he later told Yahoo Finance.

Hopefully, services inflation will be subdued enough to offset coming goods inflation. Slowing wages and lower oil prices are helping here.

• A 10% Trade War Premium for the Dollar (Apollo)

Currencies normally move around with interest rate differentials. For example, when the Fed keeps interest rates higher for longer because of higher inflation, the US dollar goes up.

Since the trade war started, this relationship has broken down. Now the dollar is driven by forces other than interest rate differentials, and the chart below suggests EURUSD should be trading closer to parity.

In other words, the dollar is about 10% weaker than interest rate differentials would have suggested.

U.S. Loses Last Triple-A Credit Rating Moody’s downgrades the U.S. government, citing large fiscal deficits and rising interest costs

The U.S. has lost its last triple-A credit rating.

Moody’s Ratings downgraded the U.S. government on Friday, citing large fiscal deficits and rising interest costs.

Expanding budget deficits mean U.S. government borrowing will rise at an accelerating rate, pushing interest rates up over the long term, Moody’s said. The firm said Friday that it didn’t believe that any current budget proposals under consideration by lawmakers would do anything significant to reduce the persistent gap between government spending and revenues.

The move strips the U.S. of its last remaining triple-A credit rating from a major ratings firm, following similar cuts by Fitch Ratings in 2023 and S&P Global Ratings in 2011. Moody’s downgraded the U.S. to Aa1, a rating also held by Austria and Finland.

For the first time in history, the US does not hold a triple-A credit rating from at least one of the three big agencies.

“Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs,” Moody’s wrote in a statement. (…)

At the margin, the Moody’s downgrade could put pressure on the market for U.S. Treasurys, which has already been hit by expectations for greater borrowing and stubbornly high inflation. (…)

For years the U.S. was one of a select group of nations rated triple-A by Moody’s, but the rise of debt levels around the world has pared that figure to 11.

Moody’s shifted its outlook on U.S. debt to stable, noting the nation “retains exceptional credit strength such as the size, resilience and dynamism of its economy and the role of the U.S. dollar as global reserve currency.” (…)

Rep. French Hill (R., Ark.), chairman of the House Financial Services Committee, said that the downgrade was “a strong reminder that our nation’s fiscal house is not in order.” House Republicans, he said, “are committed to taking steps to restore fiscal stability, address the structural drivers of our debt, and foster a pro-growth economic environment.”

MarketWatch adds:

(…) Moody’s said mandatory spending, including interest expense, is projected to rise to around 78% of total U.S. spending by 2035, from around 73% in 2024. If the 2017 Tax Cuts and Jobs Act is extended, which is the firm’s base-case scenario, it would add around $4 trillion to the federal fiscal primary deficit, which excludes interest payments, over the next decade, Moody’s said.

The downgrade comes on the same day the House Budget Committee failed to advance a sweeping tax and spending bill that is the centerpiece of President Donald Trump’s legislative agenda, underscoring deep divisions within the Republican caucus.

“Over the next decade, we expect larger deficits as entitlement spending rises while government revenue remains broadly flat. In turn, persistent, large fiscal deficits will drive the government’s debt and interest burden higher,” Moody’s said. It expects U.S. fiscal performance to deteriorate “relative to its own past and compared with other highly rated sovereigns.”

Moody’s said that while Treasury assets remain in high demand, higher yields since 2021 have raised the interest burden on U.S. debt — with interest payments set absorb around 30% of revenue by 2035, versus 18% in 2024 and 9% in 2021.

“While we recognize the U.S.’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics,” Moody’s said.

Richard Bernstein Advisors last year illustrated the significance of a downgrade:

Chart 8 shows the spread between the US 10-Year T-Note and the 10-Year German Bund. Prior to the downgrade of US debt in 2011, Treasury and Bund yields traded within a range. However, the US 10-Year has sold at a consistent yield risk premium since the debt downgrade. At times, the US’s risk premium exceeded 200bp!

Low absolute interest rates obscured the penalty Americans were paying when the US became a lower quality credit. However, if the US had been a higher quality credit, yields on government debt, municipal debt, mortgages, car loans, and credit cards would have been even lower.

Although some believe a day of debt reckoning looms for the US, the reality is debt crises are slow and insidious. To that point, the US economy has been over the past 13 years consistently penalized for our lack of budgetary prudence.

• House’s Latest Budget Is a Fiscal Time Bomb The new plan includes more tax cuts and spending increases. American taxpayers will bear the damage for such recklessness. (Michael Bloomberg)

There is nothing conservative about the budget reconciliation bill emerging from the House. Even by Washington’s ever-declining standards of fiscal responsibility, this budget stands out as a dereliction of duty. By subverting rules meant to promote sound management, it takes today’s alarming projections of government deficits and makes them much worse, creating a ticking time bomb.

As things stand, federal debt held by the public — which is at its highest point since 1946 — is already slated to rise from about 100% of gross domestic product this year to 117% by 2034. And that’s before the new budget pours fuel on the fiscal fire.

The new plan, as written, includes another round of tax cuts and spending increases that would push the debt-to-GDP ratio to 125%. And that’s essentially a best-case scenario, because it presumes full employment through the next decade. If an economic downturn occurs and is accompanied by fiscal stimulus, the debt ratio would rise sharply higher.

In addition, the budget perpetrates a fraud on the American taxpayer — by calling a tax cut or spending increase temporary at the accounting stage while quietly planning to make it permanent. The bill for that sleight of hand will eventually come due, and when it does, the debt ratio will rise higher still. (…)

The process has further to go, and the House plan isn’t a done deal — but it would be foolish to bet that prudence is about to make a comeback. Congress seems intent on finding out just how far this irresponsibility can be pushed. Without a course correction, taxpayers — and the nation’s economic strength and stability — will bear the consequences.

The FT noted the White House reaction:

The White House dismissed the downgrade and lashed out at Mark Zandi, Moody’s chief economist.

“Nobody takes his ‘analysis’ seriously. He has been proven wrong time and time again.”

Zandi was not an author of this report and works for Moody’s Analytics, a separate part of the company that is not part of its ratings business.

Meanwhile, the world may be changing:

Carney, Mexico’s Sheinbaum agree to start working more closely together in face of U.S. tariffs

(…) Mr. Carney and Ms. Sheinbaum spoke by phone on Thursday. In a summary of the call, the Prime Minister’s Office said the pair assigned “senior officials to immediately work to find opportunities to deepen bilateral relations” via the U.S.-Mexico-Canada Agreement, or USMCA.

“We’re going to protect that critical partnership in the face of global economic shocks,” Mr. Carney wrote on X. Ms. Sheinbaum tweeted that she congratulated Mr. Carney on his election victory and “we agreed on the importance of the USMCA for the three nations.” (…)

USMCA comes up for review next year and Mr. Trump has said he wants to extensively renegotiate it. In a White House meeting with Mr. Carney last week, Mr. Trump also suggested he might do away with the deal entirely.

On Friday, Mr. Trump cryptically suggested that more worldwide tariffs may soon be coming. Next week, he said, his treasury and commerce secretaries “will be sending letters out” telling countries “what they’ll be paying to do business in the United States.” (…)

Ildefonso Guajardo, a former Mexican economy minister who oversaw USMCA negotiations during Mr. Trump’s first term, said his close relationship with Chrystia Freeland, the then-foreign affairs minister who led talks for Canada, was key during negotiations.

The two countries successfully pushed back on U.S. demands to strip out nearly all of the deal’s enforceability provisions, for instance, as well as Mr. Trump’s demand for guaranteed U.S. content in all North America-made cars.

“The strategy of the U.S. was to bilateralize things – divide and conquer. Chrystia and I always exchanged information on areas where Canada and Mexico had common interests,” he said. (…)

Mr. Guajardo also argued in favour of sharper retaliation on Mr. Trump for violating the USMCA with the tariffs.

“The countries that have responded aggressively are the ones that have a seat at the table. With China, he had to do the moonwalk back and back and back,” he said, referring to Mr. Trump’s abrupt scaling back of tariffs on Beijing after the country hit back hard with tariffs of its own. “He will not treat you with respect unless you respond.”

China now top buyer of Canadian oil shipped on Trans Mountain pipeline amid U.S. trade war

China has emerged as the top customer for Canadian oil shipped on the expanded Trans Mountain pipeline, ship tracking data showed, as a U.S. trade war has shifted crude flows in the year since the pipeline started operating. (…)

Canada is the world’s fourth-largest oil producer, but its main oil-producing province of Alberta is landlocked with limited access to tidewater ports. That means the bulk of Canadian oil – about 4 million barrels per day or 90 per cent – is exported to the U.S. via pipelines that run north-south.

The $34-billion Trans Mountain is Canada’s only east-west oil pipeline, carrying oil to the Pacific Coast where it can be loaded onto tankers for export. The expansion, which began operations on May 1, 2024, tripled the pipeline’s capacity to 890,000 barrels per day and opened opportunities for Canadian oil along the U.S. West Coast and in Asian markets.

While oil is currently exempt from U.S. tariffs, Canada has sought to diversify its exports due to brief U.S. duties on its crude and Mr. Trump’s threats to annex the country. (…)

China’s top spot as the TMX buyer defies some early expectations that the U.S. would be the biggest buyer of crude shipped via the pipeline, which is owned by the Canadian government.

Many expected its barrels to land on the West Coast versus Asia, which has access to cheaper Russian oil.

However, Mr. Trump’s protectionist policies have in recent months made Canada more attractive to Chinese buyers, said Philippe Rheault, director of the China Institute at the University of Alberta.

China has also been reluctant to be over-reliant on Russian energy supplies, Mr. Rheault said. (…)

Other nations taking Canadian crude include South Korea, Japan, India, Brunei, and Taiwan, ship tracking data showed. (…)

The pipeline is expected to be 84 per cent full this year, and ramp up to 92 per cent in 2027.

Its operator, Trans Mountain Corp, has said it is looking at expansion projects that could add between 200,000 and 300,000 bpd of capacity to the system.

Given China’s increased desire to find new, stable supplies of crude, the bulk of any additional capacity on TMX is likely to go to Asia rather than the U.S. West Coast, said Skip York, chief energy strategist with Turner, Mason & Company. (…)

Recall that Canada’s ticker oil is what U.S. Midwestern refineries need. U.S. oil production is lighter oil.

Trump claims victory on squishy Saudi investment promises (Axios)

The Saudis agreed to buy nearly $142 billion of military equipment and services from U.S. defense contractors, nearly double the Kingdom’s entire 2025 defense budget.

• Saudi Arabia also agreed to purchase gas turbines from GE Vernova, planes from Boeing, and to invest in U.S. companies via new private equity funds.
• By the end of his trip to the Gulf, which includes stops in Qatar and the UAE, Trump is hoping to obtain more than $1 trillion worth of deals and economic commitments.

An itemized list provided by the White House doesn’t come close to $600 billion.

• Instead, it works out to $282.8 billion — nearly 30% of which involves private-sector tech investments “in both countries.” Some of those are from U.S. companies like Google and Oracle.
• The remainder seems to fall under the unenumerated umbrella of “many other deals,” which may include Nvidia’s new agreement to sell chips to Saudi Arabia.
• The White House declined to provide more granular information when contacted by Axios, but reiterated the headline number.

Even if all $600 billion were accounted for, which it isn’t, that doesn’t necessarily mean there will be $600 billion of investment.

• Trump secured $450 billion via a similar Saudi pledge in 2017, but it didn’t all materialize.
• The same goes for some other high-profile investment promises during Trump’s first term, such as $10 billion from China’s Foxconn to build a factory in Wisconsin. To date, less than $1 billion has been invested in that project.

Saudi Arabia also could be hampered by its own economic challenges, such as low oil prices and a growing budget deficit.

There’s an old Arabic saying that there are no taxes on words. A corollary may be that there are no political penalties on vague investment promises.

Goldman Sachs tallies inbound US investment announcements:

The second Trump administration has highlighted that its economic policies are driving “trillions of dollars in new investment in U.S. manufacturing, technology, and infrastructure,” largely because tariffs should incentivize domestic production.

Companies have indeed announced plans to invest over $2tn in the US, while foreign governments have announced an additional $4.2tn in investment. Applying guidance on timing (and assuming the average announced investment horizon for companies that did not provide guidance), company-level investment announcements imply an uplift to annual GDP of more than 1.5%, with foreign investment adding another 2.5%.

These announcements therefore signal an upcoming surge in US investment, if taken at face value.

The ultimate investment impact from these announcements will depend on 1) whether the promised investments actually materialize, 2) whether they correspond to investment as measured in the national accounts, and 3) whether this investment is incremental to current spending trends.

On 1), evidence from the first Trump administration suggests that most projects announced from 2017-2020 were ultimately completed, although several higher-profile projects fell short of their goals. For example, Foxconn’s promise to invest $10bn and create 13k jobs in Wisconsin was subsequently scaled back to only $672mn and 1,454 jobs. That said, our retrospective examination of similar promises during President Trump’s first term suggests that 80% (dollar-weighted average) were realized.

On 2), some of the larger recent investment announcements do not appear to reflect investment as measured in the US national accounts. Apple has promised to invest $500bn (or $125bn/year) in the US over the next four years but only spent $10.0bn on capex and $31.4bn on R&D globally in 2024. Nvidia has similarly promised to invest $500bn (or $125bn/year) despite spending only $3.0bn on capex and $12.9bn on R&D last year. The large gaps between promised and current investment suggest that some companies include spending not relevant for GDP—i.e., partnerships, acquisitions, intermediate inputs, and the cost of goods sold—in headline totals.

Similarly, country-level announcements have generally not provided full details on US investment plans, although this week’s announcement from Saudi Arabia included plans for a $20 billion investment in AI data centers and energy infrastructure, and Qatar’s announcement included $8.5bn of investment in critical energy infrastructure and $1bn in quantum technologies.

In addition, both Saudi Arabia’s and Qatar’s announcements highlighted specific purchases of US goods ($142bn in defense purchases from Saudi Arabia; $96bn in aircraft purchases from Qatar) that would boost US GDP via exports but not raise US investment.

Still, the lack of detail on specific projects for the bulk of these foreign investment announcements suggests that they are most likely to boost investment indirectly by lowering the cost of capital.

To estimate the GDP-relevance of the investments, we manually collect details of investment plans and restrict to specific physical investment and/or R&D projects. Under these more restrictive assumptions—which exclude investment plans that are more aspirational and less likely to provide a direct GDP contribution—we estimate a $135bn increase in annual investment.

On 3), many of the announced projects appear to overlap with previously planned US investment and therefore are not necessarily incremental to the current investment trend. We provide two pieces of evidence to support this view.

First, Exhibit 3 compares the increases in investment implied by recent announcements with changes in equity analyst consensus company-level capex and R&D forecasts since President Trump’s election. Exhibit 3 also shows industry-level forecast revisions (green dotted lines) over this period to facilitate comparison with changes in broader trends related to shifts in the overall outlook

This exercise demonstrates that these announcements have not driven major upgrades to equity analyst capex forecasts, with a near-zero correlation between the size of investment announcements and consensus revisions. Discrepancies are particularly large for the information technology sector (where headline promises likely include spending not typically classified as investment; see discussion above) and for pharmaceuticals (where sectoral tariffs could provide an incentive to onshore production, although some of the investment in US production is likely driven by tax policy changes from President Trump’s first term rather than tariffs).

Second, our GS equity analysts that cover companies that have announced investments generally see a limited signal in these announcements. As shown in Exhibit 4, 69% see recently announced investments as mostly overlapping with prior plans, 25% see partial overlap, while only 6% see them as mostly new.

 

In contrast to company-level announcements, investment promises from the United Arab Emirates, Saudi Arabia, Qatar, and Japan could provide a material incremental increase if they materialize.

Announced investments would significantly increase Japan’s exposure to US assets and far exceed existing US investments for UAE, Saudi Arabia, and Qatar. While we are skeptical that most of the investment from these countries will directly boost investment and GDP (although announced purchases of US goods would; see discussion above), we do see more potential for increased capital provision to put downward pressure on the cost of capital. These calculations suggest country-level promises are less likely to overlap with previously-planned investment than company-level announcements.

Our results imply that the increase in investment from these announcements will likely fall well short of the headline numbers, although there is admittedly uncertainty around their precise impact.

Our estimate of announced investments tied to specific projects ($135bn/year or 0.4% of US GDP) likely provides an upper bound for the near-term investment uplift, since some might not materialize and much of it was already planned. Assuming an 80% completion rate (in line with announcements from President Trump’s first term) reduces the investment uplift to around $110bn. Further shaving by the share our equity analysts see as “mostly overlapping with prior plans (69%) reduces the net impact to around $30bn annually. That said, increased capital provision from Japan, UAE, and Saudi Arabia could provide upside to these estimates.

Taken together, our estimates suggest a moderate uplift to annual investment of $30-135bn (or 0.1%-0.4% of US GDP) over the next few years is a reasonable guess for the new investment generated by recent announcements, while announced foreign purchases of US goods could add another $50bn (0.1-0.2%) to annual US GDP if they materialize. Though not negligible economically, such increases would fall well short of the recent headlines.

BTW:

Will Anyone Take the Factory Jobs Trump Wants to Bring Back to America? President has pledged to bring more factory work back to U.S., but many manufacturing jobs are already going unfilled

(…) America has nearly half a million unfilled manufacturing jobs, according to the U.S. Labor Department. Nearly half of manufacturing companies say their biggest challenge is recruiting and retaining workers, according to a survey this year by the National Association of Manufacturers. (…)

Many manufacturers find that worker retention can be as challenging as recruitment, and that new hires frequently quit for less-taxing or better-paid employment. (…)

Services jobs can also be challenging. Can Apple be reasonably expected to assemble its iPhones in the USA where wages are much higher than in India?

EARNINGS WATCH

461 companies in the S&P 500 Index have reported revenue for Q1 2025. Of these companies, 62.3% reported revenue above analyst expectations and 37.7% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 38% missed estimates.

In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.2%.

The estimated earnings growth rate for the S&P 500 for 25Q1 is 14.3%. If the energy sector is excluded, the growth rate improves to 16.3%.

The estimated revenue growth rate for the S&P 500 for 25Q1 is 4.9%. If the energy sector is excluded, the growth rate improves to 5.3%.

The estimated earnings growth rate for the S&P 500 for 25Q2 is 5.9%. If the energy sector is excluded, the growth rate improves to 7.8%.

Trailing EPS are now $251.52. Full year 2025: $263.84e. Forward EPS: $269.93e.

Guidance is positive and analysts are revising up …

… but really only in the tech world. In fact, Q2 earnings growth rates are down in all but 3 sectors in the past 2 weeks (Real Estate, Tech and Comm Services). The average Q2 growth in the other 8 sectors is –2.6%, down from –1.0% 2 weeks ago.

So the S&P 500 has rallied by 19% from its April low and is back into positive territory. But the Magnificent 7 index has rebounded by 28% (still down 5% YtD) while the S&P 493 has returned 4% YtD. The S&P 400 index of mid-caps has fallen by 2% and the small-cap Russell 2000 index has fallen by 6%.

Goldman Sachs reckons that

the valuation premium of the Magnificent 7 relative to the S&P 493 has fallen to the lowest levels since 2019 despite 1Q results demonstrating the group’s continued earnings outperformance. Antitrust is a key risk for the performance of the Magnificent 7. Cases and investigations are currently ongoing in both the US and Europe regarding Alphabet, Apple, Microsoft, and Meta. (…) the Magnificent 7 beat earnings estimates by 27%. Partly as a result of strong 1Q results, consensus 2025 earnings estimates for the Magnificent 7 are roughly in line with where they began the year, while estimates for the remaining 493 stocks in the index have been revised down by 4%.

Currently, the Magnificent 7 trades at an NTM P/E of 28x in aggregate vs. 20x for the S&P 493, a 43% valuation premium that ranks in the 30th percentile relative to the past decade.(…) Furthermore, recent headlines around Apple’s ambitions for an AI-powered search engine sent Alphabet’s stock price down 7%, a reflection of the risk from competitive pressures within the cohort.

Note that NVDA reports May 28.

Other interesting charts from GS:

 

Other charts FYI:

Source:  Topdown Charts

Source:  @WillieDelwiche

Lastly: Global EV milestone (Axios)

EVs are slated to reach one-fourth of global car sales this year despite trade and policy question marks, Axios’ Ben Geman writes from a new International Energy Agency report. EV sticker prices are getting more competitive with gas-powered models as battery costs fall, but gaps persist in key markets outside China.

IEA sharply cut its U.S. EV growth estimate as Trump 2.0 officials and congressional Republicans reverse Biden-era subsidies and rules.
The agency now sees EVs with 20% of the light-duty market — sedans, vans, SUVs and pickups — in 2030. That’s less than half of its projection in last year’s analysis.

Data: IEA. Chart: Jacque Schrag/Axios

Retail Sales as Trade War Bellwether

Retail sales rose 0.1% in April. That was a bit better than expected, and it comes on the heels of a sharp upward revision to March sales numbers. One thing that did not go exactly according to script was that auto & parts dealers saw a decline in sales in April. Yet, this still reflects tariff worries boosting sales as the 0.1% pullback comes after a 5.5% surge in March.

Another area that might have seen a tariff-related demand surge last month is the store category that sells building materials & garden supplies. Those stores saw a 2.9% increase in March but just a 0.8% pick-up in April. The lack of ‘payback’ in sales suggests some tariff pull-forward could have remained in April.

Because it largely represents goods spending, which comprises less than a third of overall personal consumption in the United States, the retail sales report is not typically an A-lister among economic indicators…until now. For the next few months at least, the retail sales report is set to be center stage as we seek to measure the impact of tariffs.

While import duties can introduce pass-through effect to the service sector, it is goods that are apt to be the most impacted. We may eventually see these impacts manifested through product scarcity or higher prices, but the first action will simply be evident in the sales activity.

A key question after this week’s 90-day reprieve from a full-blown trade war with China is whether the sharp lowering in the tariff rate for one of America’s largest trading partners comes quickly enough to blunt the worst of the economic fallout. Our position has long been that the effective tariff rate ultimately would settle at 15%. The recent détente with China puts the effective tariff rate now at about 14%, if only temporarily.

Until such time as we have specifics regarding the contours of a bilateral U.S.-China trade deal, this step down is in line with our target. With every additional deal that is struck, the effective tariff rate could come down further. If tariffs indeed introduced the “stagflationary shock” we have warned about, then an unwinding of those tariffs surely has scope to boost growth and lower inflation, if not in an absolute sense, at least relative to expectations that priced in tariff-induced shocks. (…)

Source: U.S. Department of Commerce and Wells Fargo Economics

Control group sales, which exclude autos, gas, food services and building materials, fell 0.2% (versus an upwardly revised 0.5% gain in March). Consumers may have continued to front-run goods purchases after the April 2 tariff announcement, with electronics and furniture sales rising over the month. The 0.2% rise in non-store retailers may reflect an effort to get purchases in ahead of price-hikes as well, but elsewhere declines were large enough to drive the overall control group measure negative. (…)

Amid many recent anecdotal reports of a pullback in discretionary spending, one category not captured in the retail sales report is on accommodation and air travel. Many U.S. carriers have withdrawn full year financial guidance for 2025 citing uncertainty and consumer pullback.

While it is only a measure of price, earlier this week, the CPI report revealed that airline fares fell in April for the third month in a row, a classic tell of waning demand. Taken in context with the trend decline lower for consumer confidence, we find sufficient evidence that discretionary outlays are beginning to be curtailed. Along similar lines, today’s report showed sporting goods & hobby stores posted the largest 2.5% drop in April, that said it is the second-smallest category of sales.

While the April data were ultimately a bit of a mixed bag with some potential signs of a pull-forward in demand, payback from a strong March and consumer fatigue, it’s too early yet to call it on the consumer. Households feel worse off, but they remain in good financial shape at the macro level, which will mitigate the initial blow from uncertainty.

US Producer Prices Fell Unexpectedly in April as Margins Shrank

Prices paid to US producers unexpectedly declined in April by the most in five years, largely reflecting a slump in margins, suggesting companies are absorbing some of the hit from higher tariffs.

The 0.5% decrease in the producer price index followed no change in March, Bureau of Labor Statistics data showed Thursday. The median forecast in a Bloomberg survey of economists called for a 0.2% gain. Excluding food and energy, the PPI declined 0.4% — the most since 2015.

Stripping out food, energy and trade, a less-volatile measure favored by many economists, prices fell 0.1%, the first decline in five years. Compared with a year ago, the gauge rose 2.9%.

The figures suggest American manufacturers and service providers are so far refraining from passing along higher US duties on imports. (…)

The PPI report showed goods prices excluding food and energy increased 0.4% in April. The cost of business equipment, including computers and industrial material-handling machinery, accelerated. (…)

Final-demand services prices decreased 0.7%, the most in data going back to 2009. Over 40% of the decrease was attributed to declines in margins for machinery and vehicle wholesaling. (…)

Note that “there was a big upward revision to the March data from -0.4% to 0.0% MoM. The core measure also saw a huge upward revision. It either suggests a significant error in the calculation or they have had late data in that really swung things around in March.” (ING)

Note also that Final Demand PPI for core goods was up 0.4%, accelerating from +0.3% in each of February and March. Last 3 months annualized: +4.1% following +2.0% in the previous 8 months when monthly gains were limited to 0.1-0.2%.

Walmart Becomes Biggest Retailer Yet to Pass Through Tariff Price Increases Company plans to raise prices this month and early this summer; other retailers likely will follow

Retail goliath Walmart on Thursday said it plans to raise prices this month and early this summer, when tariff-affected merchandise hits its store shelves. Some prices already have increased.

“The magnitude and speed at which these prices are coming to us is somewhat unprecedented in history,” Walmart Chief Financial Officer John David Rainey said in an interview.

Walmart, which counts 90% of Americans as customers, is the biggest company so far to signal that tariff-related price increases on everyday goods are coming. Other companies also have announced price increases. Ford Motor last week said it would raise prices on three of its popular vehicles. Birkin handbag maker Hermès said prices in the U.S. would rise. Next week, Target, Lowe’s and Home Depot are set to report earnings and discuss their financial forecasts.

(…) Walmart reported strong sales for the three months through April 30, as shoppers flocked to its deals and its low-price store brand.

But Walmart didn’t share a profit forecast for the current quarter, in part because the company may absorb some tariff costs to keep prices lower than competitors, Rainey said.

Shoppers could see prices rise by the end of May, “and then certainly much more in June,” Walmart CFO John David Rainey said today in a CNBC interview.

“We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb,” Walmart CFO John David Rainey told CNBC today.

“Well, if you’ve got a 30% tariff on something, you’re likely going to see double digits [in price increases],” he later told Yahoo Finance.

Despite Plenty of Supplies on Hand, Production Stalls in April

Tariff-induced uncertainty has begun to bite the industrial sector. Industrial production was flat in April, but that likely still overstates the strength of the industrial sector today. For starters, April brought a 3.3% pop in utilities production, which likely more-so reflects a rebound rather than renewed demand as it comes after a near-record drop (-6.2%) in March. The largest industry group, manufacturing, also slipped 0.4%, or by the most in seven months. Mining output also fell 0.3% in April.

Today’s outturn does not come as a complete surprise. The production component of the ISM manufacturing index fell in each of the past three months hitting a low in April of 44.0, the lowest reading for this survey-based measure of production in five years and consistent with contraction. In fact, over the past 20 years, the only times the production index of the ISM has been lower was during either the financial crisis or the pandemic.

Together, the data suggest the recent tariff-induced pop in manufacturing activity has begun to reverse under the weight of uncertainty. Manufacturing production received a jolt in February largely from a near-record monthly pick up in auto production, and activity continued into March leading the overall manufacturing production index to its highest post-pandemic reading. But as we cautioned last month, this ‘pick-up’ in activity was likely to be short-lived amid tariff uncertainty. Regional Fed surveys out of New York and Philadelphia released thus far for May suggest continued weakness in activity. (…)

Source: Institute for Supply Management, Federal Reserve Board and Wells Fargo Economics

Yes, firms pulled forward industrial supplies at an unprecedented clip; the resulting drag from net exports was the largest on record in the first quarter. But aside from a ramping up in machinery productions, there is little evidence that firms are putting those hoarded supplies into immediate production. This corroborates a viewpoint we see in the respondent comments section of the ISM and in our client meetings: more clarity and less variability with respect to tariffs would be helpful in guiding plans for domestic production.

Xi Seeks New Economic Formula to Dodge Future US Trade Risks

(…) If anything, Xi seems to be making sure China is never so economically vulnerable to the US again.

In the aftermath of the first trade war, China started diversifying its exports away from the US, and now relies on the world’s biggest economy for just under 15% of total shipments, down from almost a fifth in 2018.

Xi is trying to lower that figure more. To do that, Beijing will have to work with other countries to open new markets for goods once intended for American consumers.

That means strengthening trade relationships with nations in the so-called Global South, meaning developing countries. China is also doing something similar with Southeast Asia and the European Union.

By targeting countries as diverse as Brazil and Ethiopia this week, Xi has given an indication how he’ll accomplish this: increased investment, greater imports, massive credit lines and expanding membership in his Belt and Road Initiative.

This week Colombia agreed to join the BRI, which among other things can help countries build modern infrastructure.

During a meeting with leaders of Latin American and Caribbean nations, Xi pledged to import more products from them and provide a $9.2 billion credit line to support development in the region. Those moves should help boost commerce.

Beijing is also doubling down on Brazil. That’s important because the South American nation is an increasingly significant supplier of agricultural products like soybeans, and in recent years China has been getting fewer of those commodities from North America, Europe and Australasia.

During a visit to Beijing, Brazilian President Luiz Inacio Lula da Silva and Xi signed more than 30 agreements for Chinese investment in Brazil, including in mining, transport infrastructure and ports. Pacts on AI and climate action were also sealed.

China hopes to sell more of its home appliances and electronics to Brazilian consumers, attracted by cheap prices and more features. Brazil hopes the tighter ties help transform its economy, moving it up the value chain. (…)

Xi’s latest charm offensive follows efforts to woo neighbors in Asia and also Europe, though in both cases that’ll be a challenge. Asian nations have to balance closer economic ties with worries about China’s increasing military assertiveness. Brussels remains very annoyed with Beijing over its support of Moscow since the full invasion of Ukraine. (…)

Xi’s challenge remains domestic spending amid a slowly curing real estate market. Pent-up demand is huge but Chinese consumers are hoarding money with the household savings rate currently running at 31.8% of disposable income.

Chris Wood has these significant stats:

A total of 143 or 71% of countries traded more with China than with the US in 2024, while 107 or 53% of countries traded more than twice the amount with China that they trade with the US, based on IMF’s data on international trade in goods by partner countries.

This compares with 22% and 11% respectively back in 2001 when China joined WTO.

And while Trump hates the green stuff and loves black rocks, Chris informs us that

battery storage plus solar will become cheaper than spot coal power in China by the end of this year, thanks to the continuing drop in battery prices.

This is of huge potential interest, as China is the testing ground for increasing penetration (or dominance) of renewables in what has been a coal-dominated energy system. Energy storage is so important because storage prices will determine the success of renewables.

Battery energy storage systems (BESS) now account for one-quarter of global battery shipments, up from 5% in 2019, with CATL the dominant player.

In this respect, China is the key country to monitor since it is likely to be the first example of a coal-dominated large producer hitting a large solar-powered free energy system.

On this point, China has already, from this year, made storage attachment mandatory for any new solar installation.

Indeed, in the very long run, battery storage has the potential to make coal obsolete even potentially without any sun or solar.

In this respect, while China has a bad reputation with the green crowd for its still increasing coal production, the reality is that it has also been expanding renewables more aggressively than anyone for the practical reason that it is likely to end up cheaper if storage technology can deliver as already discussed.

This is a reminder, if it was needed, that the renewable story does not need the likes of ESG or net-zero commitments to deliver if it is cost-competitive.

Meanwhile, the Trump-triggered stampede out of ESG and net-zero commitments continues.

Nvidia plans Shanghai research centre in new commitment to China US chipmaker considers expanding its presence in the country even as sales are hit by Washington’s export controls

Nvidia is seeking to build a research and development centre in Shanghai that would help the world’s leading maker of artificial intelligence processors stay competitive in China, where its sales have slumped due to tightening US export controls. (…)

According to people with knowledge of the plans, the R&D centre would research the specific demands of Chinese customers and the complex technical requirements needed to satisfy Washington’s curbs. The actual core design and production will remain overseas however, due to legal sensitivity around transferring intellectual property to China.

Nvidia said: “We are not sending any GPU designs to China to be modified to comply with export controls.”

The Shanghai team would also work on global R&D projects including verification of chip designs, optimisation of existing products and sector focus research such as autonomous driving, people with knowledge of the matter said.

Huang also wants to ensure access to top artificial intelligence talent based in China. (…)

“We want to build the world’s AI [where] American standards are being adopted around the world,” Huang said last week at a Milken Institute event. “If we leave a market altogether, there’s no question somebody else would step in. Huawei, for example, is very formidable . . . they’ll step in.” (…)

Tech giants are understood to be hesitant to put in orders because the processors cannot compete with rival Chinese products on performance.

“We are in an awkward situation where we either choose a worse Nvidia chip that runs on [its software system] Cuda, which means lower operational cost, or switch to Chinese chips altogether and live through the pain of switching systems,” said one executive at a leading Chinese tech firm.

Clients led by ByteDance, Alibaba and Tencent are monitoring geopolitical developments to evaluate whether Nvidia could offer a redesigned high-end chip to meet their needs. While Nvidia was exploring various options, there were no finalised plans because of legal uncertainty, the people said.

Japan to hold out for better trade deal with US Prime Minister Shigeru Ishiba’s unpopular government fears concessions could prompt electoral backlash

(…) “Although Japan was very keen to be the first nation to open negotiations with Washington on tariffs, that sense of urgency has now shifted and the emphasis is on ensuring that Japan gets a good deal,” said an official in Tokyo with direct knowledge of the negotiations.

Officials said a deal was now unlikely to be reached before elections for Japan’s upper house of parliament that are due by late July and are already expected to be difficult for Ishiba’s highly unpopular administration.  Japan’s negotiators, led by economy minister Ryosei Akazawa, have held two meetings with Trump administration officials.

A third is planned for next week. Tokyo’s finance minister Katsunobu Kato is also hoping to resume talks with the US Treasury Secretary Scott Bessent on the sidelines of a G7 meeting in Canada next week. (…)

The impact on the operating profits of US tariffs on Japan’s big automotive companies is expected to be about ¥2tn ($13.7bn) in the current financial year ending next March, according to company and analyst estimates, although the impact could be offset by measures such as price increases. Japan’s economy shrank for the first time in a year in the first quarter.

“Auto and auto parts is the biggest exporting sector from Japan to the US,” said a second Japanese official with knowledge of the talks. “It means this US-Japan negotiation must deal with this auto tariff issue. If we cannot make progress in this sector, then I think we cannot reach any consensus.”

Tokyo’s strongest offers for Washington could be larger purchases of US agricultural products, greater market access for US cars and investment in a liquefied natural gas pipeline project in Alaska, said the officials. But with the July upper house elections looming, Ishiba has told parliament he will not sacrifice the domestic agriculture industry, also a big employer, to win tariff reductions for automobiles. (…)

Autos accounted for 81 per cent of Japan’s trade surplus with the US in 2024. (…)

The Long-Term Effects of Higher Tariffs (Goldman Sachs)

We expect the US’s effective tariff rate to increase by about 13pp this year to its highest level since the 1930s. While the ultimate level and composition of tariffs remains uncertain, they will probably remain elevated for the foreseeable future.

Applying estimates from a range of economic studies suggests that a 13pp increase in domestic and foreign tariffs will lower US real income by around 1% in the long run.

Our results suggest that country-specific tariffs are unlikely to result in much reshoring because production costs for alternative suppliers of US imports are well below the US’s for most products. We also estimate that domestic production of more differentiated goods like medical equipment and semiconductors is relatively less responsive to cost shocks, suggesting a higher hurdle for tariffs to boost production in these sectors.

In addition to the standard efficiency losses from reduced trade, higher tariffs could weigh on output in three ways.

• First, higher tariffs will likely raise equipment costs and discourage investment, lowering the capital stock and GDP in the long run. We estimate that this channel could exert a ¾% drag on output over time.
• Second, higher tariffs could also weigh on innovation by reducing the most innovative firms’ access to export markets and raising input costs.
• Third, economic studies suggest that higher tariffs could lead to increased rent-seeking by businesses attempting to secure protection from foreign competition.

Taken together, we expect higher tariffs to weigh on US real income by 1½-2% in the long run if the tariff policies we expect this year become permanent.

Our estimates are highly uncertain, however, in part because they depend on the extent of foreign retaliation, how the dollar responds, and how international capital flows change as a result of the tariffs. Still, the empirical evidence on the economic performance of the UK after Brexit and countries that liberalized trade in the late 1990s and early 2000s is broadly consistent with our results.

A Trillion Here, a Trillion There (John Mauldin)

President Trump’s 2026 budget proposal requests $1.0 trillion for defense spending. This chart places that number in historical context, showing the Pentagon’s annual budget, adjusted for inflation.

A $1 trillion+ defense budget, if approved, will be comparable to the amounts spent
during World War II or the Iraq and Afghanistan conflicts.

This also matters economically. More than half the defense budget goes to private contractors, mainly US companies. This flows into the economy as both profits and payroll. Higher defense spending may or may not enhance national defense but will
certainly have a stimulative effect on the economy. It will also raise the national debt unless offset by other spending cuts.

Trump to Apple: Don’t expand iPhone production in India

President Trump on Thursday said he told Apple not to expand iPhone production in India, while also indicating the possibility of a sweeping new trade deal with the country.

Apple was reportedly planning to massively expand phone manufacturing for the U.S. market in India, as a workaround for the ongoing trade war with China.

“I had a little problem with Tim Cook yesterday, I said to him ‘Tim you’re my friend, I’ve treated you very good,'” Trump told a news conference in Qatar. “I don’t want you building in India,” Trump said he told Cook.
“I said to Tim, I said, ‘Tim we’ve treated you really good, we put up with all the plants that you built in China for years … we’re not interested in you building in India, India can take care of themselves,” Trump said.

AI CORNER

Google dominates AI patent applications

Google has overtaken IBM to become the leader in generative AI-related patents and also leads in the emerging area of agentic AI, according to data from IFI Claims shared first with Axios.

Patent filings, though they’re not a direct proxy for innovation, indicate areas of keen research interest — and generative AI patent applications in the U.S. have risen by more than 50% in recent months.

“The surge in applications for AI related patents is a sign companies are actively seeking protection for their AI technologies, leading to an increase in grants as well,” IFI Claims spokesperson Lily Iacurci said in a statement to Axios.

• In the patents-for-agents U.S. rankings, Google and Nvidia top the list, followed by IBM, Intel and Microsoft, according to an analysis released Thursday.

Globally, Google and Nvidia also led the agentic patents list, but three Chinese universities also make the top 10, highlighting China’s place as the chief U.S. rival in the field.

• In global rankings for generative AI, Google was also the leader — but six of the top 10 global spots were held by Chinese companies or universities. Microsoft was No. 3, with Nvidia and IBM also in the top 10. IFI Claims identified only a single patent tied to China’s DeepSeek, one for a method of constructing training data. (…)
• Many of the same names cropped up in the list of overall AI-related U.S. patent applications, with Google in the top spot, followed by Microsoft, IBM, Samsung and Capital One.
• Globally, Google topped the list, followed by Huawei and Samsung.

Neither Meta nor OpenAI ranked in the top 10, though OpenAI has stepped up its patent efforts over the past year, IFI’s analysis found. Meta has concentrated efforts on open source development, and OpenAI says it intends to use its patents only “defensively.” (…)

Eric Schmidt’s AI marathon (Axios)

Eric Schmidt, the former chairman and CEO of Google, is out with a TED talk interview today — titled “The AI Revolution Is Underhyped” — predicting that “the eventual state of this is the computers running all business processes.”

“I want to be clear that the arrival of this intelligence — both at the AI level, the AGI, which is general intelligence, and then superintelligence — is the most important thing that’s going to happen in about 500 years, maybe 1,000 years, in human society,” Schmidt says.

Comparing AI to a marathon, Schmidt continues: “As this stuff happens quicker, you will forget what was true two years ago or three years ago. That’s the key thing. So my advice to you all is: Ride the wave, but ride it every day.”

• Watch the TED talk.