Month: June 2025

US FLASH PMI: Growth slips lower as goods prices jump higher, but job gains accelerate

The headline S&P Global US PMI Composite Output Index registered 52.8 in June, according to the ‘flash’ reading (based on about 85% of usual survey responses), down from 53.0 in May. While the June rise in output was the third strongest so far this year, the pace of growth remains well below that recorded in late 2024. Output has nevertheless now grown continually for 29 months.

A positive aspect of June’s expansion was that growth became more balanced between manufacturing and services. Although service sector output growth cooled slightly, it remained solid while manufacturing output rose for the first time since February.

The ongoing expansion reflected a further rise in new orders, which have now risen continually for 14 months, though the rise in orders dipped slightly in June to remain well below the strong gains seen at the turn of the year. Similar gains in inflows of new work were recorded in the manufacturing and service sectors and, in both cases, growth was driven by rising domestic demand.

This served to mask a fall in export orders in June. Service providers again recorded a steeper contraction than manufacturers, the latter down only slightly in June after a small rise in May. Services exports have suffered the largest quarterly contraction since late 2022 in the three months to June.

June saw further inventory building in manufacturing. Purchasing of inputs was expanded at the fastest rate in 37 months, causing inventories of inputs to also rise again, increasing at the second-fastest rate in over three years following May’s survey record rise. Inventories of finished goods at factories meanwhile registered the largest rise for nine months; a rise that was among the greatest in the survey’s 18-year history.

Price pressures rose sharply across both manufacturing and service sectors during June, the former reporting an especially steep increase, and again commonly linked to tariffs.

Manufacturers’ input prices and selling prices both rose at rates not seen since July 2022, as higher costs were passed on to customers. Close to two-thirds of all manufacturers reporting higher input costs attributed these to tariffs, whilst just over half of respondents linked increased selling prices to tariffs.

However, prices also rose sharply in the service sector, likewise often attributed to tariffs but also reflecting higher financing, wage and fuel costs. Service sector input costs and selling prices nonetheless rose at slower rates than in May, in part reflecting more intense competition.

While the slower rates of service sector price inflation helped offset some of the increase in manufacturing prices to bring rates of inflation down from May’s recent peaks, the overall rise in costs was still the second largest since the start of 2023. The rise in prices charged for goods and services was the second highest since September 2022.

Companies took on additional staff at a rate not seen for just over a year largely in response to the need to meet higher workloads. A 12-month high rate of job creation in manufacturing was accompanied by a five-month peak in services.
June saw the largest accumulation of uncompleted work recorded for three years. Higher work outstanding in services were accompanied by the first rise in manufacturing backlogs since September 2022.

Companies’ expectations about output in the year ahead dipped slightly in June, remaining well below levels see at the turn of the year (and the surveys’ long-run average). Sentiment was however above April’s two-and-a-half year low.

While trade worries and anxiety around government policies have moderated since April, companies generally remained less upbeat than prior to the inauguration of President Trump. This was especially notable in the service sector, where confidence fell in June amid heightened uncertainty over government policy such as spending cuts. In contrast, manufacturers grew slightly more upbeat, in part reflecting hopes of greater benefits from trade protectionism than service sector counterparts.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“The June flash PMI data indicated that the US economy continued to grow at the end of the second quarter, but that the outlook remains uncertain while inflationary pressures have risen sharply in the past two months.

“Although business activity and new orders have continued to grow in June, growth has weakened amid falling exports of both goods and services. Furthermore, while domestic demand has strengthened, notably in manufacturing, to encourage higher employment, this in part reflects a boost from stock building, in turn often linked to concerns over higher prices and supply issues resulting from tariffs. Such a boost is likely to unwind in the coming months.

“Prices for goods have meanwhile jumped sharply again, the rate of increase accelerating to a three year high as firms pass higher tariff-related costs on to customers. Service providers are by no means immune to this tariff impact and likewise reported another jump in prices, often linked to tariffs on inputs such as food.

“The data therefore corroborate speculation that the Fed will remain on hold for some time to both gauge the economy’s resilience and how long this current bout of inflation lasts for.”

Hard data has so far remained soft amid hardening softy data. Goldman’s view:

We show that in past slowdowns, soft data have tended to signal that the economy is weakening earlier than hard data. In the current environment, the hard data might take even longer than usual to weaken because frontloading of imports and consumer spending ahead of tariffs could support the hard data or—as in the case of the GDP statistics—make them hard to interpret.

But many investors are skeptical of the surveys after they signaled a slowdown that never arrived a few years ago and are only willing to trust the hard data. The hard data have weakened somewhat and have provided some early clues about the impact of tariffs but are unlikely to provide any definitive answers for a while. This leaves survey skeptics with little more than model estimates for now.

(…) We see two main reasons that surveys were misleading a few years ago. First, businesses and consumers were frustrated by high prices, and frustration often came across as pessimism in surveys. Second, in the echo chamber of recession gloom at the time, some business leaders repeated what they heard rather than offering unique insights from their business.

The lesson is to focus on what business leaders are saying about concrete decisions at their own company, not about their impression of the overall economy. Most importantly, we look at what changes they are making to hiring, investment, production, and pricing in response to tariffs and policy uncertainty. (…)

Job openings are roughly unchanged this year for companies whose management teams mentioned tariffs the most during earnings season, but they have fallen sharply at companies with a high reported share of sales to China or Europe—two trading partners that are more likely to retaliate against US exports—and at companies whose management teams highlighted uncertainty as a challenge during earnings season. (…)

Taken together, these early signals suggest only a bit of caution on hiring and look roughly consistent with our expectation that job growth will continue to slow as both labor demand and labor supply decline and that the unemployment rate will rise modestly from 4.2% today to a peak of 4.4%. (…)

A new index of shortages from Fed economists, the New York Fed’s supply availability index, and business survey questions about supplier delivery times also show at most a modest increase in shortages so far. (…) Serious shortages could cause pandemic-style price spikes and production disruptions and are therefore an upside risk to our inflation forecast and a downside risk to our GDP growth forecast.

Companies have so far announced only modestly firmer price increases this year on average, and while business inflation expectations have rebounded more noticeably, they remain far below the pandemic peak. While it is still early, the quite limited increase in our price announcement index mirrors the findings of Cavallo et al. and our impression from the category-level details of recent inflation data that passthrough has been a bit underwhelming so far. Reflecting this, we recently lowered our forecast for core PCE inflation to peak at 3.4%, vs. 3.6% previously.

Beneath the surface, companies with the highest tariff cost exposure have announced more aggressive price hikes. While companies more exposed to policy uncertainty or worried about the uncertainty of the economic outlook have been more restrained in raising prices, perhaps out of fear that consumer demand might weaken, companies with high exposure to broad tariffs have raised prices much more forcefully than the average company.

While it is still too early for companies to have fully announced let alone implemented tariff-driven price increases, surveys from the New York and Atlanta Feds asked companies to provide quantitative answers to questions about how much of the tariff cost increase they intend to pass along eventually.

On average they expect consumers to absorb about 50% of the direct cost of the tariffs. While this is somewhat below our working assumption of 70%, it is possible that it will rise over time if tariffs stay in place. In addition, indirect spillover effects—price hikes by companies protected by tariffs from foreign competition—would add to this and are included in our inflation assumptions, and some companies have also reported raising prices on products whose costs have not been affected by tariffs, another spillover effect that would be additive to our estimates of the total impact on consumer prices.

Surveys from the New York and Dallas Feds also asked companies about the timeline for raising prices. We have assumed that all of the passthrough from tariffs on consumer goods imports to consumer prices will occur within 3-4 months, and that passthrough from tariffs on raw materials, intermediate parts, and capital goods—which raise US production costs and should raise consumer prices eventually—will occur evenly over a year. Businesses have indicated an even faster timeline, which raises the stakes for the upcoming monthly inflation reports.

Overall, early company commentary appears roughly consistent with our forecast that tariffs will have a visible effect that will leave the US economy with slower hiring and a slightly higher unemployment rate, little growth in investment spending this year, below-potential GDP growth but not a recession, and a meaningful but one-time inflation rebound to the mid-3s.

Layoffs From Trump Tariffs Ripple Across the Auto-Parts Industry

(…) “We had forecast to have a lot of work this year,” Morales said. “Now, most companies are pushing back order times. The new building is empty and we have been letting people go.”

What’s happening with SMT and companies like it shows how rapid changes in US industrial policy can roil businesses up and down the supply chain. Trump’s shifting stances on trade and tariffs have upended the planning of many companies that provide parts and equipment to big automakers. Other changes, like Trump’s move to reverse incentives for clean technology including electric vehicles, have left suppliers grappling with sunk costs and struggling to shift gears. (…)

The auto industry built a transnational chain of suppliers in the decades after Bill Clinton signed the North American Free Trade Agreement in 1993, with metals, cars and parts flowing across borders in a finely calibrated economic balancing act. Now, car companies are having to eat the cost of tariffs while trying to decide whether to move production.

As a result, some companies that help GM and other auto giants crank out new cars are suffering. Marelli Holdings Co., a supplier for Nissan Motor Co. and Stellantis NV, filed for Chapter 11 bankruptcy protection this month. Marelli has had problems managing its debt and declining revenue, but it cited tariffs as the blow that sent it to the courts for restructuring. (…)

“Everything is frozen right now, and no one is hiring.” (…)

Other companies have decided they would rather stop producing in the US than deal with the constant flux. French technological equipment supplier Lacroix Group SA said in May that it will leave the North American market, where it employs more than 1,200 people in the US and Mexico. It plans to shutter a factory in Grand Rapids, Michigan, and lay off 115 workers in July, according to a WARN Act filing with the state. (…)

The auto industry employed just over 1 million workers in the US in May, down more than 22,000 jobs from a year ago, according to data from the Bureau of Labor Statistics. (…)

Financing is becoming a problem for some suppliers. When revenue falls, banks start cutting credit lines. (…)

Nearly Two Million Student-Loan Borrowers Are at Risk of Docked Pay This Summer The government is set to start garnishing wages after a pandemic-era reprieve ended

Roughly six million federal student-loan borrowers are 90 days or more past due after a pandemic-era reprieve ended, according to TransUnion. The credit-reporting company estimates that about a third of them, or nearly two million borrowers, could move into default in July and start having their pay docked by the government. That’s up from the 1.2 million that TransUnion had estimated in early May.

An additional one million borrowers are on track to default by August, followed by another two million in September. Borrowers fall into default when they are 270 days past due. 

Some borrowers might be having communication issues with their student-loan servicers, while others might be too financially stretched to make payments, said Joshua Turnbull, head of consumer lending at TransUnion.

The Education Department restarted collections on defaulted student loans in May, something it hadn’t done since before the pandemic. The department sent notices to borrowers saying their tax refunds and federal benefits could be withheld starting in June if they don’t take steps to resume payments.

Wage garnishment is also set to restart this summer. Until past due payments are paid in full or the default status is resolved, borrowers could see up to 15% of their wages automatically deducted from their paychecks. (…)

Roughly 43 million borrowers owe more than $1.6 trillion in student-loan debt.

More than nine million of them are expected to see their credit scores drop this year, according to data from the New York Fed released in March.

Trump’s Relentless Fed Pressure Creates Lose-Lose Scenario for Powell Two Fed officials appointed by Trump have become the first to speak out in favor of lowering rates after having supported last week’s decision to hold them steady

President Trump escalated his long-running public attack on the Federal Reserve, creating a lose-lose situation for the central bank as it navigates the risks of higher prices and weaker growth from tariffs.

The assault has little modern precedent and forces the Fed to confront a dreadful choice: It could cut rates sharply as Trump demands and risk fueling inflation that damages its credibility with markets. Or it could maintain its current wait-and-see stance, and face further bullying that would weaken its standing if the economy slows sharply and the administration is validated in its view that inflation shouldn’t be a worry.

The presidential pressure is being applied at the same time that a divide is opening up among Fed policymakers that could further complicate Chair Jerome Powell’s effort to balance political and economic hazards in the months ahead.

Among Fed officials who have spoken since last week’s meeting, the first to signal any appetite to cut rates at the Fed’s next meeting in late July have been the two appointed by Trump in his first term.

Michelle Bowman, the Fed’s vice chair for bank supervision, said in a speech Monday she was more worried about risks of weaker employment than higher inflation—a meaningful shift for a policymaker who was previously highly focused on inflation worries.

Fed governor Christopher Waller said in a CNBC interview on Friday that he could support a rate cut next month because he worries about allowing too much labor-market weakness. (…)

If future central bank leaders feel more compelled to consider political preferences alongside economic data, decades of credibility that anchor global confidence in U.S. monetary policy could be degraded.

On Friday, Trump called on Powell to reduce the central bank’s policy rate, currently around 4.3%, to between 1% and 2% to lower rising costs to service the federal debt. (…)

Since meeting with Powell privately in the Oval Office last month, Trump has unleashed a torrent of insults. “I don’t know why the Board doesn’t override this Total and Complete Moron!” said Trump in a social-media post on Friday. (…)

Powell became Fed chair in 2018 after Trump appointed him, and the president frequently bashed Powell for being too slow to support the economy by lowering interest rates. (…)

Trump acknowledged Friday that “my strong criticism” of Powell “makes it more difficult for him to do what he should be doing.” (…)

Ousting Powell looks less viable than it did a few weeks ago. The Supreme Court went out of its way to signal that the Fed was off limits when it granted Trump’s emergency request last month to fire federal commissioners in the face of a law prohibiting their arbitrary removal.

A second option would be to announce Powell’s successor unusually early, which Trump hinted at doing earlier this month. A so-called “shadow chair” would be designed to undercut Powell by getting markets to place less weight on his forward-looking statements about policy.

It could put the chair-in-waiting in an awkward spot of publicly criticizing his or her future Fed colleagues—whose support will be needed once the new chair takes office—and being judged by market participants as a presidential toady. Alternatively, the shadow chair might defend the Fed’s moves, upsetting Trump and losing the job before even taking office.

The lack of attractive options for dislodging Powell explains why a sustained pressure campaign is likely to continue. The Fed is worried about letting inflation become a problem for a second time in five years. But Trump is balancing out that institutional risk by putting officials on notice that they will be blamed if the economy takes a dive.

“Trump’s broadsides ‘work.’ That’s why he does them,” said Spindel.

New York to Build One of First U.S. Nuclear-Power Plants in Generation Gov. Hochul directs state’s public electric utility to add at least 1 gigawatt of new nuclear-power production

New York intends to build a large nuclear-power facility, the first major new U.S. plant undertaken in more than 15 years and a big test of President Trump’s promise to expedite permitting for such projects.

Gov. Kathy Hochul said in an interview that she has directed the state’s public electric utility to add at least 1 gigawatt of new nuclear-power generation to its aging fleet of reactors. A gigawatt is roughly enough to power about a million homes. (…)

The New York Power Authority may pursue the project alone or in partnership with private entities, Hochul said. (…)

Only five new commercial reactors have come online in the U.S. since 1991, which hasn’t been enough to offset plant retirements. (…)

Nuclear plants currently produce about 19% of the country’s electricity. (…)

Meanwhile, she said, local support for Microsoft’s plan to restart the undamaged reactor at Pennsylvania’s Three Mile Island power plant, suggests that concerns around nuclear safety have eased and confidence in the technology has improved since a partial core meltdown in 1979 set back the industry by decades. (…)

New York is making arrangements with Canadian officials to study efforts in Ontario to build four small modular reactors. Smaller reactors that could be built in a factory setting, one after the next, could in theory drive down costs and overcome one of the industry’s stumbling blocks.

New York officials are also scrutinizing the problems that plagued development of the two newest U.S. reactors at Plant Vogtle in Georgia. Construction began in 2009, and they wound up costing more than $30 billion when they were completed in 2023 and 2024, which was more than twice the initial estimates.

China Rips Trump’s Iran Attack in First Comment Since US Hit

(…) “The US move seriously violates the purposes and principles of the UN Charter and international law and exacerbates tensions in the Middle East,” it said. “China calls on all parties to the conflict, especially Israel, to cease fire as soon as possible.”

On Monday, the state-run Global Times added to the criticism, saying the US’s use of bunker-buster bombs would push “the Iran-Israel conflict closer toward an uncontrollable state.” (…)

Beijing hasn’t yet offered substantial assistance to Tehran besides rhetorical support. President Xi Jinping last week outlined a four-point proposal for the Iran-Israel war in a call with Russian President Vladimir Putin. (…)

China is the nation most dependent on oil passing through the strait, where a third of its crude transits. Tehran could seek to retaliate for the US attack by trying to close the chokepoint. Iran’s parliament has called for closing the waterway, according to Iranian state-run TV — a move that would need the explicit approval of Supreme Leader Ayatollah Ali Khamenei to proceed. (…)

John Authers:

(…) The case against escalation is that Iran is already Monty Python’s Black Knight:

Its nuclear program has been put back by years.

It’s lost control of its own skies.

Its proxies in the region — Hamas, Hezbollah, the Assads in Syria and the Houthis in Yemen — have been neutralized or weakened.

Its most powerful allies aren’t keen to help — Russia is embroiled in Ukraine, and China needs Iran’s oil to keep flowing.

Tehran’s best available option might be, like Saddam after 1991, to reinforce itself at home while desisting from greater offensive ambitions. That would be a win for the US, and the oil market.

Yet the regime has no choice but to retaliate if it wants to maintain its hold over its own people. Doing nothing would guarantee regime change. If it is to fall, it would far rather do so with a bang than a whimper. Closing the Strait, however, would be a desperate measure that might not last long. (…)

To quote Larry McDonald of Bear Traps Report:

Iran has little downside to talking up the closure of the Strait of Hormuz. The real pain is the closure itself, which affects China, their cash cow, far more than the rest of the world. Bottom line: Oil prices will likely be elevated for the rest of the summer.

That would make it harder for the Federal Reserve to ease rates, and dampen economic activity. And that would in turn mean hits to commercial real estate, private credit, CCC-rated bonds, housing, and the US consumer. (…)

Trump taunts Iran with prospect of ‘regime change’ after strike on nuclear sites President’s social media posts contradict officials’ claims that US does not seek to topple government

(…)  “It’s not politically correct to use the term, “Regime Change,” but if the current Iranian Regime is unable to MAKE IRAN GREAT AGAIN, why wouldn’t there be a Regime change???,” Trump wrote on Truth Social. “MIGA!,” he added. Trump’s comments about Tehran come after top US officials said they were not seeking a different government in Iran. “Our view has been very clear that we don’t want a regime change.

We do not want to protract this or build this out any more than it’s already been built out,” US vice-president JD Vance told NBC on Sunday. “We want to end their nuclear programme, and then we want to talk to the Iranians about a long-term settlement,” he said. (…)

FLASH PMIs

Eurozone: Business activity up marginally as new orders near stabilisation

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index was unchanged at 50.2 in June, posting above the 50.0 no-change mark for the sixth consecutive month but continuing the trend seen through much of the year-to-date of only marginal expansions in business activity.

 

Overall growth was again centred on the manufacturing sector, where production increased for the fourth successive month. That said, the rate of expansion in June was slight, having eased to a three-month low. Meanwhile, services business activity was unchanged at the end of the first half of the year, following a first fall in activity in six months during May.

Germany posted a renewed expansion in output, after activity decreased modestly in the previous month. That said, the rise was only marginal. On the other hand, France posted a further reduction in output, extending the current sequence of decline to ten months. The rest of the euro area continued to see business activity increase, but the rate of growth eased to the slowest since last November.

New orders neared stabilisation in June. Although continuing to fall marginally, the latest reduction in new business was the slowest in the current 13-month sequence of decline. Manufacturing new orders were unchanged, ending a period of contraction stretching back just over three years.

Meanwhile, services new business fell slightly. The picture for new export orders (which include intra-Eurozone trade) was broadly similar to that seen for total new business. New export orders decreased modestly, but to the least marked extent since April 2022. Germany posted a rise in new business from abroad for the first time in almost three-and-a-half years.

In line with the picture for business activity, employment in the Eurozone was up marginally again in June, with the pace of job creation unchanged from May. Here though, growth was driven by the service sector where staffing levels were up modestly. Meanwhile, manufacturing workforce numbers decreased solidly, and at a faster pace than in May. Employment was reduced in Germany and France, but increased in the rest of the Eurozone.

The pace of input cost inflation eased for the fourth consecutive month in June and was the weakest since last November. The latest rise in input prices was also softer than the series average. A third successive monthly fall in manufacturing input costs contrasted with continued strong inflation in the service sector.

The differing trends between the two monitored sectors in terms of input costs were also seen with regards to selling prices. Service providers raised their charges at a strong pace that was the fastest in three months, while manufacturing output prices were cut for the second month running. Overall, selling prices increased solidly, and at a slightly faster pace than in May. France posted a renewed rise in charges in June, joining Germany and the rest of the euro area in inflation territory.

Manufacturers in the Eurozone continued to scale back their purchasing activity in June, but the pace of decline was modest and among the weakest in the past three years. With input buying falling, stocks of purchases decreased at a marked and accelerated pace. Stocks of finished goods, meanwhile, declined to the smallest extent since September 2024. Suppliers’ delivery times lengthened at the end of the first half of the year, ending a four-month sequence of shortening lead times.

June saw an improvement in business confidence, with sentiment up to the highest since January. The strengthening of optimism was driven by the service sector where confidence hit a four-month high, but was nonetheless still weaker than the series average. Manufacturers in the Eurozone remained more confident in the year-ahead outlook than their services counterparts, despite sentiment dipping from May’s 39-month high. French companies were much more confident than was the case in May, with optimism in June matching that seen in Germany. Meanwhile, strongly positive sentiment continued to be recorded across the rest of the euro area.

Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:

“The eurozone economy is struggling to gain momentum. For six months now, growth has been minimal, with activity in the service sector stagnating and manufacturing output rising only moderately. In Germany, there are signs of a cautious improvement in the situation, but France continues to drag its feet. The momentum evident in the official growth figure of 0.6 percent for the first quarter is unlikely to have carried over into the second quarter, especially since special factors such as Ireland’s unusual jump in growth inflated this figure.

However, there is no reason to be resigned, as the outlook has brightened according to the survey and companies are keeping employment roughly constant.

Delivery times increased in June. Given the weak order situation and only moderate growth in production, this may be related, among other things, to the new geopolitical crises and the variable tariff policy of the US. Both factors are making supply chain management more difficult. Overall, however, the delivery time indicator shows that most companies are relatively good at adapting to uncertainty and that there have been no major disruptions so far.

For the ECB, the price environment for services remains slightly tense. Companies are still facing quite significant cost increases and raised their selling prices slightly more in June than in the previous month. This higher inflation in the service sector is partly offset by a deflationary environment in the goods sector. However, energy prices play an important role here. Until recently, they were still falling, but have risen sharply since the conflict between Israel and Iran. This information has only been partially reflected in the surveys. Overall, however, the ECB can remain relatively calm, as the strong euro and the deflationary effect of US tariffs argue against a short-term rise in inflation.”

Japan: Output expands at quickest rate for four months in June

 

The latest Flash PMI data suggest that Japan’s private sector had a positive end to the second quarter, with business activity growth improving to a four-month high on the back of a stronger increase in services activity and a fresh rise in manufacturing production.

However, overall demand conditions remained challenging, with total new business rising only slightly, and weaker foreign demand for manufactured goods dampening overall export sales. Companies indicated that US tariffs and lingering uncertainty over the global trade outlook continued to inhibit customer demand.

When assessing the year-ahead outlook for output, Japanese private sector firms remained cautious. Notably, the overall level of positive sentiment remained stuck near a post-pandemic low.

On a more positive note, the latest data hinted that cost pressures eased across the private sector in June, with input prices rising at the slowest rate in 15 months. Firms also continued to add to their workforce numbers, with overall employment increasing at the quickest pace for nearly a year.

Fed’s Waller Suggests Support for a July Cut Waller told CNBC that the Fed should “look through” one-time price increases from tariffs

In a Friday morning interview with CNBC, Waller said the Fed should “look through” one-time price increases from tariffs and instead respond to the underlying trend in inflation, which has been cooling.

Waller’s comments reaffirm his role as the central bank’s most vocal advocate for a return to rate reductions since the Fed paused its cuts in January.

“I think we’ve got room to bring it down, and then we can kind of see what happens with inflation,” Waller said. The Fed could then pause rate cuts again if inflation worsens, he added.

Waller noted that his colleagues on the Fed’s policy-setting committee might not agree with his timetable. On Wednesday, the group unanimously decided to hold interest rates steady, standing pat for the fourth straight meeting. In a press conference after the meeting, Fed Chair Jerome Powell said the Fed’s current stance is well-positioned to respond to risks in a highly uncertain economy. (…)

Waller said that interest rates are likely still far enough above a neutral level, however, that the Fed could begin cutting rates again gradually, monitor inflation, and then pause cuts again in the future to lean against price increases if they threaten to get out of hand.

“We should be basing policy based on the data,” Waller said in the interview, arguing that prospective inflation caused by tariffs would likely be temporary. (…)

• Fed’s Daly Says Next Rate Cut More Likely in the Fall

China Asks State-Owned Developers to Avoid Public Defaults

China has introduced a requirement for state-owned developers to avoid defaulting on publicly issued debt, in the latest attempt by authorities to contain the nation’s prolonged property crisis.

The State-owned Assets Supervision and Administration Commission added the directive to its latest performance metrics for about 20 developers that are controlled by the central government, people with knowledge of the matter said, asking not to be identified discussing a private matter.

While the regulator has so far stopped short of providing additional support to backstop the developers, the new stipulation underscores growing urgency to contain credit risks from China’s protracted property downturn. Most of the biggest private developers have defaulted since 2021, shattering confidence in the housing market and leaving a pile of distressed debt that currently stands at almost $140 billion.

The directive may place pressure on management, while also sending a signal to banks, often responsible for rolling over loans and issuing new credit. (…)

China’s housing slump has dragged on for four years, with little sign of improvement. Prices of new homes slid the most in seven months in May, and sales also fell, signaling the effects of a stimulus blitz last September is wearing off.

Like their privately owned peers, SOE developers have felt pressure from slumping sales. Last year, some resorted to steep price cuts to rekindle transactions.

“China’s state-owned and private developers are both susceptible to a possible renewed property sales downturn,” Bloomberg Intelligence analyst Kristy Hung wrote in a recent note. She warned that state-owned builders face the risk of a full-year decline in sales this year. (…)

Premier Li Qiang this month pledged action to stop the decline in the real estate market, which has been depressing household sentiment just as the government is trying to boost consumption and offset the threat to exports from US tariffs.

Even if China’s housing market picks up, the long-term outlook remains grim. Demand for new homes in cities is expected to stay at 75% below its 2017 peak in the coming years, due in part to a shrinking population, Goldman Sachs Group Inc. estimated.

Canada Retail Sales Fell 1.1% in May, Largest Drop in a Year

An advance estimate suggests receipts for retailers plunged 1.1% in May, the biggest decline in a year, Statistics Canada said Friday. That more than reversed April’s 0.3% gain (…).

With cars and parts making up a quarter of Canadian retail sales, the stark difference in sales between those two months suggests volatility in auto purchases played a role in the weakness in the middle of the second quarter. Most of the April gains were also driven by cars. Excluding autos, sales fell 0.3% that month, a bigger decrease than economists had expected, and a second straight monthly drop. (…)

Despite outperforming expectations in the first quarter, the Canadian economy is expected to stall or contract in the second quarter, as tariff front-running activity in trade and inventory faded. Domestic consumption was already weak in the first three months of this year, and consumers who are concerned about their job prospects will likely continue to curb their spending. (…)

Commercial Real Estate Distress Is Spreading

Delinquencies continue to increase, though the rate has moderated, researcher Green Street said this past week. Distress is also climbing, rising 23% to more than $116 billion at the end of March from a year earlier, data compiled by MSCI Real Capital Analytics show. That’s the highest in more than a decade.

Investors including Victor Khosla of Strategic Value Partners LLC have warned that debt maturities will lead to a “tsunami” of problems for US offices in particular. There are signs that’s spreading. The past-due and nonaccrual rate for commercial real estate portfolios reached the highest since 2014 earlier this year, the Federal Deposit Insurance Corp. wrote in a report last month, citing multifamily as an increasing source of pain. Past-due and nonaccrual loans are so far past due that banks have stopped booking interest owed because they doubt they’ll ever receive it.

Policy uncertainty, meanwhile, is also holding back activity in the underlying market as businesses delay decisions across districts, the Federal Reserve noted in its May Beige Book survey. For example, some of the reserve banks stated that demand for warehouses was affected by the potential impact of tariffs.

The proposed Section 899 ‘revenge tax’ in President Donald Trump’s tax-and-spending bill could also “trigger wider foreign investor pullbacks, impacting all US real estate lenders,” said Harsh Hemnani, a senior analyst at Green Street. German commercial property lender Deutsche Pfandbriefbank AG announced this past week that it’s quitting the US market and will wind down, securitize or sell its €4.1 billion ($4.7 billion) portfolio there, warning it could make a loss this year due to the expected cost of the decision. (…)

On Thursday, the Financial Stability Board cautioned that shadow lending to the industry globally “may amplify and transmit shocks to banks.”

Some traditional lenders continue to kick the can down the road in the US rather than take impairments. The wall of CRE debt continues to rise, in part because some credit providers have extended the duration of loans, the Mortgage Bankers Association said on Tuesday.

Another headwind for traditional lenders is large unrealized losses on securities portfolios that they’re holding to maturity or seeking to offload, with the FDIC saying last month that the losses stand at more than $410 billion.

CRE is likely to be a similar source of pain. Loss rates on commercial and residential mortgage-backed securities suggest the unrealized losses on banks’ mortgage books are likely to be as large or larger than in securities, academics including Lawrence White of New York University’s Stern School of Business wrote last week.

Chinese factories rush to reduce reliance on Donald Trump’s US Companies in major exporting province of Zhejiang look to other markets or to sell at home

Chinese trade data released since US President Donald Trump announced high tariffs in April shows increased exports to alternative markets partially offsetting a plunge in US-bound shipments. The value of exports to Europe in May climbed 12 per cent from a year earlier, with shipments to Germany up 22 per cent. Exports to south-east Asian countries rose 15 per cent. (…)

“We want to find new customers in markets like Europe,” said Xia Shukun, a manager at Shaoxing Sulong Outdoor Technology, which until now has only exported to Asia and the US. (…)

“That road isn’t working so we need to find a new one,” he said (…).

“We are seeing a new ‘China shock’,” said commission president Ursula von der Leyen at the G7 gathering in Canada this month. “As China’s economy slows down, Beijing floods global markets with subsidised overcapacity that its own market cannot absorb.” (…)

“They want stability and in the long term it doesn’t look good,” Chu said. “Many factories are concentrating on Europe.” (…)

The provincial government has begun covering the cost of attending trade fairs abroad, rolling out language programmes to cultivate 100,000 new cross-border ecommerce sellers and increasing subsidies for export credit insurance. (…)

“The signal was clear, US-China relations were chaotic . . . We found new buyers in south east Asia,” he said. “This time, I’m not paying attention.”

Shortages in US? Goods deflation in ROW?

BTW: China is an increasingly-dominant global innovator. “China is reaping the results of a relentless effort to overtake the U.S. at the cutting edge of engineering, science & technology… The Australian Strategic Policy Institute puts Chinese researchers ahead of Americans in 37 of 44 technologies examined, across the sectors of defense, space, robotics, energy, environment, biotechnology, artificial intelligence, advanced materials and quantum technology.” (WSJ)

BTW #2: More US exceptionalism:

• US vs Global Household Holding Habits: Something somewhat related to that (and I have to say this looks so extreme that I wonder if there is an element of measurement error in this) — US investor allocations to equities are some 5x greater than that typical of the rest of the world. This probably speaks at least in part to the strong run in US equities relative to global (simply drifting allocations there). But also a potential source of future shift if things can change around the rest of the world (as we know that rising allocations in the US have coincided with rising PE ratios). (Callum Thomas)

Source:  @MikeZaccardi

AI CORNER

Productivity Gains Are Coming

The Census conducts a biweekly survey of 1.2 million firms, and one question is whether a business has used AI tools such as machine learning, natural language processing, virtual agents, or voice recognition to help produce goods or services in the past two weeks, see chart below. Nine percent of firms reported using AI, and the rising trend in AI adoption increases the likelihood of a rise in productivity over the coming quarters. (Torsten Slok)

xAI is apparently burning $1 billion per month

Elon Musk’s artificial intelligence company is reportedly spending $1 billion per month on its large language model.

The LLM is intended to compete with OpenAI’s ChatGPT and Anthropic’s Claude, per Bloomberg.

That sum is a pressing issue because xAI doesn’t yet generate that kind of revenue. Earlier this month, the company’s banker, Morgan Stanley, reported that xAI expects $1 billion in gross revenue by the end of this year; this latest report estimates the company’s 2025 revenues at $500 million.

xAI would hardly be the first modern AI company to spend first and prompt questions later. Virtually all of its rivals, from startups like OpenAI to giants like Meta, have forecast dizzying amounts of capital expenditures related to AI. (Fortune)

Last January, it was reported that DeeSeek spend $5.6 million (yes Million) on its LLM model although that figure is widely disputed with the highest figure I have seen at $1.3 billion (SemiAnalysis).

We are still well below what Sam Altman has raised for OpenAi: $60B. And we don’t know what Google, Amazon and Meta have collectively spent so far but their 2025 budgets are all in the high Billions.

Can’t wait to measure the return on capital in a few years…