Federal Reserve Beige Book gives the greenlight to further rate cuts

The Federal Reserve isn’t directly impacted by the government shutdown, and they have just released their Beige Book report, which is an anecdotal survey on the state of the US economy. It suggests there has been a slight loss of momentum in activity over the past eight weeks, which supports the messaging from Fed Chair Jerome Powell yesterday that the economic situation hasn’t improved since the Fed cut rates 25bp on 17 September.

The report suggests that, on balance “economic activity changed little” since the last report, with 3 of 12 Fed districts reporting slight to modest growth, five reporting no change and four reporting a slight softening. This is a loss of momentum relative to the August report, which had indicated 4 of 12 Fed districts reporting “modest growth” with the other eight indicating “little or no change in economic activity”.

In terms of the jobs market, it was suggested that “demand for labour was muted across districts and sectors”. The August report had stated 11 of 12 districts reported flat employment with the other one reporting a “modest decline”. More specifically on jobs “in most Districts, more employers reported lowering headcounts through layoffs and attrition, with contacts citing weaker demand, elevated economic uncertainty, and, in some cases, increased investment in artificial intelligence technologies”.

With regard to prices, the August Beige Book indicated all 12 Fed regions saw “moderate or modest” price growth, but in two that growth was less than the rising input cost, suggesting squeezed profit margins. The assessment that corporate profits were bearing the brunt of higher costs was reaffirmed in today’s report with “several Districts” indicating that input costs rose at a faster pace than selling prices, with tariffs, insurance, health care and technology all cited as pressure points.

Private Inflation Data Shows Some Goods Are Getting More Expensive Due to Tariffs

Prices for goods like household equipment and furniture rose firmly, pushing up annual inflation to the highest level in two years, according to PriceStats data that’s based on products sold by online retailers. Another metric from OpenBrand showed the strongest monthly price growth since June, driven by personal care products and communications devices.

While the September data showed a notable increase in some prices, particularly on imported merchandise, economists see inflation starting to abate somewhat next year. Key to this development will be services costs. Unlike the private-sector reports, these are more fully represented in consumer price index data that have been delayed until later this month because of the government shutdown. (…)

“We’re beginning to get a little bit more concerned about the trend,” said Michael Metcalfe, head of macro strategy at State Street Markets, which analyzes and distributes the PriceStats data. “We’re currently getting into a period where prices are supposed to be really quite soft and the PriceStats data is not currently showing that normal softening.” (…)

“I think a lot of people expected one big change, and that driving inflation a lot. That’s not how it has happened,” he said. “It’s more like a gradual pass-through that is slowly putting upward pressure on prices.”

US Small-Business Optimism Falls to Three-Month Low on Economy

The National Federation of Independent Business optimism index declined 2 points to 98.8, according to data out Tuesday. Five of the 10 components that make up the gauge decreased, while three were unchanged.

A net 23% of small-business owners surveyed said they expect better business conditions in the next six months, down 11 percentage points from August. The net share of firms that viewed their inventories as too low sank last month by the most since 1997, which was accompanied by a smaller percentage expecting higher sales.

Owners also grew more anxious about inflation, with 14% of owners reporting that rising costs were their biggest problem in operating their business, up 3 points from August. A net 31% plan to raise prices in the next three months, up 5 points and the largest share since June.

The group’s uncertainty index rose 7 points from August to 100 — the highest since February, reflecting a decline in the share of owners saying now is a good time to expand. according to NFIB.

Still, overall business health was generally unchanged compared to August, with 68% of owners rating their business as excellent or good, compared with 27% who said it was just fair.

USA: Empire Manufacturing Well Above Expectations

The Empire manufacturing index increased by 19.4pt to 10.7 in October, well above consensus expectations for a negative reading. The composition of the report was strong, as the new orders (+23.3pt to 3.7), shipments (+31.7pt to 14.4) and employment (+7.4pt to 6.2) components all increased and returned into expansionary territory.

The prices received (+5.6pt to 27.2) and the expected prices received (+0.6pt to 43.7) components both increased, reaching their highest level since April. The prices paid (+6.3pt to 52.4) and the expected prices paid (+7.2pt to 65.0) components also increased.

The 6-months-ahead business conditions index increased by 15.5pt to 30.3, its highest level since January. (Goldman Sachs)

Eurozone industrial production slumps in August despite previous optimism

Despite a boost in industry optimism about production in August, according to the PMI, the reality turned out to be much less positive. A big decline in capital and durable consumer goods production caused overall production to tick down to the lowest level since January.

And this was despite a surge in production in Ireland – which is notoriously volatile – of 9.8% month-on-month. Without Ireland, the reading would have been much weaker as Germany, Italy and Greece all posted sizeable declines of more than 2%, while France and Spain posted smaller declines of under 1%. Dutch production was a bright spot among the larger industrial countries, with a 2.3% increase.

Despite optimism among manufacturers returning, the hard data is telling a different story at the moment. After a peak in production related to the US frontloading of European goods, the past few months have shown a declining trend again. Production is still elevated compared to late-2024 levels, but is quickly moving back in that direction.

Sizeable eurozone investment plans will take time to materialise, which means that while optimism about the medium-term outlook for the eurozone industry has become brighter, there is no immediate reason for short-term optimism as trade with the US settles into a new regime. For the third quarter, this means that manufacturing is unlikely to have contributed positively to GDP growth, keeping expectations for growth very muted.

POWER PLAY 2

On September 24, 2024, I wrote Power Play, highlighting the huge acceleration that AI would have on power demand, particularly electricity.

Today’s WSJ provides a good update. 

AI Data Centers, Desperate for Electricity, Are Building Their Own Power Plants

(…) With the push for AI dominance at warp speed, the “Bring Your Own Power” boom is a quick fix for the gridlock of trying to get on the grid. It’s driving an energy Wild West that is reshaping American power.

Most tech titans would be happy to trade their DIY sourcing for the ability to plug into the electric grid. But supply-chain snarls and permitting challenges are complicating everything, and the U.S. isn’t building transmission infrastructure or power plants fast enough to meet the sudden surge in demand for electricity.

America should be adding about 80 gigawatts of new power generation capacity a year to keep pace with AI as well as cloud computing, crypto, industrial demand and electrification trends, according to consulting and technology firm ICF. It’s currently building less than 65 gigawatts. That gap alone is enough electricity to power two Manhattans during the hottest parts of summer. (…)

One data center can devour as much electricity as 1,000 Walmart stores, and an AI search can use 10 times the amount of energy as a google search.

The growth is intense, too. The U.S. had around 522 hyperscale data centers at the end of the second quarter, which account for around 55% of global capacity, according to Synergy Research Group. Another roughly 280 are expected to come online through 2028 in the U.S.

Data centers consumed less than 2% of U.S. electricity before about 2020, but by 2028 could use as much as 12% of U.S. electricity, according to the Energy Department and Lawrence Berkeley National Lab. (…)

Note that just one year ago, forecasts were 8-9% by 2030!

This is on top of increasing electricity demands from EVs, heat pumps, electrification in industry, and the onshoring of manufacturing incentivized by the CHIPS Act, Inflation Reduction Act (IRA), and Infrastructure Investment and Jobs Act (IIJA), all placing both immediate and sustained pressure on the electric grid to accommodate new loads.

President Trump in January declared a national energy emergency, in part to keep the U.S. from falling behind China in the AI race. He has issued a series of related executive orders including one that aims to fast-track data-center construction and needed power infrastructure.

The U.S. appears to have a lot of catching up to do.

China will invest twice as much as the U.S. this year in power plants, storage and the grid, according to the International Energy Agency. It added about 429 gigawatts of new power generation last year, according to the think tank Climate Energy Finance, while the U.S. built about 50 gigawatts. (…)

Most U.S. data-center developers cited grid access as their top concern.

Project developers and utilities are trying to pick up the pace. ICF forecasts the U.S. will deliver almost 80 gigawatts of new generation starting in 2027, doubling the average pace of the past five years.

Even so, in some locations, data centers won’t be able to plug into the power grid until the 2030s because of the sheer backlog of projects and the fact that the nation’s high-voltage electric wires are running out of room. (…)

Many of the data-center developers scrambling for electricity intend to use on-site power for a few years until the grid infrastructure can catch up. A few plan to bypass the grid indefinitely, and others expect to split the difference, using a mix of grid and on-site power.

Ultimately, most data centers and tech customers will want to connect to the grid. It offers reliability and diversification with its mix of power plants—when one power source goes down, another can pick up the slack, said Andy Power, chief executive of Digital Realty, which has 300 data centers globally. He views on-site power as a stopgap. (…)

Planning and building large-scale power plants or expanding grid infrastructure takes years. The process, normally gummed up, is even more difficult lately. Projects of all kinds face hurdles obtaining permits, equipment shortages, a labor crunch and rising costs, exacerbated by Trump’s tariffs on steel and aluminum, as well as some copper products.

Orders for transformers began climbing just as global supply chains became snarled at the start of the Covid-19 pandemic, according to data from energy consulting firm Wood Mackenzie. Data-center demand for the equipment is up 10-fold since then. It’s expected to quintuple next year. New factories and utilities’ efforts to replace aging or damaged equipment have added to the order backlog.

Transmission construction, too, has been bogged down. The U.S. added 888 miles of new high-voltage transmission lines last year, and 450 miles the year before, according to a report from Grid Strategies. That’s down from an average of more than 900 miles a year between 2015 and 2019, and more than 1,700 miles a year on average for the five-year period before that.

As utilities push to increase supply and access, data centers are pulling in resources wherever they can, with natural gas the clear winner.

Massive turbines for large power plants have a yearslong backlog. But smaller turbines, reciprocating engines or fuel cells that also can use natural gas remain available—for now. Companies are snatching them up, adding them to data-center sites like Legos. Enough of them equal the output of utility-sized power plants or nuclear reactors. (…)

Billy Sorenson, Lightfield’s founder, has developed and built solar projects for the past 15 years but said only natural gas has the power density to meet AI demand.

“All roads point to natural gas,” he said. The site design will include a lot of smaller turbines, battery storage and diesel generators for backup in case there’s ever a problem with the gas supply, he said. (…)

Years of flat power-demand growth mean the number of natural-gas projects in the construction pipeline is small. The cost of building a new natural-gas power plant, meanwhile, has tripled over the past few years by some estimates.

Developers plan to deliver fewer than 20 gigawatts of natural-gas-powered projects this year through 2027, according to a Wall Street Journal analysis of data reported by power generators to the federal government.

Hugh Wynne, an analyst with Sector & Sovereign Research, predicts the dearth of construction will limit data-center growth.

Texas is seeing such rapid data-center, crypto and industrial growth that its grid operator expects peak electricity demand to increase 62% by the end of the decade—roughly the equivalent of adding all of California. The state is trying to persuade power companies to come to the Lone Star State to build or upgrade reliable generation, especially natural gas.

So far projects that would add more than a gigawatt of power have taken up officials’ offer of low-interest state-backed loans, but several others dropped out this year citing rising costs and supply-chain delays.

The gas projects moving forward in Texas and elsewhere are ones that likely secured equipment and locked in prices years ago, said Corianna Mah, an analyst with Enverus.

Complicating the picture further, most of the recent investment nationally has focused on renewable energy. About 214 gigawatts of large-scale solar, wind and battery projects are under construction or in various stages of planning, about two-thirds of what is currently operating in the U.S. for those technologies, according to government data.

Analysts, however, expect spending on wind and solar to drop and project cancellations to rise because they are set to lose key federal tax benefits under Trump’s tax-and-spending law. The president and his team argue clean-energy projects don’t provide the round-the-clock power generation needed to meet AI demand and have promised to make permitting more difficult for wind and solar. Wind and solar developers say every available electron will be needed to help meet demand, and they can deliver quickly.

Already, at least $22 billion in new factories and electricity projects have been canceled or scaled back this year, according to data tracked by advocacy group E2, including everything from offshore wind to battery factories. The Energy Department is slashing another nearly $24 billion of funding for early-stage climate projects.

Instead, the administration is boosting fossil fuels by opening swaths of federal land to oil and gas drilling and coal mining, approving new terminals to export natural gas, proposing to ax environmental regulations and offering $625 million to upgrade coal plants. (…)

Data centers and the companies giving them a power boost are preparing for a supply crunch that could last a while.

Equinix has been signing agreements in the U.S. and Europe with developers of small modular nuclear reactors, which haven’t yet delivered projects.

“We don’t know exactly where we’re going to use it, but we know we have a multigigawatt planned development for the coming handful of years,” said Raouf Abdel, executive vice president of global operations at Equinix. “We want as much flexibility in our power supply as we can get.”

Caterpillar, which has long provided power in remote locations for mining and oil-field operations, is seeing rising demand for its smaller turbines and reciprocating engines.

“Customers are saying, ‘Hey, can you help us bridge the two to three years until we can get a utility connection?’” said Jason Kaiser, group president of energy and transportation at Caterpillar. “That’s a new and growing opportunity for us.”

The company is spending $725 million to increase capacity at a large engine factory in Indiana, as power generation makes up the biggest part of company growth. The engines have traditionally been used for backup or emergency power, while the smaller turbines have been used at power plants, for pumps and compressors in the oil field and as jet, marine or train engines. (…)

Declaring a national energy emergency was smart, what followed not so much. Consider:

• tariffs on copper, steel and aluminum;
• reducing or eliminating incentives for renewable energy;
• gas pipeline capacity;
• LNG exports;
• cancelling what would have been the largest solar project in North America. “The Bureau of Land Management scrapped approval for Esmeralda 7, a 6.2 gigawatt project that could have powered nearly 2mn homes. It had begun the permitting process under the Biden administration.”

In my July 30, 2025 post, I wrote:

• China generated over 10,000 TWh (terawatt-hour) of electricity in 2024. That’s more than the combined output of the U.S., EU, and India—the next three biggest producers.
• China’s capacity, already more than 2x the US, is growing very rapidly and at lower costs.

From other Daily Edge posts:

• Renewables are expected to provide over one-third of China’s electricity generation globally by early 2025. The expansion of renewable energy sources is expected to meet all of China’s additional electricity demand.

• In 2024, China installed 277 GW of new solar capacity, bringing its total to 900 GW, which is as much as the rest of the world combined.

• China also controls the solar supply chain:

• As well as battery storage technologies, increasingly critical when using renewable energy.

FYI:

G7 accounted for 25% of China’s exports year to date, down from 48% in 2000. Only about 11% of PRC exports are going to the US this year, down from a peak of 21%.

AI Stocks Are in a Bubble, Most Investors Say in BofA Survey

About 54% of participants in the October poll indicated tech stocks were looking too expensive, an about-turn from last month when nearly half had dismissed those concerns. Fears that global stocks were overvalued also hit a peak in the latest survey. (…)

The BofA survey showed exposure to US stocks rose to the highest in eight months — stretching back to before tariff anxieties took hold. Worries about a recession subsided to the lowest since early 2022. (…)

The BofA survey showed an AI bubble was viewed as the biggest tail risk, followed by a resurgence in inflation and worries about the loss of Federal Reserve independence and dollar debasement.

The poll was conducted between Oct. 3 and Oct. 9, and canvassed 166 participants with $400 billion in assets.

Powell Keeps Fed on Track to Lower Rates Again The central-bank leader also suggested the Fed could be close to ending a three-year campaign to passively reduce its $6.6 trillion asset holdings

(…) “There really isn’t a risk-free path now, since [inflation] appears to be continuing to increase quite gradually…but now the labor market has demonstrated pretty significant downside risks,” Powell said. “Both the supply and demand for labor has declined quite sharply.” (…)

He said the economic outlook hadn’t changed much since the Fed agreed to cut rates at its meeting last month.

Since a lapse in federal funding on Oct. 1, the Fed has been operating without access to the first-tier government statistics that it uses to refine its economic outlook, which in turn guides decisions on where to set rates. “We’ll start to miss that data,” Powell said. If the shutdown persists, evaluating how the economy is performing “could become more challenging.” 

Data available before the government shutdown suggested economic activity might be “on a somewhat firmer trajectory than expected,” he said. (…)

Private data suggest that labor demand keeps declining:

“You’re at a place where further declines in job openings might very well show up in unemployment,” Powell said during a question-and-answer session following his prepared remarks. “You’ve had this amazing time where you came straight down, but I just think you’re going to reach a point where unemployment starts to go up.”

• Goldman Tells Staff It Will Cut More Jobs as AI Saves Costs

(…) In the note to staff, which announced the launch of the bank’s “OneGS 3.0” strategy, top executives touted the efficiency gains produced by AI as a path to more growth. They added that it would be a “multiyear effort” to implement AI in areas such as client on-boarding, lending processes, regulatory reporting and vendor management.

“While we are still in the early innings in terms of assessing where AI solutions can best be deployed, it’s become increasingly clear that our operational efficiency goals need to reflect the gains that will come from these transformational technologies,” Chief Executive Officer David Solomon, President John Waldron and Chief Financial Officer Denis Coleman said in the memo. (…)

A statement that will likely be widely used.

• Salesforce Says AI Customer Service Saves $100 Million Annually

(…) The company said more than 12,000 customers are using Agentforce. For example, Reddit Inc. was able to cut customer support resolution time by 84%, Salesforce said. (…)

AI allows Salesforce to give attention to customers who weren’t getting called back by human employees, Benioff said. Over $60 million in potential business has been identified since the company rolled out the technology internally, he said.

During a podcast appearance in August, Benioff said Salesforce has reduced its customer support workforce by thousands of people.

Meanwhile:

The US is now collecting tariffs on imported timber, lumber, kitchen cabinets, bathroom vanities and upholstered furniture, duties that threaten to raise the cost of renovations and deter new home purchases.

The import taxes — initially set at 25% for cabinets, vanities and upholstered wooden furniture — officially took effect on Tuesday at 12:01 a.m. New York time. Imports of softwood timber and lumber, meanwhile, are newly subject to 10% fees.

At President Donald Trump’s direction, most of the lumber and furniture tariffs are set to snap even higher in the new year — with upholstered wooden products subject to a 30% rate and kitchen cabinets and vanities at 50% as of Jan. 1. (…)

Roughly 7% of all goods used in new residential construction come from foreign suppliers, according to the National Association of Home Builders, which cited 2024 data. Even without new import taxes, the group has said the cost of building materials has risen by 34% since Dec. 2020. (…)

Trump also ordered administration officials to vigilantly monitor the price of imports and impose “specific, compound or mixed tariffs” when necessary to counter goods deemed to have unfairly low costs.

Unlike typical tariffs — expressed as a percentage and applied to invoiced prices — specific tariffs could be set in US dollars and applied against a select weight or other unit of measurement. (Bloomberg)

Chinese Deflation Eases Again Even as Pressure on Prices Lingers

Prices at the factory gate fell 2.3% from a year earlier after slipping 2.9% in August, the 36th straight month of declines that was in line with forecasts. Producer deflation moderated for a second month, though it remained unchanged at zero in month-on-month terms.

Under pressure from falling food costs, consumer prices dropped 0.3%, the National Bureau of Statistics said Wednesday, below the median estimate of minus 0.2% in a Bloomberg survey of economists. The core consumer price index, which excludes volatile items such as food and energy, rose to an 19-month high of 1%.

Morgan Stanley expects the comparison base for core CPI and producer prices to shift “from tailwind to headwind” in the fourth quarter, after they benefited from favorable statistical effects.

“An improvement in demand and supply has stabilized prices in some industries, such as coal mining and solar equipment,” Dong Lijuan, chief statistician at the NBS, said in a statement. (…)

A strong showing in the first two quarters likely means China will reach the official growth target of around 5%, with fresh stimulus probably not on the agenda for a meeting of the ruling Communist Party later this month.

Goldman Sachs chart is more telling: inflation on core goods and services is rising likely reflecting improving domestic demand. Core goods prices rose 0.5% MoM in September.

China, Betting It Can Win a Trade War, Is Playing Hardball With Trump Chinese leader Xi Jinping thinks the president will fold before launching new tariffs that would roil markets

In its trade standoff with Washington, Beijing thinks it has found America’s Achilles’ heel: President Trump’s fixation on the stock market.

China’s leader, Xi Jinping, is betting that the U.S. economy can’t absorb a prolonged trade conflict with the world’s second-largest economy, according to people close to Beijing’s decision-making. China is holding a firm line because of its conviction, the people said, that an escalating trade war will tank markets, as it did in April after Trump announced his so-called Liberation Day tariffs, prompting Beijing to hit back.

China expects that the prospect of another market meltdown ultimately will force Trump to negotiate at an expected summit with Xi late this month, the people said.

Beijing continued playing hardball this week, escalating the trade fight Monday by sanctioning the U.S. units of South Korean shipping company Hanwha Ocean. The move whipsawed U.S. markets on Tuesday, triggering a sharp early selloff as hopes for easing tensions faded, before major indexes partially rebounded and steadied in the afternoon. (…)

On his Truth Social platform, Trump said the U.S. is considering “terminating business” with China on cooking oil and other “elements of Trade,” because of China’s refusal to buy U.S. soybeans—a decision Beijing has said is retaliation for Trump’s own tariffs. (…)

“I have a great relationship with Xi,” Trump said, before quickly adding: “But sometimes he gets testy.”

Acknowledging the severity of recent Chinese actions ranging from its new rare-earth export controls to the latest shipping-related sanctions, Trump said, “We have a lot of punches being thrown.”

He then pivoted to defend his economic strategy against fears of a market downturn, portraying the U.S. as impervious to pressure. “We are the most successful we have ever been as a country,” Trump said. (…)

U.S. Trade Representative Jamieson Greer told CNBC on Tuesday that senior officials in Washington and Beijing held discussions about the latest trade tensions on Monday, saying both sides “will be able to work through it.”

People familiar with the matter said the U.S. ambassador to China, David Perdue, has been trying to arrange a phone call between Treasury Secretary Scott Bessent, who leads the U.S. negotiation team, and his Chinese counterpart, Vice Premier He Lifeng. (…)

• Trump Says Argentina Bailout Depends on Milei’s Party Winning Upcoming Elections

President Trump directly tied the $20 billion lifeline the U.S. is extending to Argentina to President Javier Milei’s success in the upcoming midterm elections.

“If he loses, we are not going to be generous with Argentina,” Trump said, sitting across a table at the White House from the visiting South American leader, who he also endorsed for re-election in 2027. “If he doesn’t win, we’re gone.” (…)

Trump didn’t specify what he would consider a “win” for Milei’s party in the legislative elections. (…)

Former IMF executive director Hector Torres called Trump’s blunt statement in support of Milei “a life preserver made out of lead.”

Trump praised Milei as “MAGA all the way” and said the bailout was “really meant to help a good financial philosophy where Argentina can be successful again.” (…)

Officials from both countries emphasized that the deal isn’t only an economic one, but a broader effort to bolster ideological allies in the region and counter China. (…)

Treasury Secretary Scott Bessent said that it is “much better to form an economic bridge with our allies” and “end up with people who want to do the right thing” than have to be “shooting narco gunboats,” an apparent reference to the boats that the U.S. has targeted off the coast of Venezuela. As the two leaders met, the White House announced that the U.S. military had struck a fifth alleged drug-smuggling vessel, killing six. (…)

Milei frequently cited Trump during his unlikely rise, adopting the American leader’s slogan and lavishing him with praise. For his part, Trump has taken credit for Milei’s electoral success. “He ran as Trump,” he said in 2023. “Make Argentina Great Again. It was perfect.” (…)

Ahead of the meeting, Milei had hailed the U.S. deal as a turning point that would bring “an avalanche of dollars,” promising “we will have dollars pouring out of our ears.”

Why do I link Argentina with the trade war?

Because China bought a lot of soybeans this year but none from the US. Argentina cut its export taxes on grains, including soybeans, prompting China’s increased purchases while the peso was tanking.

The Trump administration is going out of its way to justify this unusual bailout. Scott Bessent, the architect of the bailout, said that American business leaders have told him that they want to deepen ties with Argentina.

The United States is Argentina’s third-largest trading partner, behind Brazil and China. The trade balance remains chronically in deficit for Argentina, which averaged USD 3.666 billion annually between 2014 and 2023.

Some media found another angle. Here and there:

• Major hedge funds, including those led by friends of Mr. Bessent, stand to benefit financially from an Argentina economic lifeline. Funds at investment firms including BlackRock, Fidelity and Pimco are heavily invested in Argentina, as are investors such as Stanley Druckenmiller and Robert Citrone, both of whom worked with Mr. Bessent when he was an investor for George Soros.
• The bailout would deliver a major windfall to Rob Citrone, a billionaire hedge fund manager with significant investments in Argentina. “Bessent’s personal and professional relationship with Citrone has spanned decades,” according to independent journalist Judd Legum.
• Mr. Druckenmiller was a mentor to Mr. Bessent at Soros Fund Management. A government filing in June of this year indicated that the Duquesne family office, which he runs, was the second largest investor in Argentina’s principal exchange-traded fund, a pool of Argentine stocks.

Mr. Citrone, the founder of Discovery Capital Management, has made Latin America his biggest bet in the world, and Argentina is the fund’s biggest investment in the region. Mr. Citrone has said that when he worked with Mr. Bessent under Mr. Soros in 2013, he convinced them to make their now famous bet against the Japanese yen and that he was responsible for most of the bonus that Mr. Bessent earned.

Two people familiar with the deal said Mr. Citrone was in close contact with Mr. Bessent in the lead-up to the Treasury announcement last month, arguing that if Argentina’s currency crashed, so too would the political fortunes of Mr. Milei.

Mr. Citrone told Mr. Bessent that if Mr. Milei were to lose the upcoming elections, Argentina would pivot to China for more economic assistance, according to one of the people familiar with the contacts. Mr. Citrone also apparently told Mr. Bessent that such an outcome would mean the United States could lose one of its most steadfast Latin American allies.

Hence: Bessent this week: “What we’re doing is maintaining a U.S. strategic interest in the Western Hemisphere.”

Maintaining (???) a strategic (???) interest. Really?

In negotiations over the terms of a support package, U.S. officials have been pushing for Argentina to scale back ties with China and have been seeking access to its uranium and lithium supplies, according to a person familiar with the matter.

But in Argentina, legislators and governors have more say in those contracts than Mr. Milei does, and the U.S. Treasury’s support for the Argentine president may not translate into more American companies securing mining rights.

Also this from Bloomberg:

“You can do some trade, but you certainly shouldn’t be doing beyond that,” said Trump, seated in front of Milei, referring to Argentina’s ties to the Asian giant. “Certainly shouldn’t be doing anything having to do with the military with China and if that’s what’s happening, I’d be very upset about that.”

Trump’s comments about Chinese activity in Argentina happened during the same meeting where he insisted Milei will need to perform well in the nationwide Oct. 26 vote in order to receive a $20 billion currency swap line, something US Treasury Secretary Scott Bessent had already said was finalized last week.

The remarks all but point to China’s space observation center in Argentina’s Patagonia region, and they build on previous comments that Milei is “committed to getting China out” of Argentina. Last weekend, China’s embassy in Argentina fired back at Bessent for “bullying” Latin American nations while pushing a “Cold War-era mentality.”

In 2012, Argentina’s then-leftist government granted China the rights for 50 years to build a 494-acre space station in the Patagonian province of Neuquen. Milei’s predecessor, Alberto Fernandez, renewed a joint venture agreement with China to collaborate on space exploration.

Past US administrations have speculated that China’s Patagonia space station is covertly conducting military activities. The administration of former US President Joe Biden called on Milei to inspect the site, but it’s unclear to what degree local authorities did so last year.

What Does China Want? It’s Too Soon to Tell Whether playing from a position of strength or weakness, Beijing’s timing is excellent.

(…) Robin Brooks of the Brookings Institution argues that China is dealing from weakness. It’s managed to replace exports lost to the US by increasing the products it sells to everyone else, but can only have done this by price-cutting, or “dumping.” He said:

Margins are getting hit, which means there’s a big negative shock lurking beneath the surface of these data… China is an export-dependent economy that’s on borrowed time. It’s hardball tactics on rare earths stems from weakness, not strength.

These export tactics risk a coordinated response from China’s trading partners. Speaking in Washington, former EU Trade Commissioner Cecilia Malmstrom warned that anti-dumping measures against China would increase further, “as China is trying to dump its goods on markets and diversify.”

An alternative take comes from Peter Tchir of Academy Securities, who notes that this episode of the trade war, unlike its predecessors under Trump, was initiated by Beijing. He argues that China believes that its rare-earths dominance will never be greater, and that it might be well served by reducing its own dependence on US chips (arguably the single greatest US point of leverage, which Trump has threatened to deploy):

China’s bargaining chip is declining in value and they think they can actually benefit from restricted access to chips. That would support an argument that China has analyzed the situation and is prepared for a full-on trade war.

This argument is possibly strengthened if China believes, as Brooks contends, that its position is weak. Developments over the last few days, with the US making threats, backpedalling somewhat, and then watching as China ups the ante by restricting shipping, tends to support this interpretation. (…)

Perhaps, yesterday’s threat from Trump to ban cooking oil illustrates the hand each side has:

The US is just seventh in the pecking order, with about 1.9 million tons of reserves. It also has little capacity to refine them. In fact, the few countries that can mine rare earths often still need to send them to be refined in China.

The US relies on China for 70% of its rare-earth imports. It’s a dependency that leaves the American military-industrial complex vulnerable, as the F-35 fighter jet requires more than 900 pounds (408 kilograms) of rare earths, according to the US Department of Defense.

Trump wants to increase domestic supply of rare earths. In March, he signed an executive order invoking wartime emergency powers to expand American production and processing of critical minerals and rare earths. The aim is to provide more financing, loans and other investment support, and accelerate the permitting process for new projects.

The president then launched a probe into the US critical minerals supply chain in April, ordering Commerce Secretary Howard Lutnick to determine whether the country’s reliance on imports poses a threat to national security and if tariffs need to be applied. The results of the investigation must be delivered within 270 days.

Import taxes wouldn’t translate to an immediate surge in US supply. There’s only one operational rare-earths mine in the country at present: MP Materials Corp.’s Mountain Pass mine, reopened in 2018, in California’s Mojave Desert. Getting other projects up and running would be a yearslong and expensive process. In the meantime, American businesses that need rare earths would likely pay more for their imports if new tariffs were introduced — assuming China allows these materials to be exported. (…)

Trump is looking beyond US shores for rare earths as well. He’s homed in on the mineral riches of Greenland, which has the eighth-largest reserves of rare earths in the world, mooting a potential takeover of the Danish territory.

The US has also signed an agreement to exploit Ukraine’s critical minerals. Trump has pointed to the European country as a source of rare earths but it doesn’t have any major reserves that are internationally recognized as economically viable. (Bloomberg)

The FT’s Ed Luce:

(…) China has shown that it can innovate rapidly on semiconductors and other dual-use technologies. The US, by contrast, has had 15 years to make up for its lack of rare earths and processing capabilities and has done almost nothing to fix it. China’s ability to damage the US economy is more potent for the time being than vice versa. Which means Trump is again likely to blink first. (…)

Why are Republican hawks so muted in their criticisms of Trump on China? Only partly because of fear. Mostly it is because he is giving them what they want on AI. Trump has done away with the few guardrails that existed. In Silicon Valley they extol AI’s many benefits to humankind. Their Washington lobbyists chiefly cite the race with China.

Either way, Trump’s administration is a field day for Palantir, OpenAI, xAI, Anduril and others. Trump may think he is the ultimate peacemaker. But his actions are stoking China’s self-belief and elevating America’s military-AI complex. It would be eccentric to assume he knows what he is doing. 

Jeep Maker Stellantis Plans $13 Billion Investment to Boost U.S. Manufacturing Automaker says that American production will grow by 50% with 5,000 new jobs at plants across the Midwest

Stellantis said Tuesday that it would spend $13 billion through the end of the decade as it launches five new vehicles and a new four-cylinder engine, creating more than 5,000 jobs at plants across the Midwest. Suppliers providing parts for those models may add 20,000 jobs, Chief Executive Antonio Filosa said in an interview.

“The most important and relevant objective that we have with this investment is to grow in this market,” Filosa said.

The plan could help one of the country’s largest car manufacturers defray costs from tariffs imposed by President Trump’s administration. The company has said it expects a total tariff impact of $1.5 billion for the year. (…)

In 2024, Stellantis imported roughly 45% of cars it sold in the U.S.

The investment plans include a mix of gas-powered vehicles and electrified models at plants in Michigan, Indiana, Illinois, and Ohio. In the interview, Filosa said additional plans will be announced in the future for the company’s other key American brands, including Chrysler and Dodge. He declined to provide specifics. (…)

More than $600 million will be spent to reopen the Belvidere factory to build the Jeep Cherokee midsize SUV and Compass SUV in the U.S. Both Jeeps are currently assembled in Mexico. Production is expected to begin there in 2028. (…)

• Canadian Jeep Plant At Risk in Stellantis’ $13 Billion US Plan Stellantis NV said it’s halting plans to manufacture the Jeep Compass SUV at its factory in the Toronto region, throwing into doubt the future of one of the company’s two major assembly plants in Canada.