Inflation Held Steady at 2.7% in July Prices excluding food and energy categories rose 3.1% over the past 12 months, above forecasts

(…) For the Fed, the lack of a more alarming acceleration in price pressures likely removes an obstacle to lowering rates in response to growing worries about a slowing labor market. (…)

Prices either fell or stabilized in the categories that consumers tend to pay the most attention to: shelter, energy and groceries. That helped keep overall inflation in check.

Energy prices declined, grocery prices were roughly flat, and rent growth was modest in July. (…)

But muted inflation for energy and housing was offset by higher costs elsewhere, including some categories such as furniture, tires and pet products, that saw larger increases last month.

“That’s definitely a sign of tariffs passing through,” said Alan Detmeister, economist at UBS investment bank. (…)

In an interview on Fox Business Network Tuesday afternoon, Treasury Secretary Scott Bessent encouraged the central bank to consider a larger half-percentage-point rate cut at its September meeting. Bessent, who earlier this year warned the economy might face a “detox period” as it cut government spending, said the Fed could have been lowering rates at its last two meetings given payroll gains that were revised lower.

• Bets on Outsize Fed Cut Gain Steam as CPI Data Backs Doves

A largely benign US inflation report is bolstering the case for traders betting that the Federal Reserve will soon cut interest rates, with some seeing an increased possibility of an outsized reduction.

For weeks, investors have piled into swaps, options and outright Treasury longs to wager that subdued inflation will allow the Fed to lower borrowing costs in coming months. There’s some vindication for that view, with shorter-term Treasury yields dropping for a second day on Wednesday, while swaps traders lifted the odds of a September rate cut to more than 90%.

Bets that the Fed will reduce rates by more than 25 basis points in September also gained traction, with traders adding some $2 million in premium on Tuesday to a position in the Secured Overnight Financing Rate (SOFR) that would benefit from such a move.

The inflation report “was a bit stronger than we have seen over the prior few months, but lower than many have feared,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, in a note. “As a result, we expect the Fed to begin cutting rates in September, and it could be justified cutting the Funds rate by 50 basis points.”

Tuesday’s report was far from an all-clear for the Fed. Though a tepid rise in the costs of goods tempered concerns about tariff-driven price pressures, underlying US inflation accelerated in July by the most since the start of the year. (…)

Wells Fargo’s account:

July CPI: Broad Heat in the Core

Excluding food and energy, the core CPI was hotter, rising 0.32% over the month and pushing the year-over-year rate up to 3.1%—its highest year-ago reading since February.

The details show tariff-related price increases continuing to seep into the economy, with core goods prices rising 0.2% in July amid additional increases for heavily imported items, such as household furnishings and recreational goods.

Core services inflation picked up a stronger-than-expected 0.4% as a rebound in airfares and a strengthening in medical care services prices overtook the gradual moderation in primary shelter cost growth. Yet, with medical care and airfares not serving as source data for the PCE deflator, we currently estimate the core PCE index rose a softer 0.22% in July.

Today’s CPI report illustrates the challenges the Fed faces in its efforts to balance its price stability and maximum employment dual mandate. The labor market is showing signs of lost momentum, but inflation is 1) still above the 2% target and 2) drifting in the wrong direction.

We are skeptical of rate cuts much deeper than our current forecast of 25 bps cuts at the FOMC’s next three meetings given the prospects for above target inflation over the next year. Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present, in our view. (…)

For all the consternation over the impact of tariffs on goods prices, it was mostly service-related categories that accounted for the firmer core reading in July. Medical care services (+0.8%) and airfares (+4.0%) posted monthly readings that were stronger than we were expecting and above their recent trends. (…) Primary shelter inflation continues to moderate on trend and is starting to approach its pre-pandemic pace.

Core goods inflation was 0.2%, below the 0.3% we were expecting but above the 0.05% that this category averaged in the 12 months ending in June. Tariff-related price increases continued to seep slowly into the data, with prices for household furnishings, apparel and recreational goods once again climbing higher. Prices for used autos rose 0.5% in the month, while new vehicle prices were roughly flat in July.

With medical care and airfares not serving as source data for the PCE deflator, the Fed’s preferred measure of inflation looks likely to be somewhat softer in July. We currently estimate the core PCE index rose 0.22% last month. We will update our estimate following Thursday’s PPI report. (…)

Meantime, energy prices slid 1.1% in July with broad-based declines in gasoline (-2.2%) and energy services (-0.3%). Over the past year, energy prices are down 1.6% and have served as a source of deflationary pressure on overall consumer prices. Yet the downdraft has been due largely to lower oil prices.

Energy services, while dipping in July, are up more than 7% over the past year. Further strength is likely in store, specifically for electricity prices, as utilities contend with higher upkeep costs and growing demand for nonresidential uses. (…)

The pass-through to prices from higher tariffs is not a one-month event. Stockpiling and reluctance to immediately raise prices has helped mitigate the impact to consumers thus far. However, with tariff rates settling higher and no reason to think they will come down for the foreseeable future, we expect the added costs will continue to seep through to selling prices in the months ahead, leading to further strength in goods prices.

Core services inflation is likely to slow only somewhat further in the near term, with primary rents, airfares, motor vehicle insurance and medical care services all at or near their disinflation nadir.

(…) we are skeptical of rate cuts much deeper than this given the prospects for above target inflation over the next year due to higher tariffs and fiscal stimulus that will start to hit the economy sometime in H1-2026. Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present, in our view.

My observations:

• Goods deflation seems over. Prices are not exploding but goods are no longer contributing to slowflation:

• Services inflation has seriously accelerated since its March low, in spite of slowing wages and low oil prices. Many surveys mentioned tariffs as a source of services inflation. Maybe service providers are more easily passing through their tariff-related cost increases.

• The correlation between services and headline cpi inflation is 88.2% since 1969:

John Authers:

Tariff Derangement Syndrome Is Meeting Reality The links between inflation, a rate cut, and a record for stocks aren’t what they seem.

Outside food and energy, US prices are picking up again. Disinflation after the epic post-pandemic price shock is over. In other news, the latest nominee for the Federal Reserve’s board of governors is chiding his new colleagues for “tariff derangement syndrome” and the US Treasury secretary says that a jumbo cut of 50 basis points would be in order next month. And the US stock market has surged to an emphatic new record. (…)

The inflation numbers don’t strengthen the case for a rate cut. All else equal, they should be bad for stocks. But the intense political pressure for a rate cut has little to do with the data.

That pressure has moved the dial toward easy money. Rate cuts don’t generally happen when inflation is above target and no recession appears imminent. When they do, the stock market might well melt up. Hence Tuesday’s buying.

Last week, the nominee Fed governor, Steven Miran, told Bloomberg there was “zero macroeconomically significant evidence of price pressures from tariffs.” If there were any effect, he said, it would be a “one-time price shift,” as happens when governments raise sales taxes, and not an enduring regime change. If the administration’s message wasn’t clear enough, Treasury’s Scott Bessent piled on to say that the Fed should consider cutting by 50 basis points next month.
It’s hard to reconcile such rhetoric with the actual numbers. This is our standard beautiful chart, dividing inflation into its four core elements:

Tariffs have their most evident effect on core goods, which are scarcely visible in the big chart. Here is the sector’s contribution to CPI in isolation:

Two points are clear. First, core goods aren’t contributing much to the overall price burden. Second, their prices usually have a tendency to go down, so even if they add only two-tenths of a percentage point to bring core CPI to 3.1%, a trend has turned. It’s not terrifying, but is concerning. Some tariffed products (like home furnishings) are already showing signs that the levies are being passed through, and others (notably new cars) aren’t (…).

Omair Sharif of Inflation Insights LLC warns that of 75 items within core goods, 65.3% rose in July, up from 57.3% in June and the highest in 30 months. He suggests that a wider swathe of core goods is steadily being impacted by higher tariffs.

Services, not goods, have been leading inflation and continue to do so. Chair Jerome Powell started to look at “supercore” (core services minus shelter) as a priority, which is unfortunate as it has unambiguously turned upward, rising to 3.2% from 2.7% in April.

(…) the key is that the trend is no longer in the right direction. The same is true if we look at inflation of sticky prices, for products whose prices take a while to change and are very difficult to cut. Again, this inflation is rising again, and it never got down to the Fed’s upper bound of 3%:

The Cleveland Fed produces a median CPI, and also a trimmed mean, which excludes outliers. Both these purists’ measures of core inflation have stopped falling and started to rise, without ever getting within target range. Outside the post-pandemic spike, the median hasn’t been this high in more than three decades:

The overall numbers look good because one of the Trump 2.0 priorities, a lower oil price, is coming through in spades. Cheaper gasoline will make people much happier and brings the headline rate down to 2.7%. Exclude energy, and everything else is at 3%. It’s not at a level that would normally encourage central bankers, who generally ignore oil prices as they have no control over them, to ease rates:

(…) Wage inflation is falling, but not as fast as the Fed would like. These are the wage-tracker numbers produced by the Atlanta Fed from census data. Wages are rising, for both full- and part-time employees, faster than at any time in the 20 years before Covid:

Jim Bianco of Bianco Research makes the devastating point that in the last 40 years, the Fed has only once cut rates when the core was above 3% and the three-month change was greater than 0.3%. That was between October 1990 and March 1991 when there was war in the Persian Gulf and the economy slid into recession.

The Fed might now give up on its 2% target. There’s an argument for that, but the electorate seemed to feel differently last November, after the battering from inflation during Joe Biden’s presidency. As for stocks, everyone understands the potential of artificial intelligence. But the S&P 500 is trading at a record multiple of sales, so a lot is riding on keeping margins high:

Share prices shouldn’t be viewed in isolation. Lower interest rates justify higher valuations. But if we compare the S&P’s earnings yield (the inverse of the price/earnings ratio) with the 10-year Treasury yield, or its dividend yield with the three-month Treasury bill, stocks look terrible value. Those rate cuts really need to happen:

Tariffs’ pass-through to prices to date has been weaker than many had feared. But it’s not deranged to monitor the risks, which are clear and obvious. Whether it’s deranged to pile into stocks is another matter. With a dovish error apparently in the pipeline, maybe it makes sense.

Allow me two last charts to add to Authers’ referring to Jerome Powell’s supercore CPI.

Monthly supercore inflation has been above 3.0% annualized in 10 of the last 11 months. It averaged 3.8% in the last 6 and 3 months and 4.2% in the last 2 months. No longer in the 5%+ range of 2023 but uncomfortably high for what Powell sees as a fundamental underlying inflation indicator.

FYI, supercore inflation averaged 2.1% between 2010 and 2019:

The Partisan Economist Trump Wants to Oversee the Nation’s Data E.J. Antoni lacks the research record of previous commissioners of the Bureau of Labor Statistics, but has a solid record of backing Trump’s narrative of the economy

President Trump this week tapped Antoni to run the agency whose data and methodologies he has long criticized, especially when it produces numbers that Trump doesn’t like. He recently proposed suspending the monthly jobs report, one of the most important data releases for the economy and markets. On Tuesday a White House official noted that Antoni made the comment before he knew he was going to be chosen, and that his comments don’t reflect official BLS policy.

If confirmed by the Senate, Antoni would run a 141-year-old agency staffed by around 2,000 economists, statisticians and other officials. The BLS has a long track record of independence and nonpartisanship that economists and investors say is critical to the credibility of U.S. economic data. (…)

Past BLS commissioners have had extensive research experience, and many have climbed the ranks of the agency itself. Antoni doesn’t fit that profile. He doesn’t appear to have published any formal academic research since his dissertation, according to queries of National Bureau of Economic Research working papers and Google Scholar. Much of his commentary on the Heritage website praises Trump’s policies and economic record. He frequently posts on X and appears on conservative podcasts such as former Trump adviser Steve Bannon’s “War Room,” where he criticized the economy under President Joe Biden and lauds Trump’s economy. (…)

“It’s not a matter of making the numbers look good, it’s a matter of them being accurate,” Antoni said on Bannon’s Aug. 1 show after McEntarfer’s dismissal. “The models and the methodologies need to be revised.”

Antoni told Fox News Digital in an interview on Aug. 4 that “BLS should suspend issuing the monthly job reports” until its methodologies are corrected. Such a move would be unprecedented, leaving the public and markets without a vital source of information on the economy’s health.

His commentary on the data has been partisan. During Biden’s final year in office, Antoni argued the consumer-price index was understating inflation. In July 2024, he said its monthly rent data was “stale” and the real costs wouldn’t show up until after the election. In fact, while BLS data showed rents rising more slowly than private data in 2021-22, by 2024 the reverse was true: it showed rents up 5.2% that June from a year earlier, compared with 3.2% for Zillow.

On Bannon’s Aug. 1 show, he wrongly said that Biden had removed McEntarfer’s predecessor, Bill Beach, whom Trump appointed in 2019. In fact, Beach remained in the job until his four-year term expired in 2023, something Beach has said he was “very grateful” for.

Conservatives praised Trump’s choice. “EJ Antoni is one of the sharpest economic minds in the nation—a fearless truth-teller who grasps that sound economics must serve the interests of American families, not globalist elites,” Heritage Foundation President Kevin Roberts said in a statement.

But several independent economists said he is unqualified. “There are a lot of competent conservative economists that could do this job,” said Kyle Pomerleau, a senior fellow at the right-of-center American Enterprise Institute, in a social-media post. “E.J. is not one of them.”

Harvard University economist Jason Furman, who was chair of the Council of Economic Advisers under President Barack Obama, said on X, “E.J. Antoni is completely unqualified to be BLS Commissioner. He is an extreme partisan and does not have any relevant experience. He would be a break from decades of nonpartisan technocrats.” (…)

Also in the WSJ:

The truth is that the recent sharp downward revisions are a result of declining business survey response rates that require agency statisticians to rely more on models and guesswork. Numbers are later revised when more data is collected. Declining survey response rates are a real problem for the BLS and other federal statistical agencies.

The response rate for the BLS establishment survey, which is used for the monthly jobs report, has fallen to 43% from 61% over the last decade. Response rates for the household survey that feeds into the unemployment and labor force participation rates have declined to 68% from 88%. Inflation reports may also be affected by falling response rates in calculating shelter prices (14 percentage-point decline over a decade) and weights for items in the consumer price index (28 point decline). (…)

Another problem: A funding shortage has caused BLS to stop collecting some granular data that can illuminate economic changes. The BLS this month will stop calculating some 350 individual producer price indices showing which industries pay for goods and services. (…)

Trump Calls on Goldman to Replace Economist Over Tariff Stance Bank’s economists had predicted tariffs could cause inflation and slow economic growth

Trump said on his Truth Social social-media platform that Solomon should “go out and get himself a new Economist” because the bank made a “bad prediction a long time ago” on the market and tariffs. The president asserted that tariffs haven’t caused inflation or other issues for the U.S. economy.

He also questioned whether Solomon himself should focus on just being a DJ, a reference to the bank chief’s former side gig.

Trump appears to be referring to Jan Hatzius, the bank’s longtime chief economist, though he didn’t call him out by name or title. Hatzius is well-known on Wall Street for forecasting in 2008 that mortgage defaults could lead to a severe recession.

Hatzius and his team have been among the many economists who have predicted tariff policies would dent labor markets, cause higher inflation and slow U.S. economic growth.

A report by Hatzius and his team Sunday included an analysis that found U.S. consumers had absorbed 22% of tariff costs through June, but will eventually absorb 67% if recent tariffs follow the same pattern as earlier tariffs. This assessment is similar to those of other economists. (…)

Trump said in his post that consumers, for the most part, aren’t paying the tariffs but rather it is “mostly Companies and Governments, many of them Foreign, picking up the tabs.”

Inflation data released Tuesday showed steady increases in consumer prices, but a higher-than-expected uptick in a key measure of underlying price growth. (…)

Complicating the issue for six of the biggest banks is the fact that they are in the running to work on the Trump administration’s potential initial public offering of mortgage giants Fannie Mae and Freddie Mac. If it happens at the valuations being discussed, the offering could be among the largest of all time, which means missing out could lead to many millions in lost fees. (…)

White House to Vet Smithsonian Museums to Fit Trump’s Historical Vision

The White House plans to conduct a far-reaching review of Smithsonian museum exhibitions, materials and operations ahead of America’s 250th anniversary to ensure the museums align with President Trump’s interpretation of American history.

In a letter sent to Lonnie Bunch, the secretary of the Smithsonian Institution, three top White House officials said they want to ensure the museums present the “unity, progress, and enduring values that define the American story” and reflect the president’s executive order calling for “Restoring Truth and Sanity to American History.” (…)

Tiya Miles, a professor of history at Harvard University, said she was concerned that the Smithsonian would be asked to interpret history based on “one man’s view” as opposed to scholarship and research.

“The Smithsonian museums have never reflected one person’s view, or even one administration’s view,” Miles said. “They have reflected the composite research, analysis, discussion, findings of many different people, scholars and researchers.” (…)

CONSUMER WATCH

Consumer spending increased again in July, but a gap is widening between lower- and higher-income households.

Total credit and debit card spending per household increased 1.8% year-over-year (YoY) in July, the highest YoY rate of growth since January, and up from the 0.2% (YoY) increase in June, according to Bank of America aggregated card data. Seasonally adjusted (SA) spending per household rose by 0.6% month-over-month (MoM), following a 0.4% MoM increase in June.

Looking at the data in more detail, the rise in MoM total card spending in July was fairly broad based, with both retail and services contributing, and services spending reversing after three months of declines. The 0.9% MoM services increase was the largest since April 2024.

Does this rise in spending mean that the weakening we saw in April and May is largely behind us? Perhaps, but there are reasons to be cautious on that view.

First, retail spending in July appears to have been boosted by online promotions by numerous retailers, such as ‘Prime Day,’ which lasted longer than in 2024. This resulted in stronger online retail spending this year compared to the year prior.

Back-to-school (BTS) spending also appears to have picked up in July, following a slow start in June. In our view, strength in spending in both of these areas does not necessarily say much about the underlying momentum of the consumer going forward, as this spending is, by nature, temporary and “event driven,” and could reverse in subsequent months.

Another reason for caution: the spending gains may reflect some impact from tariffs. For one, it is possible some of the increase in spending was due to retailers passing through current or prospective tariff increases onto customers. When we look at the number of card transactions per household in July, we see a smaller rise than in dollar terms. Additionally, the August 1st deadline for countries to reach trade deals with the US may have also encouraged some consumers to “buy ahead” to avoid future price rises. (…)

Looking at Bank of America deposit data, we see a YoY rise in the number of households receiving unemployment payments. Higher- and middle-income households are seeing the biggest increases/growth, with the YoY increase in unemployment payments for both cohorts around 10% in July. Lower-income households, however, are seeing comparatively small YoY increases, around 4% YoY. Although, it is important to note that the absolute numbers of households receiving unemployment payments is low across all income cohorts.

Yet, we also see wage gaps widening. Bank of America deposit data shows that the three-month moving average of after-tax wage growth for lower-income households decelerated in July to 1.3% YoY from 1.6% YoY in June.

By contrast, higher-income households’ wage growth accelerated for the third month in a row to 3.2% YoY from 2.9% YoY in June. The gap between higher- and lower-income wage growth is the highest since February 2021. So, from this perspective, the labor market appears to have deteriorated most significantly for lower-income workers.

In our view, lower-income households may not be seeing a large rise in unemployment payments in part because their wage growth is weakening. In other words, they may not be losing their jobs, but soft labor demand is pressuring their pay and they are potentially working fewer hours.

Furthermore, the stark divergence in wage growth is increasingly reflected in card spending. In July, card spending was flat among lower-income households. But it was much stronger for middle- and higher-income households, with YoY growth accelerating to 1.0% and 1.8%, respectively.

From a macroeconomic perspective, it is reassuring that middle- and higher-income households’ spending growth does not appear to weakening like it has for lower-income households. It is worth noting that the lowest 30% of households by income account for less than 15% of overall US consumer spending. So, if spending among those who earn more continues to look solid, the outlook for overall consumer spending should also be robust. (…)

While lower-income households’ wage and spending growth is clearly a weak point, consumers’ overall financial health looks sound. Bank of America deposit data shows that households continue to hold more in both nominal and inflation-adjusted terms than in 2019. Moreover, across all households, including lower-income ones, the rate of decline of deposits has eased.

The latest data on credit card “borrowing capacity” also looks solid. For example, we continue to see that the share of households who carry a credit card balance from one month to the next (“revolvers”) is lower than in 2019 across income cohorts.

Among those that carry a balance, there is, however, some sign of the increasing pressure on some lower-income households. In particular, the median credit card utilization rate for this group has risen faster than that of middle- and higher-income households since 2019.

However, there is an important caveat: monthly credit card balances are not high relative to after-tax wages and salaries compared to 2019 – thanks in part to previous strong wage growth across income cohorts in recent years. (…)

Trump Fed Nominee Brings Ally on Tariffs, Rates

(…) Many Fed officials are worried that tariffs will weaken the economy while raising prices, creating a difficult trade-off between cutting rates to support the economy or holding them steady to contain inflation. Miran says this is backward: that the economy will benefit from tariffs with no noticeable impact on prices, allowing the Fed to resume rate cuts it paused at the beginning of the year. (…)

Miran, who has a Ph.D. in economics from Harvard, is currently the head of the White House Council of Economic Advisers. (…)

Miran’s contrarian challenge centers on two main claims: that tariffs won’t meaningfully affect aggregate prices or consumers’ expectations of future inflation, and that Trump’s broader economic policies are “extremely disinflationary.” (…)

Miran last fall suggested that tariffs wouldn’t lead prices of tariffed materials or goods to rise because a stronger dollar would offset some of the impact. That hasn’t happened this year. Instead, the dollar has weakened against foreign currencies.

In a Bloomberg Television interview on Thursday, Miran said there has been “zero macro-economically significant evidence of price pressures” from new trade barriers imposed by Trump. Even if some individual prices rise, the effects would be temporary because services inflation—which dominates the consumer-price index—has been running at modest rates, he said.

So far, those arguments have had little traction inside the Fed, with only two officials—both Trump appointees—concluding that the central bank can cut rates because they think tariff effects will be short-lived. A few other officials, however, have indicated in recent days they could support cutting rates for another reason: They are worried that the labor market may be weakening in a way that would make inflation less worrisome. (…)

Now, with Trump pushing for lower rates, Miran has said he doesn’t think inflation is likely to be a problem. Miran has said his views about trade-offs in managing inflation haven’t changed but that economic policy has, including Trump’s push to cut taxes and deregulate businesses. (…)

Now Trump Wants an Export Tax Want a license to sell chips to China? Better pay the man.

The WSJ Editorial Board:

President Trump views tariffs as a toll that he alone gets to set for access to U.S. markets. Now he’s charging fees on U.S. companies for the purported privilege of exporting artificial-intelligence chips to China. Mark this as another step toward government control of private business.

The Commerce Department imposed restrictions on the sale of Nvidia and Advanced Micro Devices AI chips to China this spring in the name of protecting “national and economic security.” China’s military-civil fusion strategy requires its companies to acquire technologies to advance the government’s military and intelligence capabilities.

Such export controls hurt Nvidia’s business in China, and the chip maker (market cap: $4.4 trillion) lobbied the White House to ease them. Voila, the Administration last month lifted the export restrictions in return for China easing controls on rare earth exports.

“We held it up, and then, in the magnets deal with the Chinese, we told them that we would start to resell them,” said Commerce Secretary Howard Lutnick. Treasury Secretary Scott Bessent said resuming H20 sales was “all part of a mosaic.”

Now we’re seeing the rest of the mosaic, and it’s not pretty. The Administration is demanding a 15% cut on sales of Nvidia’s H20 and AMD’s MI308 chips to China. Want to do business? Pay Paulie. It’s not clear whether the Administration plans to use the cash to pay down the deficit, spend it, or use it for its mooted sovereign wealth fund.

In any case, this is an export tax that Congress didn’t authorize. Will AMD or Nvidia challenge the political extortion in court? Selling chips in China may be more important to them than defending the legal principle that the government can’t willy-nilly shake down companies. (…)

Nvidia argued that the restrictions benefit Beijing’s national chip champion Huawei and would result in China setting global AI standards rather than the U.S. Perhaps. But the Administration earlier insisted it wasn’t using chip controls as leverage in trade talks. Relaxing its curbs in exchange for trade concessions from China and payments from chip makers suggests the Administration’s real priority is deal-making in pursuit of more revenue.

Step by step, Mr. Trump is expanding the long arm of the state into more of the private economy. Will any Republican object? Alas, probably not.

• China Urges Firms Not to Use Nvidia H20 Chips In New Notices

Beijing has urged local companies to avoid using Nvidia Corp.’s H20 processors, particularly for government-related purposes, complicating the chipmaker’s attempts to recoup billions in lost China revenue after the Trump administration reversed an effective US ban on such sales.

Over the past few weeks, Chinese authorities have sent notices to a range of firms discouraging use of the less-advanced semiconductors, people familiar with the matter said, asking not to be named discussing sensitive information. The guidance was particularly strong against the use of H20s for any government or national security-related work by state enterprises or private companies, the people said.

The letters did not, however, constitute an outright ban on H20 use, according to the people. Industry analysts broadly agree that Chinese companies still covet those chips, which perform quite well in certain crucial AI applications. President Donald Trump said Monday that the processor — which he called “obsolete” — “still has a market” in the Asian country. (…)

Beijing asked companies about that dynamic in some of its letters, according to one of the people, posing questions such as why they buy Nvidia H20 chips over local alternatives, whether that’s a necessary choice given domestic options, and whether they’ve found any security issues in the Nvidia hardware. The notices coincide with state media reports that cast doubt on the security and reliability of H20 processors. Chinese regulators have raised those concerns directly with Nvidia, which has repeatedly denied that its chips contain such vulnerabilities.

Right now, the people said, China’s most stringent chip guidance is limited to sensitive applications, a situation that bears similarities to the way Beijing restricted Tesla Inc. vehicles and Apple Inc. iPhones in certain institutions and locations over security concerns. (…)

Nvidia said in a statement that “the H20 is not a military product or for government infrastructure.” China has ample supplies of domestic chips, Nvidia said, and “won’t and never has relied on American chips for government operations.” (…)

Beijing has publicly indicated that the resumed H20 shipments were not part of any bilateral deal. China’s recent notices to companies suggest that the Asian country may not have sought such a concession from Washington in the first place. (…)

The H20 chip has less computational power than Nvidia’s top offerings, but its strong memory bandwidth is quite well suited to the inference stage of AI development, when models recognize patterns and draw conclusions.

That’s made it a desirable product to companies like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. in China, where domestic chip champion Huawei Technologies Co. is struggling to produce enough advanced components to meet market demand. By one estimate from Biden officials — who considered but did not implement controls on H20 sales — losing access to that Nvidia chip would make it three to six times more expensive for Chinese companies to run inference on advanced AI models.

“Beijing appears to be using regulatory uncertainty to create a captive market sufficiently sized to absorb Huawei’s supply, while still allowing purchases of H20s to meet actual demands,” said Lennart Heim, an AI-focused researcher at RAND, of China’s push for companies to avoid American AI chips. “This signals that domestic alternatives remain inadequate even as China pressures foreign suppliers.” (…)

• Trump Open to Nvidia Selling Scaled-Back Blackwell to China

Trump said he would consider a deal that would allow Nvidia to ship its Blackwell chips to China if the company could design it to be less advanced. “It’s possible I’d make a deal” on a “somewhat enhanced — in a negative way — Blackwell” processor, he said in a briefing with reporters. “In other words, take 30% to 50% off of it.” (…)

Trump didn’t say exactly when he might negotiate a deal with Nvidia Chief Executive Officer Jensen Huang on the Blackwell chip but alluded to a possible meeting soon on the prospect: “I think he’s coming to see me again about that, but that will be an unenhanced version of the big one.”

Nvidia’s Blackwell design is at the heart of the most powerful computers that create and run AI software. Those chips are currently too powerful to be sold into China, according to US restrictions. (…)

When the US tightened restrictions in April, Nvidia said it would work on another chip for the China market and would seek permission to export that one. It cautioned that the older Hopper design, the basis of the H20 chip being sent to China only, could no longer be reduced in capabilities.

• Trump’s Tariffs Won’t Solve U.S. Chip-Making Dilemma The proposed semiconductor tariffs—and exemptions—don’t line up with their supposed purpose

President Trump’s chip-tariff regime could disrupt the global electronics trade and send prices of all kinds of goods higher. One thing it appears unlikely to do: bring advanced chip-making roaring back in the U.S.

Trump last week threatened a 100% tariff on “chips and semiconductors,” but offered an exemption. Companies that commit to “build in the U.S.” won’t have to pay the duty, according to Trump.

While vague, that appears logical on its face. If the point of the tariffs is to cajole companies into doing more of their work in the U.S., they ought to get a reprieve when they do that.

One issue is that all of the world’s big chip companies are already investing in U.S. production, encouraged in part by subsidies doled out by the prior administration. Meanwhile, other big technology companies are likely to invest in areas other than advanced chip production to get their own exemptions. (…)

If anything, the incentive will be to make just enough U.S. investment to appease politicians, then import whatever else is needed, especially considering the substantially higher cost of manufacturing in the U.S.

Those higher U.S. costs have been a core issue for foreign chip-makers that the tariffs won’t alleviate. TSMC told investors last month that it expects the higher cost of its U.S. fabrication to weigh down companywide gross margins by 2 to 3 percentage points over the next few years. And those fabs aren’t even first in line for the company’s most expensive and most advanced technology. TSMC’s Arizona facilities are currently producing chips with the company’s N4 process technology—two generations older than the N2 process the company is about to launch in its Taiwan fabs. (…)

TSMC, Samsung and Intel are the only chip makers in the world that can produce at the most technically advanced process nodes. And Intel is struggling for survival—having slashed its workforce and capital spending plans to conserve cash as it tries to catch up to TSMC. Trump’s recent broadside against Intel’s Malaysian-born chief executive adds even more uncertainty to the chip giant’s outlook.

Counterintuitively, chip tariffs might end up having a more dramatic effect on electronics companies that don’t make chips, because they have so much to lose from tariffs on vital imported components. Apple’s tariff exemption—secured through pledges for $600 billion of investments over the next four years—saved the company from costs that could have undermined its U.S. business.

Its peers—at least those with deep pockets—will likely aim for the same tariff-free treatment.

If the goal is to spur investment in U.S. manufacturing generally, this might make sense. But if the aim of chip tariffs was to bring more advanced chip manufacturing to the U.S., these pledges are hardly silver bullets.

Apple’s U.S. investments do support domestic advanced chip-making: The company is the first and largest customer of TSMC’s factory in Arizona and is working with Samsung to devise chip-making technology in Texas, among other efforts. But Apple is also spending big on server manufacturing, expanding its data centers and adding to its campus in Austin, Texas—all activities that have less bearing on the domestic chip industry.

It is also notable that much of what Apple is doing was already in progress before the tariff threat. Chief Executive Tim Cook said in 2022 during a joint press conference with President Joe Biden that Apple would use TSMC’s Arizona chips. Now that Apple has a tariff exemption, the tariffs provide no nudge to do more.

What is more, U.S.-based manufacturing will still come at a premium, and someone will have to cover the price. “The higher cost of tariffs and U.S. production will eventually be shared across U.S. consumers and different parts of the supply chain,” Bernstein Research analysts wrote in a report Thursday.

There remain good reasons for chip makers to expand in the U.S., of course. The companies have tapped grant money under 2022’s Chips Act to increase their U.S. manufacturing. They also have access to tax credits for purchases of chip-making equipment that increased in Trump’s “big, beautiful bill” last month.

Many companies also see value in locating more of their supply chains in the U.S. to avoid the kind of shock they experienced during the Covid-19 pandemic. There is a geopolitical calculation at play, too, that has little to do with tariffs: A more aggressive Chinese posture toward Taiwan, a widening of conflicts in the Middle East, or any number of other potential political disruptions all give companies reasons to want more of their semiconductor supply chain close to home.

Those factors have been, and will continue to be, the main drivers of chip investment in the U.S.—not tariffs.

Donald Trump softens stance on Intel boss after demanding resignation

(…) Trump said he met Intel’s chief executive on Monday afternoon along with commerce secretary Howard Lutnick and Treasury secretary Scott Bessent after the president called on Tan to resign last week, claiming he was “highly conflicted”.

“The meeting was a very interesting one,” Trump wrote. “His success and rise is an amazing story. Mr. Tan and my Cabinet members are going to spend time together, and bring suggestions to me during the next week.”

The company said there had been a “candid and constructive discussion on Intel’s commitment to strengthening US technology and manufacturing leadership”. (…)

Last month Tan warned Intel could back out of the most advanced chipmaking if it is unable to win major clients for its newest so-called 14A manufacturing process.

Its withdrawal would send shockwaves through the global semiconductor industry and leave the US without a domestic alternative to Taiwan Semiconductor Manufacturing Company — a blow to the White House’s efforts to onshore advanced chip manufacturing. (…)

The president’s attack last week came after Tom Cotton, head of the Senate intelligence committee, wrote to the company’s chair expressing concern about the “security and integrity of Intel’s operations” and Tan’s ties to China. (…)

Xi Takes Aim at US ‘Protectionism’ in Phone Call With Lula

Brazilian President Luiz Inacio Lula da Silva spoke with his Chinese counterpart following talks with the leaders of India and Russia, as part of his outreach to allies after Donald Trump thrust Latin America’s biggest economy into the middle of his global trade war.

A readout from Brazil’s government said the two leaders spoke for about one hour and exchanged views on international affairs, including recent developments around the Russia-Ukraine war. Brazil’s president, known universally as Lula, and Chinese leader Xi Jinping also agreed on “upholding multilateralism” through the Group of 20 and BRICS.

During the phone conversation on Tuesday morning in Beijing, Xi called for coordinated efforts against unilateralism and protectionism — language usually used by China to criticize US trade policy. He said China supports the Brazilian people in safeguarding their country’s legitimate rights, describing ties between the two nations as being “at their best in history,” according to Chinese state broadcaster CCTV.

China is willing to work with Brazil to strengthen coordination and set an example of “unity and self-reliance among Global South nations,” CCTV cited Xi as saying.

The call caps an effort by Lula to build solidarity across the BRICS club of major emerging nations, of which Brazil is a founding member along with Russia, China and India. Lula spoke with Russian President Vladimir Putin and Indian Prime Minister Narendra Modi over the past few days, as Brazil came under pressure from the US.

Brazil has become a target of Trump’s trade war after he imposed higher tariffs in an effort to end the trial of former President Jair Bolsonaro on charges that he attempted a coup. Lula’s government has responded by seeking to expand trade with other partners, especially with China, India and Southeast Asia.

Xi’s conversation with Lula also followed Trump’s demand on Monday that China massively step up its purchases of US soybeans. Beijing has bought more of the legume from its top supplier Brazil in recent months, and is also testing trial cargoes of soybean meal from Argentina, to secure supplies of the animal feed ingredient. (…)

BRICS countries are among the nations that were hit the hardest by higher US tariffs that went into effect last week. (…)

Trump has slammed BRICS as being anti-US. The group, established in 2009, expanded last year and now also includes Iran, the United Arab Emirates, Ethiopia and Egypt.

Lula met Xi in May during a state visit to Beijing, where he signed more than 30 agreements for Chinese investment in mining, transport infrastructure and ports, among other deals.

• China Loosens Urea Exports to India in Sign of Thawing Tensions China has eased curbs on urea shipments to India, in the latest indication of a thaw in tensions between Beijing and New Delhi as US President Donald Trump’s trade policies target the two Asian nations.

Not what I think, what I do…

Via John Authers:

The share of global fund managers surveyed by Bank of America Securities who think so has risen to a record 91%:

Fund managers are stepping back into the US, and exiting the euro zone:

The natural corollary is that the risk of overheating should rise. But in a bizarre conjunction, fund managers think both that inflation will rise, and that rates will fall:

Further — and this is extraordinary — most of BofA’s respondents believe the next Fed chair will resort to quantitative easing or yield curve control, desperate expedients that are hard to justify outside the hardest of landings:

How to square this circle? Investors are grasping that fiscal dominance, or financial repression, is the order of the day. The US debt burden takes priority, taxes won’t be hiked to fix it, and so people will be forced to lend to the government for cheap (as happens with QE). Shareholders have to put up with the government muscling in on their share of the action, as with the cut of China sales that chipmakers are paying.

FYI:

Data: U.S. Census Bureau. Chart: Axios Visuals