YOUR DAILY EDGE: 14 May 2026: Worried?

Producer Price Inflation Explodes as the Services PPI Blows Out on Top of the Energy Price Spike

The Producer Price Index final demand (PPI), which tracks inflation in prices that companies pay each other, spiked by 1.38% in April from March (+17.8% annualized), seasonally adjusted, the worst since the historic one-month spike in March 2022, driven by services and energy.  It had already spiked by 8.7% annualized in March – and by 7.0% and 6.6% annualized in February and January before the energy price spike hit (blue in the chart).

Year-over-year, it spiked by 6.0%, the worst since December 2022, according to data from the Bureau of Labor Statistics today (red in the chart).

The shocker is the spike in services, and services dominate the PPI. The services PPI weighs 68% of the overall PPI, and it completely blew out – that was in addition to the spike in energy prices, and it also shows how some of the energy price increases have moved into other parts of the economy.

The services PPI spiked by 1.18% (+15.1% annualized) in April from March, seasonally adjusted.

Year-over-year, the services PPI jumped by 5.5%, the worst since November 2022. The low point, the point of the coolest recent services PPI inflation, was in December 2023 at 1.8%. The inflation rate has multiplied by more than three since then.

 

Core PPI Final Demand, which excludes energy and food components, spiked by 1.03% (+13.1% annualized) in April from March, seasonally adjusted.

This shows the massive impact of the blow-out of the services inflation in PPI, since the price spike of energy components is excluded from the core PPI.

Year-over-year, core PPI jumped by 5.2%, the worst since December 2022. (…)

The PPI for core goods (goods without food and energy) jumped by 0.65% (+8.1% annualized).

This pushed the year-over-year increase to 4.6%, the worst since February 2023.

This is a massive amount of inflation in prices that companies pay each other and are trying to pass on to each other. And some of that will seep into consumer price inflation measures, such as the CPI and PCE price index. (…)

Here’s the link between PPI and consumer prices, courtesy of Ed Yardeni. Whether you use headline or core inflation, the odds are for a coming inflation scare.

Goldman Sachs is not overly worried:

The producer price index (PPI) rose 1.4% in April, well above expectations. Energy prices (+7.8%) increased sharply in April as a result of higher oil prices from the Iran war.

The core PPI and PPI excluding food, energy, and trade services increased by 1.0% and 0.6% in April, respectively. The March growth rates for the PPI (+0.2pp to +0.7%) and core PPI (+0.1pp to +0.2%) were both revised up.

The ‘old methodology’ core PPI—finished goods excluding food and energy—increased by 0.4%.

Based on details in the CPI and PPI reports, we estimate that the core PCE price index rose 0.30% in April (unchanged from our expectation prior to today’s CPI report), corresponding to a year-over-year rate of +3.32%. Additionally, we expect that the headline PCE price index increased 0.45% in April, or increased 3.79% from a year earlier.

We estimate that market-based core PCE rose 0.35% in April. We estimate that the Dallas Fed trimmed mean PCE index rose 0.25% in April (vs. 0.21% before today’s report).

Matt Klein is worried:

Tariffs, cloud companies’ insatiable demand for (imported) data center equipment, and the disruption to the flow of goods through the Strait of Hormuz rightly get a lot of attention. But the most important thing to understand about U.S. inflation is that the prices of locally-produced services continue to rise about 1-1.5 percentage points faster than in the years immediately preceding the pandemic—and the pace has been accelerating over the past year. Even without the unwelcome “one-time things” pushing up prices, underlying inflation would still be just as far off from the Federal Reserve’s goals as it was three years ago. (…)

And Ed Yardeni is getting more worried that the FOMC could become worried:

From Cuts to Hikes: The Fed’s Shifting Calculus

The April FOMC statement contained an easing bias, signaling that the Fed remained likely to cut the federal funds rate (FFR) over the rest of the year. That bias is becoming increasingly difficult to defend. (…)

The consensus on Wall Street has coalesced around June 16-17 as the next FOMC meeting at which the easing bias will be dropped. The question is whether the easing bias will be replaced with a tightening bias.

The US Treasury market is pushing for that outcome. The 2-year Treasury yield is currently trading above the effective federal funds rate. When 2-year yields trade significantly above the policy rate, the market is signaling that the current FFR is too low to curb inflation and may have to be hiked–and certainly not cut.

A simple removal of the easing bias may not be enough. After five consecutive years of above-target inflation, the Fed may need to signal a willingness to hike.

The data support such a pivot.

PPI Inflation Was Hotter Than Expected. April’s PPI report delivered a significant upside shock. The PPI final demand rose 1.4% m/m and 6.0% y/y, the fastest annual pace since December 2022 and well above the consensus forecasts of 0.5% m/m and 4.8% y/y. The core PPI (excluding energy and food) rose 1.0% m/m and 5.2% y/y, the highest reading in more than three years, against consensus expectations of 0.3% m/m and 4.3% y/y.

The surge was broad-based across both goods and services. Service costs rose 1.2% m/m, the largest increase in four years.

Inflation is reaccelerating in a broad-based fashion according to April’s PPI report. The Fed’s easing bias is history and may need to be replaced with a tightening bias if incoming data confirm that the economy is in good shape, as we expect. (…)

A rate cut in 2026 is essentially off the table. Reaccelerating inflation, five consecutive years above the 2% target, the inflationary impact of the AI build-out phase, and a stabilizing/improving labor market all make the bar insurmountable.

Notwithstanding all of the above, we remain in the none-and-done camp for the rest of the year. Disinflationary forces are still at work: productivity growth is containing unit labor costs, inflationary tariff effects are fading, wage inflation is moderating, and market rents are pointing to further shelter disinflation. Additionally, long-term inflation expectations remain anchored, and the risk of a wage-price spiral remains low.

Nevertheless, the probability of a hike is rising. Market measures of inflationary expectations are moving higher. Additionally, labor demand is showing signs of improvement, which could accelerate wage growth, and the combination of economic resilience and another energy supply shock is a scenario in which the Fed could plausibly be forced to tighten.

The bond market is pricing in exactly this risk. The 10-year Treasury yield is likely to move up to 4.60% in coming days.

US Government Finances Are Not Ready for a Recession

This is from Apollo’s chief economist.

(…) the US has never entered a recession with this little fiscal buffer, see chart below.

The investment implication is clear: do not expect lower interest rates to bail out valuations. The standard recession playbook that growth slows, the Fed cuts, rates fall and multiples expand breaks down when the sovereign borrower is already stretched.

In the front end, inflation driven by higher energy prices, tariffs and immigration restrictions is proving stickier than the Fed expected, constraining how aggressively it can cut. At the long end, the fiscal trajectory is structurally bearish for bonds. Treasury is already funding record deficits almost entirely through T-bills to avoid putting upward pressure on long yields, a strategy that cannot continue indefinitely.

When coupon issuance eventually has to increase, the supply shock will push long yields higher, not lower. And in a recession, the deficit blows out further, requiring even more issuance at precisely the moment when market appetite for duration is most uncertain, see also here.

The bottom line is that rates are staying higher for longer across the curve, and the traditional path to value creation through multiple expansion is largely closed. Value will have to come from the hard work of operational improvement, i.e., earnings growth, margin expansion and cash generation, and not from the discount rate doing investors a favor.

America’s Earnings Power May Have Just Peaked

(…) Even more impressive is that the trailing 12-month profit margin has reached 13.9%, up from 13.2% a year earlier and a record in Bloomberg data going back to the start of 1990. (…)

Now, like a bartender announcing last call, comes a warning from the National Association for Business Economics, or NABE. Its members, who come from all parts of corporate America and are responsible for forecasting the economy so their businesses can make informed decisions, have turned pessimistic on margins.

In its quarterly survey released Monday, only 13% see margins expanding from here, a sharp drop from 26% in the January survey. That 13-percentage-point decline is the steepest since the height of the Covid-19 pandemic in early 2020, when it slid 24 percentage points to just 5%. Alternatively, 31% of respondents see margins shrinking, bringing that portion of the survey’s Net Rising Index to minus 18 — also the lowest since the beginning of the pandemic.

Businesses are more worried about margins not because of the outlook for sales, but because of material costs. Some 68% of respondents expect such costs to rise over the next three months, the most since the April 2022 survey, a period when the rate of inflation was soaring to its highest since the start of the 1980s and stocks were mired in a bear market.

NABE’s report can’t be dismissed as an outlier because it’s one of a growing number signaling concern over rising costs.

Wholesale inflation accelerated in April to the fastest pace since 2022 on the back of higher freight transportation costs, the Bureau of Labor Statistics said Wednesday. The Institute for Supply Management’s monthly manufacturing report on May 1 showed that its gauge of prices paid climbed for a fourth straight month to a four-year high. Many respondents cited war with Iran, which has pushed up energy prices and disrupted supply chains around the world. “Have not yet started to see the full impact of fuel increases but are aware they are coming,” is how the ISM quoted one survey respondent in the machinery sector.

That ISM respondent is right. Due to the nature of global supply chains, the cost of inputs like energy, aluminum, copper and freight may not necessarily have an immediate impact on profits but rather filter in slowly over time, and linger even if the conflict ends soon. That’s what worries business executives even if Wall Street is sanguine.

Emotions tend to drive equity prices in the short run, but it’s the fundamentals that ultimately win out. And if the outlook for profit margins as reflected in the NABE proves true, those questions about the stock market’s Teflon imitation will start to dry up.

What Is The Thucydides Trap and Why Did Xi Raise It With Trump?

When President Xi Jinping met US leader Donald Trump in Beijing on Thursday, he posed a big question: Can China and the US avoid the “Thucydides Trap”? It’s a phrase that sounds academic, but it goes to the heart of Beijing’s ambitions for their relationship.

The term was popularized by Harvard political scientist Graham Allison in the early 2010s, drawing on the ancient Greek historian Thucydides. His argument: when a rising power challenges an established one, conflict inevitably follows. Allison’s research found this pattern played out repeatedly across history and he used this framing as a lens to examine the US-China rivalry.

In simple terms, it’s about structural tension. China’s rise — economically, technologically and militarily — challenges America’s long-standing dominance as a world superpower. Even if neither side seeks confrontation, the risk is that competition itself creates pressure that’s hard to control.

Xi’s use of the concept dates to at least 2014, according to Zichen Wang, a Beijing-based analyst, who researched the leader’s past references to this framework. Xi more recently used the term in a meeting with President Joe Biden in November 2024 on the sidelines of the APEC gathering in Peru.

The Chinese leader’s message has been consistent: conflict isn’t inevitable. China’s framing is that the two sides should find a way to co-exist, often described by Beijing as “mutual respect” and “win-win cooperation.”

Some in Washington are more cautious about using the term with US policymakers tending instead to emphasize guardrails and risk management.

There’s also a strategic angle. By invoking the concept, Beijing elevates US-China tensions beyond trade disputes or Taiwan into something bigger — a defining test of how major powers interact.

It also reinforces China’s position as a superpower peer to the US, rather than a subordinate. As Xi asked Trump, can China and the US “create a new paradigm of major country relations?”

• Xi Warns Trump of Possible ‘Clashes’ If Taiwan Issue Mishandled

(…) “The Taiwan issue is the most important issue in China-US relations,” Xi said, according to the official Xinhua News Agency. “If mishandled, the two nations will experience collision or even clashes, pushing the entire China-US relationship into a highly dangerous situation.” (…)

China has opposed a pending US arms package to the island democracy that Beijing considers its territory, and asked the US to clarify Washington doesn’t support Taiwanese independence. (…)

A statement from a White House official released hours later didn’t mention Taiwan at all.

Instead, the American readout said the leaders had discussed expanding market access for US businesses and that Xi had indicated interest in purchasing more US energy and agriculture. The leaders also discussed ways to address the flow of fentanyl precursors and agreed Iran should not obtain a nuclear weapon, according to the official, who briefed reporters on the condition of anonymity. (…)

Xi’s comments amount to China’s most “direct” warning yet on Taiwan, said Zhu Feng, executive dean of Nanjing University’s School of International Studies. That language was likely aimed at warning the Trump administration against supporting Taiwanese President Lai Ching-te, who Beijing has previously branded a “separatist,” Zhu added.

The two leaders also discussed the situation in the Middle East, the Ukraine crisis and the Korean Peninsula, according to Xinhua, which didn’t directly name Iran. Xi stressed stability in trade between the world’s top economies.

China’s warning on Taiwan contrasted with the upbeat remarks the two leaders exchanged about the trajectory of their relationship.

“We should be partners, not rivals,” Xi said in his opening remarks, while Trump predicted the two countries had a “fantastic” future ahead. The US leader added: “The relationship between China and the USA is going to be better than ever before.” (…)

Xi said that a meeting the day before in South Korea between the countries’ trade negotiators had reached a “generally balanced and positive outcome,” according to an official statement.

The US and China are weighing a potential framework whereby each country identifies some $30 billion in goods on which tariffs could be eased without threatening national security interests, Reuters earlier reported, citing four unnamed people familiar with the Trump administration’s objectives. (…)

The Chinese readout said the two countries supported each other hosting the Group of 20 and Asia-Pacific Economic Cooperation summits this year, giving both septuagenarians two more chances to hold talks. (…)

From the FT:

Trump also praised Xi as “a great leader”, adding that the delegation of top US chief executives accompanying him — including Apple’s Tim Cook, Nvidia’s Jensen Huang, Tesla’s Elon Musk and Citigroup’s Jane Fraser — had come “to pay respect to you, to China”. (…)

On Iran, the US and China agreed that the Strait of Hormuz should be open while Xi opposed the “militarisation” of the waterway and the charging of tolls for passage, according to the White House.

• Xi Jinping tells Nvidia, Tesla and Apple CEOs that China will ‘open wider’

(…) “China welcomes stronger mutually beneficial co-operation with the United States, and believes that US companies will have even broader prospects in China,” Xi said, according to state news agency Xinhua. According to the report, the American business leaders “expressed that they attach great importance” to China’s market and hope to deepen their operations in the country. (…)

According to a readout of the Xi-Trump meeting released by Xinhua, the Chinese leader also called for the two sides to expand co-operation across the economy and trade, health, agriculture, tourism and law enforcement. (…)

American Factories Lag in Adopting A.I.

(…) Every year the World Economic Forum and McKinsey recognize manufacturers that are on the cutting edge of technology, including artificial intelligence. This year, the Bristol Myers Squibb facility in Devens, Mass., was the only manufacturer in the United States that made the list of 23.

While American companies typically lead in artificial intelligence research and capital investment, U.S. manufacturers often struggle to translate those breakthroughs into productivity gains on the factory floor.

Of the 223 factories that have made the World Economic Forum’s Global Lighthouse Network list since 2018, 14 have been in the United States, while 99 are in China. Of the American ones, four are in the pharmaceutical and life sciences sector.

“China is scaling faster,” said Rahul Shahani, a partner at McKinsey who works with the World Economic Forum on the initiative. He added, “They have technologists in the factories — hundreds of them — while in the U.S. we’re competing for that same talent with Silicon Valley.” (…)

Countrywide II

Anyone in the market in 2008 remembers Countrywide Financial, the hyper aggressive California thrift that arguably helped to cause the Great Financial Crisis. Countrywide ultimately ran out of cash and collapsed into the arms of Bank of America in 2008.

When Chris Whalen tells the story of United Wholesale Mortgage Corp (UWMC) and dubs it “Countrywide II”, we should all pay attention.

UWMC is the largest home mortgage lender in the United States and the dominant player in the wholesale mortgage channel. As such, it is the largest US nonbank lender.

You can read Chris’ whole story on UWMC here.

To wet your appetite:

This week The Institutional Risk Analyst looks at the nonbank mortgage sector as the prospect for lower interest rates is fading fast. On the one hand, a number of the larger issuers are continuing to thrive even in a difficult interest rate market. Second lien mortgages and non-agency jumbo loans are growing as a percentage of overall production volumes.

On the other hand, the aggressive behavior of some issuers is distorting pricing for loans in the secondary market and may be creating the circumstances for the next systemic “surprise” in the nonbank sector. (…)

To us, the public stock has no real value, especially when we consider the net debt of the issuer after excluding the mortgage servicing rights (MSR). (…)

But the problems with UWMC run far deeper than the current stock price and have to do with an unsustainable business model that is damaging the entire residential mortgage industry.

The basic issue with the UWMC business model is they pay too much for loans in order to protect their dominant (40% plus) market share in wholesale lending. (…)

Two decades ago, another extremely aggressive lender, Countrywide Financial, utilized similar [illegal] lending practices to boost volumes. Countrywide was a thrift that had meager core deposits and habitually overpaid for loans to hurt competitors, forcing down profits for the entire industry.  (…)

While [UWMC CEO] Ishbia claims that the [attempted] acquisition of TWO was about increasing the UWMC servicing book, in fact the motivation seems to be accessing a new source of liquidity to offset mounting operating losses.

We find the hyper aggressive UWMC business model to be unstable, unsustainable and remarkably similar to pre-crisis Countrywide. The big difference between 2008 and 2026, of course, is that residential mortgage rates may not go down significantly for some time.

DOUBLE THE FUN!

The Roundhill Memory ETF (ticker: DRAM) reached $6.5 billion in assets Monday, a mere 36 sessions after launching. Per data from Bloomberg, that’s the shortest ever stretch for a new ETF to reach that bogey, undercutting the 43 days logged by BlackRock’s spot bitcoin ETF in early 2024.

DRAM, which has levitated by 85% since its April 2 inception, gathered a net $2.4 billion last week, better than any fund outside the State Street SPDR S&P 500 ETF Trust. “This is unprecedented for thematic ETFs, which normally take years to hit $1 billion in assets, if they do it at all,” Bloomberg ETF analyst Eric Balchunas writes.

By way of response to that rousing reception, issuers are doubling down. Peer Themes ETFs filed a preliminary prospectus for a fund targeting twice the daily move of Roundhill’s vehicle Friday.

• Memory chipmaker Sandisk is up an 558% so far this year.
• The PHLX semiconductor index, which tracks 30 of the largest companies in the industry that are traded in the U.S., has gained nearly 67% in 2026. Its recent trading performance has been its best since March 2000 — the peak of the dot-com market. (Axios)