China Rips Trump’s Iran Attack in First Comment Since US Hit
(…) “The US move seriously violates the purposes and principles of the UN Charter and international law and exacerbates tensions in the Middle East,” it said. “China calls on all parties to the conflict, especially Israel, to cease fire as soon as possible.”
On Monday, the state-run Global Times added to the criticism, saying the US’s use of bunker-buster bombs would push “the Iran-Israel conflict closer toward an uncontrollable state.” (…)
Beijing hasn’t yet offered substantial assistance to Tehran besides rhetorical support. President Xi Jinping last week outlined a four-point proposal for the Iran-Israel war in a call with Russian President Vladimir Putin. (…)
China is the nation most dependent on oil passing through the strait, where a third of its crude transits. Tehran could seek to retaliate for the US attack by trying to close the chokepoint. Iran’s parliament has called for closing the waterway, according to Iranian state-run TV — a move that would need the explicit approval of Supreme Leader Ayatollah Ali Khamenei to proceed. (…)
John Authers:
(…) The case against escalation is that Iran is already Monty Python’s Black Knight:
Its nuclear program has been put back by years.
It’s lost control of its own skies.
Its proxies in the region — Hamas, Hezbollah, the Assads in Syria and the Houthis in Yemen — have been neutralized or weakened.
Its most powerful allies aren’t keen to help — Russia is embroiled in Ukraine, and China needs Iran’s oil to keep flowing.
Tehran’s best available option might be, like Saddam after 1991, to reinforce itself at home while desisting from greater offensive ambitions. That would be a win for the US, and the oil market.
Yet the regime has no choice but to retaliate if it wants to maintain its hold over its own people. Doing nothing would guarantee regime change. If it is to fall, it would far rather do so with a bang than a whimper. Closing the Strait, however, would be a desperate measure that might not last long. (…)
To quote Larry McDonald of Bear Traps Report:
Iran has little downside to talking up the closure of the Strait of Hormuz. The real pain is the closure itself, which affects China, their cash cow, far more than the rest of the world. Bottom line: Oil prices will likely be elevated for the rest of the summer.
That would make it harder for the Federal Reserve to ease rates, and dampen economic activity. And that would in turn mean hits to commercial real estate, private credit, CCC-rated bonds, housing, and the US consumer. (…)
Trump taunts Iran with prospect of ‘regime change’ after strike on nuclear sites President’s social media posts contradict officials’ claims that US does not seek to topple government
(…) “It’s not politically correct to use the term, “Regime Change,” but if the current Iranian Regime is unable to MAKE IRAN GREAT AGAIN, why wouldn’t there be a Regime change???,” Trump wrote on Truth Social. “MIGA!,” he added. Trump’s comments about Tehran come after top US officials said they were not seeking a different government in Iran. “Our view has been very clear that we don’t want a regime change.
We do not want to protract this or build this out any more than it’s already been built out,” US vice-president JD Vance told NBC on Sunday. “We want to end their nuclear programme, and then we want to talk to the Iranians about a long-term settlement,” he said. (…)
FLASH PMIs
Eurozone: Business activity up marginally as new orders near stabilisation
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index was unchanged at 50.2 in June, posting above the 50.0 no-change mark for the sixth consecutive month but continuing the trend seen through much of the year-to-date of only marginal expansions in business activity.
Overall growth was again centred on the manufacturing sector, where production increased for the fourth successive month. That said, the rate of expansion in June was slight, having eased to a three-month low. Meanwhile, services business activity was unchanged at the end of the first half of the year, following a first fall in activity in six months during May.
Germany posted a renewed expansion in output, after activity decreased modestly in the previous month. That said, the rise was only marginal. On the other hand, France posted a further reduction in output, extending the current sequence of decline to ten months. The rest of the euro area continued to see business activity increase, but the rate of growth eased to the slowest since last November.
New orders neared stabilisation in June. Although continuing to fall marginally, the latest reduction in new business was the slowest in the current 13-month sequence of decline. Manufacturing new orders were unchanged, ending a period of contraction stretching back just over three years.
Meanwhile, services new business fell slightly. The picture for new export orders (which include intra-Eurozone trade) was broadly similar to that seen for total new business. New export orders decreased modestly, but to the least marked extent since April 2022. Germany posted a rise in new business from abroad for the first time in almost three-and-a-half years.
In line with the picture for business activity, employment in the Eurozone was up marginally again in June, with the pace of job creation unchanged from May. Here though, growth was driven by the service sector where staffing levels were up modestly. Meanwhile, manufacturing workforce numbers decreased solidly, and at a faster pace than in May. Employment was reduced in Germany and France, but increased in the rest of the Eurozone.
The pace of input cost inflation eased for the fourth consecutive month in June and was the weakest since last November. The latest rise in input prices was also softer than the series average. A third successive monthly fall in manufacturing input costs contrasted with continued strong inflation in the service sector.
The differing trends between the two monitored sectors in terms of input costs were also seen with regards to selling prices. Service providers raised their charges at a strong pace that was the fastest in three months, while manufacturing output prices were cut for the second month running. Overall, selling prices increased solidly, and at a slightly faster pace than in May. France posted a renewed rise in charges in June, joining Germany and the rest of the euro area in inflation territory.
Manufacturers in the Eurozone continued to scale back their purchasing activity in June, but the pace of decline was modest and among the weakest in the past three years. With input buying falling, stocks of purchases decreased at a marked and accelerated pace. Stocks of finished goods, meanwhile, declined to the smallest extent since September 2024. Suppliers’ delivery times lengthened at the end of the first half of the year, ending a four-month sequence of shortening lead times.
June saw an improvement in business confidence, with sentiment up to the highest since January. The strengthening of optimism was driven by the service sector where confidence hit a four-month high, but was nonetheless still weaker than the series average. Manufacturers in the Eurozone remained more confident in the year-ahead outlook than their services counterparts, despite sentiment dipping from May’s 39-month high. French companies were much more confident than was the case in May, with optimism in June matching that seen in Germany. Meanwhile, strongly positive sentiment continued to be recorded across the rest of the euro area.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“The eurozone economy is struggling to gain momentum. For six months now, growth has been minimal, with activity in the service sector stagnating and manufacturing output rising only moderately. In Germany, there are signs of a cautious improvement in the situation, but France continues to drag its feet. The momentum evident in the official growth figure of 0.6 percent for the first quarter is unlikely to have carried over into the second quarter, especially since special factors such as Ireland’s unusual jump in growth inflated this figure.
However, there is no reason to be resigned, as the outlook has brightened according to the survey and companies are keeping employment roughly constant.
Delivery times increased in June. Given the weak order situation and only moderate growth in production, this may be related, among other things, to the new geopolitical crises and the variable tariff policy of the US. Both factors are making supply chain management more difficult. Overall, however, the delivery time indicator shows that most companies are relatively good at adapting to uncertainty and that there have been no major disruptions so far.
For the ECB, the price environment for services remains slightly tense. Companies are still facing quite significant cost increases and raised their selling prices slightly more in June than in the previous month. This higher inflation in the service sector is partly offset by a deflationary environment in the goods sector. However, energy prices play an important role here. Until recently, they were still falling, but have risen sharply since the conflict between Israel and Iran. This information has only been partially reflected in the surveys. Overall, however, the ECB can remain relatively calm, as the strong euro and the deflationary effect of US tariffs argue against a short-term rise in inflation.”
Japan: Output expands at quickest rate for four months in June
The latest Flash PMI data suggest that Japan’s private sector had a positive end to the second quarter, with business activity growth improving to a four-month high on the back of a stronger increase in services activity and a fresh rise in manufacturing production.
However, overall demand conditions remained challenging, with total new business rising only slightly, and weaker foreign demand for manufactured goods dampening overall export sales. Companies indicated that US tariffs and lingering uncertainty over the global trade outlook continued to inhibit customer demand.
When assessing the year-ahead outlook for output, Japanese private sector firms remained cautious. Notably, the overall level of positive sentiment remained stuck near a post-pandemic low.
On a more positive note, the latest data hinted that cost pressures eased across the private sector in June, with input prices rising at the slowest rate in 15 months. Firms also continued to add to their workforce numbers, with overall employment increasing at the quickest pace for nearly a year.
Fed’s Waller Suggests Support for a July Cut Waller told CNBC that the Fed should “look through” one-time price increases from tariffs
In a Friday morning interview with CNBC, Waller said the Fed should “look through” one-time price increases from tariffs and instead respond to the underlying trend in inflation, which has been cooling.
Waller’s comments reaffirm his role as the central bank’s most vocal advocate for a return to rate reductions since the Fed paused its cuts in January.
“I think we’ve got room to bring it down, and then we can kind of see what happens with inflation,” Waller said. The Fed could then pause rate cuts again if inflation worsens, he added.
Waller noted that his colleagues on the Fed’s policy-setting committee might not agree with his timetable. On Wednesday, the group unanimously decided to hold interest rates steady, standing pat for the fourth straight meeting. In a press conference after the meeting, Fed Chair Jerome Powell said the Fed’s current stance is well-positioned to respond to risks in a highly uncertain economy. (…)
Waller said that interest rates are likely still far enough above a neutral level, however, that the Fed could begin cutting rates again gradually, monitor inflation, and then pause cuts again in the future to lean against price increases if they threaten to get out of hand.
“We should be basing policy based on the data,” Waller said in the interview, arguing that prospective inflation caused by tariffs would likely be temporary. (…)
- Fed’s Daly Says Next Rate Cut More Likely in the Fall
China Asks State-Owned Developers to Avoid Public Defaults
China has introduced a requirement for state-owned developers to avoid defaulting on publicly issued debt, in the latest attempt by authorities to contain the nation’s prolonged property crisis.
The State-owned Assets Supervision and Administration Commission added the directive to its latest performance metrics for about 20 developers that are controlled by the central government, people with knowledge of the matter said, asking not to be identified discussing a private matter.
While the regulator has so far stopped short of providing additional support to backstop the developers, the new stipulation underscores growing urgency to contain credit risks from China’s protracted property downturn. Most of the biggest private developers have defaulted since 2021, shattering confidence in the housing market and leaving a pile of distressed debt that currently stands at almost $140 billion.
The directive may place pressure on management, while also sending a signal to banks, often responsible for rolling over loans and issuing new credit. (…)
China’s housing slump has dragged on for four years, with little sign of improvement. Prices of new homes slid the most in seven months in May, and sales also fell, signaling the effects of a stimulus blitz last September is wearing off.
Like their privately owned peers, SOE developers have felt pressure from slumping sales. Last year, some resorted to steep price cuts to rekindle transactions.
“China’s state-owned and private developers are both susceptible to a possible renewed property sales downturn,” Bloomberg Intelligence analyst Kristy Hung wrote in a recent note. She warned that state-owned builders face the risk of a full-year decline in sales this year. (…)
Premier Li Qiang this month pledged action to stop the decline in the real estate market, which has been depressing household sentiment just as the government is trying to boost consumption and offset the threat to exports from US tariffs.
Even if China’s housing market picks up, the long-term outlook remains grim. Demand for new homes in cities is expected to stay at 75% below its 2017 peak in the coming years, due in part to a shrinking population, Goldman Sachs Group Inc. estimated.
Canada Retail Sales Fell 1.1% in May, Largest Drop in a Year
An advance estimate suggests receipts for retailers plunged 1.1% in May, the biggest decline in a year, Statistics Canada said Friday. That more than reversed April’s 0.3% gain (…).
With cars and parts making up a quarter of Canadian retail sales, the stark difference in sales between those two months suggests volatility in auto purchases played a role in the weakness in the middle of the second quarter. Most of the April gains were also driven by cars. Excluding autos, sales fell 0.3% that month, a bigger decrease than economists had expected, and a second straight monthly drop. (…)
Despite outperforming expectations in the first quarter, the Canadian economy is expected to stall or contract in the second quarter, as tariff front-running activity in trade and inventory faded. Domestic consumption was already weak in the first three months of this year, and consumers who are concerned about their job prospects will likely continue to curb their spending. (…)
Commercial Real Estate Distress Is Spreading
Delinquencies continue to increase, though the rate has moderated, researcher Green Street said this past week. Distress is also climbing, rising 23% to more than $116 billion at the end of March from a year earlier, data compiled by MSCI Real Capital Analytics show. That’s the highest in more than a decade.
Investors including Victor Khosla of Strategic Value Partners LLC have warned that debt maturities will lead to a “tsunami” of problems for US offices in particular. There are signs that’s spreading. The past-due and nonaccrual rate for commercial real estate portfolios reached the highest since 2014 earlier this year, the Federal Deposit Insurance Corp. wrote in a report last month, citing multifamily as an increasing source of pain. Past-due and nonaccrual loans are so far past due that banks have stopped booking interest owed because they doubt they’ll ever receive it.
Policy uncertainty, meanwhile, is also holding back activity in the underlying market as businesses delay decisions across districts, the Federal Reserve noted in its May Beige Book survey. For example, some of the reserve banks stated that demand for warehouses was affected by the potential impact of tariffs.
The proposed Section 899 ‘revenge tax’ in President Donald Trump’s tax-and-spending bill could also “trigger wider foreign investor pullbacks, impacting all US real estate lenders,” said Harsh Hemnani, a senior analyst at Green Street. German commercial property lender Deutsche Pfandbriefbank AG announced this past week that it’s quitting the US market and will wind down, securitize or sell its €4.1 billion ($4.7 billion) portfolio there, warning it could make a loss this year due to the expected cost of the decision. (…)
On Thursday, the Financial Stability Board cautioned that shadow lending to the industry globally “may amplify and transmit shocks to banks.”
Some traditional lenders continue to kick the can down the road in the US rather than take impairments. The wall of CRE debt continues to rise, in part because some credit providers have extended the duration of loans, the Mortgage Bankers Association said on Tuesday.
Another headwind for traditional lenders is large unrealized losses on securities portfolios that they’re holding to maturity or seeking to offload, with the FDIC saying last month that the losses stand at more than $410 billion.
CRE is likely to be a similar source of pain. Loss rates on commercial and residential mortgage-backed securities suggest the unrealized losses on banks’ mortgage books are likely to be as large or larger than in securities, academics including Lawrence White of New York University’s Stern School of Business wrote last week.
Chinese factories rush to reduce reliance on Donald Trump’s US Companies in major exporting province of Zhejiang look to other markets or to sell at home
Chinese trade data released since US President Donald Trump announced high tariffs in April shows increased exports to alternative markets partially offsetting a plunge in US-bound shipments. The value of exports to Europe in May climbed 12 per cent from a year earlier, with shipments to Germany up 22 per cent. Exports to south-east Asian countries rose 15 per cent. (…)
“We want to find new customers in markets like Europe,” said Xia Shukun, a manager at Shaoxing Sulong Outdoor Technology, which until now has only exported to Asia and the US. (…)
“That road isn’t working so we need to find a new one,” he said (…).
“We are seeing a new ‘China shock’,” said commission president Ursula von der Leyen at the G7 gathering in Canada this month. “As China’s economy slows down, Beijing floods global markets with subsidised overcapacity that its own market cannot absorb.” (…)
“They want stability and in the long term it doesn’t look good,” Chu said. “Many factories are concentrating on Europe.” (…)
The provincial government has begun covering the cost of attending trade fairs abroad, rolling out language programmes to cultivate 100,000 new cross-border ecommerce sellers and increasing subsidies for export credit insurance. (…)
“The signal was clear, US-China relations were chaotic . . . We found new buyers in south east Asia,” he said. “This time, I’m not paying attention.”
Shortages in US? Goods deflation in ROW?
BTW: China is an increasingly-dominant global innovator. “China is reaping the results of a relentless effort to overtake the U.S. at the cutting edge of engineering, science & technology… The Australian Strategic Policy Institute puts Chinese researchers ahead of Americans in 37 of 44 technologies examined, across the sectors of defense, space, robotics, energy, environment, biotechnology, artificial intelligence, advanced materials and quantum technology.” (WSJ)
BTW #2: More US exceptionalism:
- US vs Global Household Holding Habits: Something somewhat related to that (and I have to say this looks so extreme that I wonder if there is an element of measurement error in this) — US investor allocations to equities are some 5x greater than that typical of the rest of the world. This probably speaks at least in part to the strong run in US equities relative to global (simply drifting allocations there). But also a potential source of future shift if things can change around the rest of the world (as we know that rising allocations in the US have coincided with rising PE ratios). (Callum Thomas)
Source: @MikeZaccardi
AI CORNER
Productivity Gains Are Coming
The Census conducts a biweekly survey of 1.2 million firms, and one question is whether a business has used AI tools such as machine learning, natural language processing, virtual agents, or voice recognition to help produce goods or services in the past two weeks, see chart below. Nine percent of firms reported using AI, and the rising trend in AI adoption increases the likelihood of a rise in productivity over the coming quarters. (Torsten Slok)
xAI is apparently burning $1 billion per month
Elon Musk’s artificial intelligence company is reportedly spending $1 billion per month on its large language model.
The LLM is intended to compete with OpenAI’s ChatGPT and Anthropic’s Claude, per Bloomberg.
That sum is a pressing issue because xAI doesn’t yet generate that kind of revenue. Earlier this month, the company’s banker, Morgan Stanley, reported that xAI expects $1 billion in gross revenue by the end of this year; this latest report estimates the company’s 2025 revenues at $500 million.
xAI would hardly be the first modern AI company to spend first and prompt questions later. Virtually all of its rivals, from startups like OpenAI to giants like Meta, have forecast dizzying amounts of capital expenditures related to AI. (Fortune)
Last January, it was reported that DeeSeek spend $5.6 million (yes Million) on its LLM model although that figure is widely disputed with the highest figure I have seen at $1.3 billion (SemiAnalysis).
We are still well below what Sam Altman has raised for OpenAi: $60B. And we don’t know what Google, Amazon and Meta have collectively spent so far but their 2025 budgets are all in the high Billions.
Can’t wait to measure the return on capital in a few years…