China’s Producer Deflation Worsens as Weak Demand Persists
Factory deflation persisted into a 33rd month, with the producer price index falling 3.6% from a year earlier, the National Bureau of Statistics said Wednesday. The decline was the most since July 2023 and sharper than any economists had forecast.
The consumer price index unexpectedly increased 0.1% and ended a four-month falling streak, although it likely reflected the short-term effect of government subsidies rather than a lasting recovery in confidence. (…)
The uptick in consumer prices was largely due to a recovery in prices of oil and other industrial consumer goods, which narrowed their year-on-year fall from 1.0% to 0.5%. (…)
Copper Market in Turmoil as Trump Touts 50% Tariff on US Imports
President Donald Trump sowed fresh chaos in metals markets by indicating the US would implement a higher-than-expected 50% tariff on copper imports, spurring a record spike in New York futures and a drop in the global benchmark.
The plan, announced in an apparently off-the-cuff comment to reporters, marks the latest twist in a tumultuous period for industrial commodities, as the US leader aims to encourage more mining and smelting at home. He’s already raised fees on steel and aluminum imports, while probes into flows of multiple other metals are in train. (…)
If the tariff takes hold, it will inflict higher costs across a broad section of the US economy due to the myriad of industries and applications that rely on copper — even as Trump piles pressure on the Federal Reserve to lower interest rates.
Trump’s already imposed 50% levies on steel and aluminum, but there’s particular concern about the economic impact of copper tariffs because the US is highly reliant on imports. US buyers have already warned that the measure risks undermining Trump’s core ambitions to revive manufacturing and challenge China’s industrial might.
“The US does not have nearly enough mine/smelter/refinery capacity to be self-sufficient in copper,” Jefferies LLC analysts including Christopher LaFemina wrote in a note. “As a result, import tariffs are likely to lead to continued significant price premiums in the US relative to other regions.” (…)
A single carve-out for a top supplier like Chile would materially dampen the blow for importers, and manufacturers now have huge buffer stocks to fall back on thanks to the record-breaking imports seen over recent months. (…)
Trump’s 50% pledge comes as copper demand is expected to surge over the coming decade, with data centers, automakers, power companies and others scouring the globe for feedstock. Retooling power and transportation systems to run on renewable energy will require far more copper than the companies that produce it are currently committed to deliver.
The path toward greater US self-reliance in copper is a fraught one for the US given the paucity of existing capacity and the challenges in building new plants. Net copper imports account for 36% of demand, according to Morgan Stanley research. (…)
Major players in the US copper industry have called on President Trump to restrict exports of ore and scrap instead of imposing tariffs on imports. They’ve also warned that putting tariffs solely on refined copper could lead to a flood of imports of value-added copper products that aren’t subject to the levies. (…)
President Donald Trump vowed to push forward with his aggressive tariff regime in the coming days, stressing he would not offer additional extensions on country-specific levies set to now hit in early August while indicating he could announce substantial new rates on imports of copper and pharmaceuticals. (…)
Trump said he would offer no additional delays on the country-specific tariffs, despite the previous night allowing he was “not 100% firm” on his August 1 deadline. He foreshadowed an update to the trade status of at least seven countries to be released Wednesday morning, Washington time, with more to come in the afternoon. (…)
He also told reporters that despite progress with the European Union on a trade deal, frustration over the bloc’s taxes and fines targeting US technology firms could result in him unilaterally declaring a new tariff rate within the next two days.
And just hours after saying he was close to a trade deal with India, Trump said he would still tag imports from the country with an additional 10% levy for their participation in BRICS, a collection of developing nations.
Moreover, he said, drug companies could face a tax as high as 200% on imports if they didn’t move production to the US in the next year. (…)
Trump said the group of developing [BRICS] countries was “set up to hurt us.” (…)
Trump has also warned nations not to retaliate, saying that any moves to counter the US would see duties increased by that amount.
(…) Trump was prompted into the 90-day pause by the “yippy” bond market. The swift rise in yields in the week after Liberation Day threatened to make it far harder for the US to fund its deficit, forcing a rethink. That strengthened the notion of a “Trump Put” — a level for the market at which the president would back down on unpopular policies. That subsequently morphed into TACO (Trump Always Chickens Out).
Now, with stocks strong, and bond yields and the dollar at levels that the White House finds comfortable, there’s room for the president to incur some unpopularity before a “put” is reached. Indeed, consumer worries that tariffs would cause more inflation also appear to be dissipating and removing another source of political pressure. The latest survey of consumer inflation expectations by the Federal Reserve Bank of New York, released Tuesday, showed forecasts right back to 3%, the top of the Fed’s target rang.
At this point, it’s the economy, and not financial markets, that will need to shift to change trade policy. The Trump Put is now a number for inflation, rather than bond yields or share prices. (…)
Ed Yardeni:
In an April 11 NBC interview, Peter Navarro, a White House trade adviser, claimed that “90 deals in 90 days” was possible. So far, there have been only two trade deals announced, with the United Kingdom and Vietnam. There is also a framework agreement with China.
China Selling Less to the US and More to Europe, Asia, and Latin America
Since December 2024, the share of China’s exports going to the US has declined from 15% to 9%, while the shares of Chinese exports to Asia, Europe, and Latin America have increased. (Torsten Slok)
Tariffs are already squeezing corporate margins, new survey finds
(…) Some 57% of companies were already experiencing a tariff-driven decline in gross margins as of May, per the KPMG Tariff Pulse Survey.
- Most of those hits were small — though a quarter of respondents said their margins had already fallen by 6% or more.
- The firm surveyed senior and C-Suite executives at 300 companies across industries, all with annual revenue of $1 billion or more.
If higher prices haven’t shown up for customers yet, the survey makes clear they’re coming.
- 77% of respondents said their companies are considering price increases of at least 5% in the next six months. (…)
The government’s already collecting nearly $30 billion a month in tariff revenue — and big companies seem to be paying the bill.
Goldman Sachs:
It is not too surprising that tariff effects have not shown up strongly in official consumer prices yet, for a few reasons.
First, the largest tariff hikes went into effect in early April. Since goods that had already been shipped were exempt and it takes about one month for distant imports to reach the US, many tariffs only began to have an impact around early May.
Second, Customs and Border Protection allows importers using the automatic payment transfer system to delay their tariff payments for up to 1.5 months.
Third, frontloading of imports and uncertainty over whether tariffs would stick may have also helped to delay increases in consumer prices.
Price data through May provide preliminary evidence on how tariff costs are being divided among foreign exporters, US businesses, and US consumers.
Foreign exporters might absorb some of the costs by lowering their export prices to the US, which would show up as lower US import prices. Although aggregate US import prices (which exclude tariffs) have not fallen this year, a more granular analysis shows that each 1pp increase in product-level tariff rates has led to a 0.2% decline in the following three months, with most of this decline driven by China. This estimate suggests that foreign exporters have absorbed about 20% of the costs of tariffs.
Our analysis suggests that the share of the tariff costs that fell on consumers rose from 0% in the first month of implementation to 10% after two months and to 40% after three months.
Fed surveys and our GSAI suggest that businesses intend to pass through 50-60% of the cost of tariffs eventually. While our estimate might rise over time, it is below our parallel estimate of passthrough in 2018-2019 at the same point in time.
We are therefore leaving our inflation forecast unchanged for now and expect tariff effects to boost core PCE inflation by about 1pp this year, leaving the year-over-year rate at around 3.3% in December, compared to 2.3% net of tariffs.
Inconsistent Markets
The bond market continues to price the next Fed move to be a cut, with the expectation that growth is slowing down.
But the stock market is trading cyclicals higher relative to defensives, with the expectation that growth is about to accelerate, see chart below.
This is not consistent. Either the bond market is wrong, and rates must move higher due to accelerating growth. Or, equity markets are wrong, and stocks have to move lower because growth is slowing down. (Torsten Slok)
