China’s Powerful New AI Surprises Investors, Fueling Tech Rout

A surprise breakthrough from Chinese AI startup Moonshot rippled through global markets Friday, sending AI and semiconductor stocks sharply lower as investors drew parallels with last year’s “DeepSeek moment” and questioned whether the industry’s enormous spending spree is becoming harder to justify.

The catalyst was Moonshot’s new Kimi K3 model, which the company said rivals the strongest offerings from OpenAI and Anthropic PBC. The launch was quickly dubbed a new “Kimi moment” by investors, echoing the market shock unleashed by Chinese startup DeepSeek’s breakthrough last year.

“People are worried that if US companies start using Chinese models more and Anthropic less, then Anthropic will invest less. That means those US firms will lower the capex and in the end chip demand will be affected,” said Vey-Sern Ling, managing director at Union Bancaire Privee. Such worries have abounded since April when DeepSeek launched its V4 model, while the release of K3 just deepened such concerns, he added. (…)

To be sure, benchmark scores don’t always translate into commercial success, and Moonshot’s claims have yet to be fully validated by the broader AI community. Markets also weathered last year’s “DeepSeek moment” as US hyperscalers pressed ahead with record AI spending, easing fears that demand for cutting-edge chips would falter. (…)

“It is a confirmation that China is firmly in the AI race with the US, particularly when cost efficiency is taken into account,” he said, adding that the tech industry is beset by a host of concerns, including AI capex returns, stretched valuations and signs of broader AI fatigue that could account for Friday’s selloff. (…)

Moonshot’s release shows that China’s AI race is evolving beyond a competition on cost alone. The startup priced its latest model at roughly the same amount as Anthropic Sonnet, a premium compared to other Chinese models based on its strong capabilities. Moonshot also claimed it surpassed Z.AI’s most advanced offering on coding tasks. That’s stoking concerns that competition in China’s AI sector is intensifying even as the country’s sector leaders race onto global markets. (…)

“The blended price for K3 is about half of the Claude Opus and GPT-5.5, which represents meaningful improvement of economics of the tokens.” (…)

Moonshot said its latest model has 2.8 trillion parameters and a 1 million token context window, gauges of its capability. Artificial Analysis ranked Kimi K3 ahead of Anthropic’s Opus 4.8 on some frontier benchmarks, making it the first Chinese open-weight model to achieve that milestone. (…)

Another way to look at the AI rankings. Note the 17-place jump from Kimi-k2.6:

LLM models will keep leapfrogging one another, continually improving their effectiveness and costs, boosting compute demand as AI agents gradually become ubiquitous.

Google’s Gemini 3.5 Pro, the company’s most powerful flagship AI model, is months behind schedule due to efforts to improve its capabilities, particularly in coding, Bloomberg News has learned.

Ten current and former employees say the delay has frustrated Google engineers and researchers, who fear the company is losing ground to rivals Anthropic, OpenAI, and Meta, which have released models that outperform Gemini in coding tasks.

A late-June attempt to improve Gemini’s performance by updating its training data yielded disappointing results, and Alphabet shares fell as much as 3.2% on the news.(Bloomberg)

• Xi Promises AI for All in Debut at China’s Top Tech Summit

Xi used his first appearance at the World AI Conference in Shanghai on Friday to urge the world to adopt an inclusive approach, encouraging collaboration without rivalries. “AI development should not be a solo performance by a single country, but a symphony of international cooperation,” he said, adding that safety risks must be contained.

His presence at the gathering, attended by scores of tech and government leaders, conveys a potent signal of China’s ambitions to dominate a technological sphere with the potential to revolutionize industry and economies — an effort that’s shot to the top of the nation’s agenda. Chinese models are winning over companies worldwide, with their share of US firms’ AI usage nearing a record 60% on the popular marketplace OpenRouter. (…)

“We should take seriously the various types of inherent and secondary risks that AI may trigger,” Xi told the gathering on Friday, calling for more regulations, monitoring and warning systems to ensure that AI is always under human control.

He also warned against “overstretching” the concept of national security to curb access to the technology. But Chinese officials have recently held discussions with companies including Alibaba Group Holding Ltd. — developer of the popular Qwen models – on how to mitigate the security risks posed by their increasingly powerful models, people familiar with the matter said.

The talks are early, with no enforcement planned, but restricting foreign access to top models was among the options raised, the people said. Reuters previously reported that Beijing was weighing curbs on overseas access. Alibaba and the Commerce Ministry didn’t respond to requests for comment.

Global AI governance has emerged as a new battleground for the world’s leading powers. With the cybersecurity threat of cutting-edge AI looming large, Washington has in recent weeks pressured prominent American labs such as Anthropic PBC to curtail foreign access to advanced models.

China is looking to build its own AI ecosystem that offers its citizens and global customers a cheaper alternative to US technology. It also wants to secure its own AI supply chain that can guarantee access for its companies and government agencies. As part of this effort, Beijing has earmarked 2 trillion yuan over the next five years to creating a network of inter-connected data centers across the country, Bloomberg News reported last month. (…)

On Friday, China’s top planning agency released an action plan for AI cooperation and development, outlining eight areas for countries to work more closely together, including data sharing, computing power, the open-source ecosystem and standards setting.

But the venture pales in comparison to the $725 billion that US leaders such as Meta Platforms Inc. and Microsoft Corp. are setting aside for AI this year alone. Chinese data centers in general cost less than in the US because of cheaper labor, component and construction costs, and local government incentives. (…)

Western companies’ challenge is to achieve respectable returns on higher cost investments competing with lower cost, lower price Chinese models. The race is on models but also importantly on applications and versatility. Closed models and closed ecosystems face significant challenges.

BTW, Xi also said: “We should seize this rare historic opportunity to encourage open-source, openness, and collaboration.”

Bloomberg’s Catherine Thorbecke is in Shanghai:

(…) It’s a rare moment indeed. The remarks take a clear side in the crusade for the future of AI: whether its evolution will progress in the hands of a few elite labs or the people. American firms have bet on the former, which makes good business sense. China is urging the rest of the world to join in the latter. (…)

In recent months, cheap Chinese AI has garnered attention for undermining the business models of US titans. But the same commoditization pressures domestic firms as well. With so many companies now giving away their technology, it makes it hard to differentiate or find real revenue streams.

There’s a real danger that these companies go the way of electric vehicles: endlessly undercutting and competing with each other. The potential is especially apparent here in Shanghai, where over 1,000 firms are exhibiting. As more of these startups go public — with a high-profile DeepSeek IPO reportedly in the works — it’s something more difficult for investors to overlook.

But it’s a much bigger warning shot to American model makers like Anthropic PBC and OpenAI. Just-as-good Chinese alternatives are punching holes in their moats and challenging astronomical valuations ahead of their mega-IPOs. (…)

Xi recognizes that the real metric of the AI race is diffusion. He’s playing the long game. Can the same be said for Washington?

If history is being written in Shanghai this weekend, and China’s vision for the AI future plays out, the consequences will be more profound than market share. The openness could just as easily be pulled back once it’s no longer needed to undermine US dominance. And by then, Chinese models will have already become the default.

US AI protectionism will continue in this increasingly digital world.

• China Can Still Win the AI Race With Inferior Technology It’s about economics, power as well as engineering.

(…) A standardized intelligence task on DeepSeek’s V4 Flash model costs about two cents. The same task on Anthropic’s premium model runs over two dollars, according to benchmarking site Artificial Analysis which compared them on different kinds of standardized tasks. The difference racks up fast for companies using these models at scale, and it’s increasingly hard to defend using pricier models. San Francisco’s Lindy AI said it slashed its AI spend by 90% after switching.

DeepSeek’s investor list reveals battery giants, state funds and e-commerce players who will likely help the startup access energy, chips and distribution. It’s a familiar Chinese playbook that has helped take the country’s steel, solar and electric vehicle products global. And it’s all backed up by China’s ambitious infrastructure buildout.
None of this is a guarantee that China will come to dominate the cutting edge of AI. But DeepSeek’s price advantage, plus international alarm about the US suspending foreign access to Anthropic’s advanced Mythos and Fable models, indicate that success isn’t just contingent on being the best.

Add the power issues, supply and costs:

The crunch time for America’s biggest power grid is intensifying as PJM Interconnection’s latest capacity auction fell more than 6 gigawatts short of what will be needed by June 2028, even as supply costs tied a record, driven by surging AI data center demand that is outpacing new generation construction.

PJM plans an emergency two-step process launching in September — bilateral contracting followed by a special auction — aimed at making AI hubs cover the costs of securing their own energy needs. (Bloomberg)

And watch robotics, a huge future compute demand vector:

Four of Japan’s leading industrial and manufacturing giants — Fujitsu, Fanuc, Kawasaki Heavy Industries, and Yaskawa Electric — are joining forces with Nvidia to accelerate AI-driven robotics development across factories, retail, logistics, and health care, in a direct bid to counter surging Chinese competition in humanoid and AI-enhanced robots.

The collaboration, born over a meal of tonkatsu, will see the four Japanese firms join Nvidia’s Cosmos Coalition, an alliance aimed at speeding adoption of Nvidia’s physical AI platforms.

The Model Is Not the Moat. The Flywheel Is: How to Read the LLM Race After Kimi K3

(…) what Kimi K3 really proves is not that model companies have no moat, but that the model itself is not the moat.

Raw model capability is becoming commoditized very quickly. A model can top the leaderboard today and be matched by competitors a few months later. Model capability still matters. It determines whether a company can sit at the table. But it is becoming harder for model capability alone to form a durable moat.

The real long-term value lies in the flywheel formed by the model, workflow, feedback data, customer relationships, and reinvested revenue.

There is also one detail that is especially easy to miss: an open-source model being widely used does not mean the model company captures the corresponding revenue. This is particularly important for Chinese AI model companies, because it determines whether model influence can actually become commercial value.

So the right question is not simply how strong Kimi K3 is. The more important questions are: how long can model capability leadership last? After open-source diffusion, who actually captures the revenue? Where do customer relationships and task feedback accumulate? And who can turn one model release into the starting point for the next iteration and the next stage of commercialization?

In many cases, the difference between the top model and the rest of the leading pack is no longer a generational gap. It is often a difference in benchmark design, task preference, and specific use case.

A single model lead is therefore more like an asset that depreciates quickly.

A model may look impressive at launch, but several months later, competitors can often catch up on a large part of its capability through architectural imitation, data improvements, post-training, distillation, and engineering replication. This is especially true in general Q&A, summarization, translation, and simple code generation, where the leading models are becoming increasingly similar.

This does not mean model capability is unimportant. Quite the opposite. Model capability is the ticket to the game. But a ticket is not a moat. What matters is whether a company can keep getting the next ticket, faster, cheaper, and more reliably than others.

US Consumers Singing, “Ain’t No Stoppin’ Us Now!

For a long time now, their doubters warned that a low savings rate, flatlining real disposable income, rising consumer debt, and mounting affordability challenges would force households to retrench. Instead, they continue to do what they do best, namely shop! A well-balanced labor market and the wealthiest retiring generation ever continue to power consumer spending.

Retail sales (including food services) rose 0.2% m/m in June after a 1.0% gain in May. The slowdown largely reflected a 5.3% drop in gasoline station sales as pump prices fell by roughly 50 cents per gallon.

Excluding gasoline but including food services, sales increased a solid 0.7%, with gains across the board.

Nonstore retail sales jumped 1.9%, the largest monthly increase in a year, likely boosted by Amazon’s Prime Day. Encouragingly, control group sales, a key input into GDP goods spending, rose by 0.5%. For Q2 as a whole, control-group sales advanced at a remarkable 9.2% annualized rate.

Several sales categories rose to new record highs in June, including discretionary areas such as motor vehicles, electronic shopping, and general merchandise. Food services, the only services category in the report, also climbed to a record high. (…)

Spending might cool in July as the World Cup ends.

The labor market remains in very good shape. Initial jobless claims fell to a 10-week low of 208,000 in the week ended July 10, while continuing claims eased to 1.81 million. Together, the data suggest layoffs remain very low. (…)

The Atlanta Fed’s GDPNow tracking model currently shows Q2 real GDP growth at 1.7% (saar). Much of the weakness reflects a surge in AI-related imports, with net exports expected to subtract 96 basis points from growth.

By contrast, consumer spending is projected to rise a solid 2.5% (saar), up from 0.5% in Q1, while final sales to private domestic purchasers is expected to increase 3.4%, up from 1.7%.

Ed is right celebrating strong spending. But let’s not totally dismiss the effects of inflation:

Also, let’s keep in mind that “a low savings rate, flatlining real disposable income, rising consumer debt, and mounting affordability challenges” are realities for most Americans.

• Gas Prices Will Stay Higher for Longer, Even if Oil Falls Refining capacity is strained, and fuel markets don’t have much of a buffer

Despite the resumption of U.S.-Iran hostilities, U.S. benchmark crude prices are hovering around $80 a barrel. That is about 18% above where they were before the Iran war began. By contrast, gasoline prices remain 32% higher at $3.94 a gallon, according to energy data firm OPIS.

So-called gasoline crack spreads, which measure the difference between gasoline and crude-oil prices, are averaging 90 cents a gallon so far this month. That is the highest level in four years, according to data from Novi Labs.

Why are fuel prices so much higher? One reason: fuel markets didn’t have the buffers that crude oil had. This means that even if there’s another ceasefire that allows oil to again flow, gasoline and diesel prices are likely to stay higher for longer.

The crude-oil market’s surprise shock absorber was China, which dramatically cut its imports. It imported just 5.7 million barrels a day in June, according to the International Energy Agency’s July oil market report, down from around 11 million barrels a day before the Iran war.

China hasn’t provided the same slack in the refined-products market. It is typically a net exporter of gasoline and diesel, but has reduced exports significantly since the war started, according to Rob Smith, global head of fuel retail at S&P Global Energy. Chinese refiners’ throughputs dropped to a six-year low in May, consistent with its decline in crude imports, according to the IEA.

Crude-oil supply was also boosted by hefty releases from strategic petroleum reserves around the world. Members of the International Energy Agency, a coalition of oil-consuming countries, released 2.4 million barrels a day in May and 1.5 million barrels a day in June. The vast majority of these releases were of crude oil rather than refined fuel, according to data from the IEA.

All of this crude oil needs to be processed to become gasoline and diesel. But refining capacity in two major fuel-export regions—the Middle East and Russia—has been severely curtailed by conflict. Global refineries processed 5.1 million fewer barrels a day in the second quarter compared with the same period in 2025, according to the IEA. (…)

Russia’s diesel export ban could have knock-on effects. If diesel prices keep rising globally, U.S. refiners may be motivated to boost diesel production and cut gasoline production unless the price of the latter rises, according to energy economist Philip Verleger.

Global gasoline inventories were 3% below the trailing-five-year average as of June and the gap is expected to widen to 4% this month, according to S&P Global. In the U.S., gasoline inventory is about 8% lower than the five-year average for this time of year.

Despite tight fuel inventories, global gasoline demand has remained resilient because of government policies to protect consumers from high prices, according to the IEA. (…)

Relief won’t be on the way for motorists for some time, even if the Strait of Hormuz opens up. One reason: Shut-in crude oil production can be resumed quickly, but turning refining capacity back on takes longer, according to S&P Global’s Smith. (…)

The problem there is that the U.S. doesn’t have a big strategic stockpile of gasoline or diesel. Unfortunately for drivers—and the U.S. economy—there is no easy way out of high gas prices.

The other problem is actual product shortages, not only for transportation but also manufacturing. Hormuz is still closed.

US Corporate Insiders Are Selling Stocks at a Near Record Pace

US executives are selling shares at the second-fastest pace in more than 20 years, a classic red flag to some investors because it suggests people with the most corporate knowledge are wary about markets.

Corporate insiders sold $77.6 billion of stock during the first half of 2026, a 20% increase from a year ago, according to EPFR Global Market Intelligence. The only time the selling spree was more intense was back in 2021, when markets were flush with pandemic-driven stimulus cash.

“Insider activity suggests executives are not especially eager to increase their exposure at current valuations,” wrote analysts including Winston Chua at EPFR.

In contrast, stock buying by corporate insiders has been subdued. They purchased just $6.9 billion worth of shares in the first half. That’s only modestly above the seven-year low of $6.7 billion recorded a year earlier. (…)

Trump to Cut US Stays for China Journalists, Risking Retaliation

US visas for foreign journalists will be trimmed to 240 days and mainland Chinese journalists will get just 90, according to new rules being published on Friday by the Department of Homeland Security. The 90-day limit would revive restrictions that President Donald Trump proposed at the end of his first term and Joe Biden later scrapped.

The US agency said the change would allow officials to more closely monitor visa holders and ensure their activities are consistent with the purposes of their entry. Extensions would be available, it said.

Chinese Foreign Ministry spokesman Lin Jian said his nation “firmly rejects the US’s discriminatory move targeting certain countries,” and urged the US to immediately halt the changes regarding journalist visas.

“China reserves the right to take reciprocal countermeasures,” he added at the regular press briefing in Beijing on Friday.

The US also put a new four-year limit on student visa holders, ending a decades-old policy that had allowed international students and exchange visitors to remain in the country for as long as their studies last. (…)

• Top Treasury Tax Official Ousted After Clashes With White House Over IRS Audits Kenneth Kies warned that political officials risked breaching a law that limits who can influence tax enforcement

The Treasury Department’s top tax policy official was forced out of his job after he warned that the White House was at risk of violating a federal law prohibiting senior officials’ involvement in IRS audits, according to people familiar with the matter. (…)

Kies at times clashed behind the scenes with White House officials, the people said. That included a recent meeting in which he contended that a potential White House request would violate Section 7217 of the Internal Revenue Code, one of the people said. That law prohibits the president, vice president, White House staff and certain agency heads from directly or indirectly requesting that the IRS conduct or terminate an audit or investigation of any particular taxpayer.

Violations are punishable with up to five years in prison and up to $5,000 in fines, and IRS officials have long seen the prohibition as an important shield against the kind of political interference that President Richard Nixon tried to impose on the tax agency.

IRS employees who receive requests they consider improper must report them to the agency’s inspector general or risk the same punishments. The 1998 law is untested in court, and enforcement in the near term would require action by the Trump administration.

It couldn’t be determined what White House requests Kies objected to and whether the administration plans to follow through with them after Kies departs. The taxpayers at issue could include individuals, corporations or nonprofit groups. Kies represented President Trump in private practice before joining the administration last year and has been recused from matters involving the president.

The president and some of his aides had become increasingly frustrated with Kies, some of the people said. Kies was at odds with White House officials over several issues during his tenure, including taxation of income from fantasy sports. He cited IRS rules about audits when asked questions about policies, even when officials weren’t asking about particular companies or audits, one of the people said.

Kies declined to comment. After The Wall Street Journal sought comment from the White House and the Treasury Department, several administration officials and Trump allies reached out to privately criticize Kies, arguing he was difficult to work with and didn’t do enough to advance the president’s agenda. (…)

Kies has been at the center of Republican tax-policy circles in Washington for nearly a half-century. (…)

In his Treasury job, Kies described himself as being pro-taxpayer, and he pushed for lighter regulations in many cases. (…)

Producer Price Inflation beyond Energy: “Core” PPI Accelerates to 4.7%, Services PPI to 4.6%. Lots of Inflation Going on in Here

Energy prices plunged in June off the spike in the prior months. And this plunge in energy prices spread through the Producer Price Index final demand (PPI), which tracks inflation in prices that companies pay each other, and which dropped by 0.28% seasonally adjusted in June from May (annualized -3.3%, blue in the chart).

Year-over-year, the PPI rose by 5.5%, still a lot of inflation, but lower than the multi-year high in May (red). It has been zigzagging higher ever since the low point in mid-2023.

Beyond the plunge in energy, producer-price inflation accelerated in June from May and year-over-year because inflation in services accelerated.

The services PPI rose by 0.21% in June from May (+2.5% annualized), seasonally adjusted, after the negative reading in the prior month.

Year-over-year, the services PPI accelerated to 4.6% (red line). That’s a lot of inflation in services. It has been zigzagging higher since the December 2023 low. (…)

The PPI for core goods, which excludes energy and food components, rose by 0.19% (+2.3% annualized) in June from May, seasonally adjusted, on top of the spikes in the prior two months (blue line in the chart below).

The year-over-year core goods PPI rose by 5.1%, a slight deceleration from the prior month, and both were the worst since February 2023 (red line). It has been zigzagging higher since March 2024. (…)

Core PPI Final Demand, which excludes energy and food components, accelerated to +0.20% (+2.4% annualized) in June from May, seasonally adjusted (blue in the chart below).

Year-over-year, core PPI accelerated by a hair to 4.7%. The last three months were the worst since January 2023. It has been zigzagging higher since the low in December 2023 (red in the chart below). (…)

These next charts show the price level of the energy  and food PPI, rather than the percentage change.

 

BTW:

• Wheat Hits Two-Year High as Black Sea Attacks Spur Supply Fears

(…) Russia is the world’s largest wheat exporter, and together with Ukraine the two countries rank among the world’s leading grain suppliers. The Black Sea acts as the crucial artery connecting their crops with global markets.

“While there does seem to have been a bit of a focus on wheat, there is the potential for disruptions to Black Sea shipments to cause broader food price inflation,” said Mike Verdin, senior markets consultant at CRM AgriCommodities. “This risk would be enhanced if disruption spreads to fertilizer too.” (…)

Ukraine has already lost about a third of its grain export capacity through its Black Sea ports because of intensifying Russian strikes, Reuters reported, citing the Ukrainian Agrarian Council. “Both Russia and Ukraine seem to be focused on limiting each other’s export revenue and that is bullish,” the Hightower Report said in a note on Wednesday. (…)

A few charts from Ed Yardeni:

Ed today expressed unusual concerns on inflation:

This week’s batch of cooler-than-expected PPI and CPI inflation numbers for June certainly calmed concerns on that front. As a result, the likelihood of an imminent Fed rate hike has become less likely, with the federal funds rate futures market now moving toward one rather than two such moves over the next 12 months.

On the other hand, the core PPI final demand for personal consumption rose 4.8% y/y in June, its highest since late 2022. The June PPI report confirms that price pressures remain in the pipeline. Core PCED excluding shelter rose to 3.5% y/y in May. Both suggest that the subdued 2.1% y/y increase in June’s core CPI excluding shelter might be misleading. To be or not to be complacent?

Here is something else to worry about: The New York Fed’s Global Supply Chain Pressure Index continues to exhibit a tight correlation with CPI goods inflation. With supply-chain pressures remaining elevated in June, goods inflation is likely to remain firm in the near term.

Ed is also concerned by other kinds of inflation:

Our favorite Bull/Bear Ratio rose to 3.12 last week, well above its historical average, suggesting that investor optimism has become increasingly widespread and may be approaching excessively bullish territory in the near term.

Furthermore, June’s BofA Global Fund Manager Survey shows investors increasingly anticipate a Roaring 2020s outcome, with an AI-driven productivity growth boom and no Fed tightening. A record percentage of respondents expect a “no landing” global economy, and their cash levels are extremely low. All that triggered BofA’s contrarian sell signal.

The buying of US equities by foreign investors tended to be a contrarian indicator in the past. They loaded up on US stocks near the tail end of the previous three bull markets. Be warned: Over the past 12 months, they purchased a record-busting $903.8 billion!

But don’t worry, the Fed is not:

Fed’s Warsh says AI price surge is real but not inflationary

(…) “I don’t view a one-time change in prices as necessarily being inflationary because I think there’s a supply response; in that way this is different from a foreign conflict and what it might do, which tends to reduce the supply side of the economy,” Warsh said. He added that prices may rise over the next 12 months but noted that whether this becomes inflationary depends on Federal Reserve action.

The Fed chairman said artificial intelligence will create jobs in both the short and long term, though the medium-term impact on employment could be disruptive. Warsh told the committee he cannot guarantee there will be no disruption or provide comfort on jobs in the short term.

Warsh said wages have grown at a reasonable pace but called the timing of when wages will increase more from productivity gains a “puzzle.” He confirmed that the surge in prices from AI is real but pointed to business capital investment contributing substantially to GDP, a trend he expects to continue.

Hmmm…

NY Fed President Williams yesterday as reported by @neilsethinew:

He points to “three drivers” of the excess inflation: tariffs, supply chain disruptions (including energy), and AI related demand.

But he goes on to say “there are encouraging reasons to expect that inflation has peaked and should edge down in coming quarters.” Williams says:

-“the direct effects of existing tariffs on prices appear to have in large part played out,”

-“shelter inflation should remain on the downward trajectory observed over the past three years,”

-“based on oil prices today and futures market pricing into next year, it appears that prices for energy and related goods have likely peaked,”

-“the supply-demand imbalances stemming from AI-related investment should recede over time as more supply comes online,” and

-“we do not see evidence of the labor market adding to inflationary pressures.”

That informs his continued belief that “the current stance of monetary policy is well positioned” to bring inflation down to 2%, which he forecasts will happen in 2028 (ending the year at 3.25%).

Fed’s Beige Book Shows Slight to Moderate Growth Across US

US economic activity increased at a slight to moderate pace in recent weeks as most regions experienced little to no change in employment levels, the Federal Reserve said.

Prices increased moderately overall, according to the US central bank’s Beige Book survey of regional business contacts released Wednesday.

“Some contacts tied these cost increases to the conflict in the Middle East; others mentioned tariffs. Consumer prices continued to rise, and a few districts said contacts saw greater price sensitivity among their customers,” the Fed said.

The report was based on information collected by the Fed’s 12 regional banks through July 6 and compiled by Chicago Fed. (…)

Some additional details:

• Several Districts noted declines in spending on discretionary items or trading down to more affordable varieties.
• Auto dealers reported little change in sales, but spending on repairs grew as consumers held onto vehicles for longer.
• Manufacturing production grew modestly to moderately in most Districts, led by stronger orders from the data center, machinery, and defense sectors.
• Manufacturers in several Districts said supply chain issues were more common.
• Construction and real estate activity increased slightly overall, with several Districts noting growth in data center building.
• Transportation activity increased modestly amidst ongoing supply chain changes related to higher tariffs and the conflict in the Middle East.
• Overall, activity in other service industries also was up modestly.
• Employment rose on balance, with five Districts showing modest, moderate, or solid gains in employment, and with seven Districts experiencing little to no change.
• Wage growth was modest to moderate in most Districts, though two saw only slight wage increases.

AI Data-Center Construction Is Booming—but Not Much Else Is Spending on new factories, warehouses and other industrial sites is damped by rising costs

(…) The AI data-center spending binge is helping to mask some of the weakness in the traditional categories of commercial and industrial buildings.

Spending on data-center construction in May rose 23% from a year earlier, according to the U.S. Census Bureau. Yet data centers accounted for 8% of the total spending on private, nonresidential construction. (…)

Construction spending on manufacturing buildings dropped 22% year-over-year in May to a seasonally adjusted annual rate of $174 billion. Manufacturing makes up the largest part of private, nonresidential construction, accounting for nearly a quarter of the spending in May, according to the Census Bureau. (…)

Meanwhile, policy changes affected other plans. The Trump administration erased America’s push to make its auto industry mostly electric by the 2030s, leading to a downturn in the construction of ambitious U.S. plants. Softening demand for some types of chips, shortages of technical workers and cost overruns have slowed construction at some semiconductor factories.

As work on these high-cost plants winds down, analysts expected a decline in aggregate spending on manufacturing plants. But analysts say the soaring costs of construction materials, like steel and electrical gear, are further discouraging spending on projects.

Materials costs for nonresidential construction are up more than 55% since early 2020 and even higher for fabricated steel, copper wire and some other individual materials, according to the government’s producer price index.

Thomas Murphy, vice president for Power & Construction Group, an electrical-infrastructure contractor near Rochester, N.Y., said prices for transformers are up about 70% in the past five years. Order backlogs for some electrical equipment extend for more than two years. That is driving up construction costs by lengthening the time it takes to complete jobs. (…)

Analysts say President Trump’s aggressive use of tariffs to make imported goods more expensive—an attempt to entice manufacturers to build more in the U.S.—also raised domestic prices for manufacturing materials, making it harder for manufacturers to justify factory expansions. (…)

In Monday’s Daily Edge, I included some charts highlighting the K-shaped US economy:

 

US Sets 25% Tariff on Some Brazilian Imports Starting July 22

The US will begin charging 25% tariff on imports of certain goods from Brazil following an investigation alleging that the country engaged in unfair trade practices. (…)

The administration proposed an additional 25% duty on imports from Brazil in a June 1 report following an investigation pursued under Section 301 of the Trade Act of 1974. The report accuses Brazil of engaging in practices that discriminate against and burden US commerce, specifically calling out its electronic payments service, known as Pix, which is used by millions of Brazilians daily.

The US report argued that Brazil has “unfairly disadvantaged” American providers of competing electronic payment services by adopting policies that favor Pix, a platform President Luiz Inácio Lula da Silva has repeatedly portrayed as a symbol of the country’s technological sovereignty and financial independence. (…)

The US is Brazil’s second-largest trading partner and one of the few major economies with which it runs a trade deficit. Brazil imported more than $45 billion of American goods in 2025, an 11% increase from a year earlier, while exports fell nearly 7%, with crude oil accounting for 12.5% of shipments.

In a post on X, Secretary of State Marco Rubio accused the Brazilian government of not negotiating in good faith. He said Lula’s “economic policies are bad for Americans and bad for Brazilians. For the past year, Lula has put his own ego ahead of making a deal for the welfare of the Brazilian people, and these tariffs are the price for that.” (…)

Flávio Bolsonaro, a senator and a son of the former president, is Lula’s main challenger in October’s election. The government, in its statement on Wednesday, said the Bolsonaro’s family had worked with the US government to enable the tariffs. (…)

US, Canada Contradict Each Other on Financial Terms of Detroit Bridge Deal

The US and Canada are presenting different accounts of a profit-sharing deal President Donald Trump agreed to that permits a new bridge connecting Michigan and Ontario to open later this month.

The White House and the government of Prime Minister Mark Carney last Friday announced an agreement to open the Gordie Howe International Bridge after the US delayed it. Canada will fund a regional development agency by sharing a portion of net toll profits from bridge traffic, which Commerce Secretary Howard Lutnick had been seeking.

Since then, however, both governments have offered only limited details that have painted different pictures of the terms.

Carney told a Canadian television network that debt costs would be factored into the calculation of the bridge’s profit. That’s important because Canada paid the entire C$6.4 billion ($4.6 billion) construction cost. Annual interest on that amount would be hundreds of millions of Canadian dollars. Deducting interest would reduce the profit and, therefore, the US share.

“We are sharing after Canada is paid back. So we get the revenues, then the servicing of the cost of the bridge and paying the debt of the bridge. And then what’s left over, there’s a split of that for 15 years,” the prime minister told CTV News on July 12.

A US official, however, contradicted Carney’s account and said that neither loan interest nor depreciation would be included in the calculation. That view suggests fewer expenses to offset the revenue and, thus, a larger share for the US. The official spoke on condition they not be identified discussing private matters. (…)

Another memorandum of misunderstanding. A pattern? USA-Iran, USA-Canada, US Pentagon-Anthropic, US Pentagon-OpenAi, USA-Ukraine security arrangements.

• Xi Scores a Coveted Soft-Power Win Over Trump Pew survey shows people view China more positively than the US for the first time in almost 20 years.

Back in 2021, President Xi Jinping called on his underlings to create a “trustworthy, lovable and respectable” image for China.

This week, Xi received evidence that the mission is being accomplished, though he should give President Donald Trump an assist.

A survey by the Pew Research Center found that more people around the world view China more positively than the US for the first time in almost 20 years.

Even the US’s closest neighbors, Canada and Mexico, saw China in a better light. Younger people especially had a better vibe about the country. (…)

WANNA BET?

Americans are set to lose nearly $250B gambling this year, up more than 60% since 2019, and that’s before counting unofficial betting via prediction markets or crypto.

Joseph Politano via Barry Ritholtz

That’s an average of $925 per adult Americans before counting unofficial betting via prediction markets or crypto.

From a 2025 TransUnion survey:

• 26% of American adults participate in some form of online or land-based betting. That would be about 70M people. So the $925 average loss per adult American becomes $3,500 per betting American.
• GenZ (31%) and Millenials (35%) were the most active bettors while Boomers (17%) were the least.
• Roughly 20% bet more than $500 per month.
• “Of online bettors who deposit over $500 per month, 54% had a combination of good or excellent credit with high or middle income.” The other half …
• “Among those who deposit at least $500 per month for online betting activities, 40% said they were unlikely to meet all their financial obligations in full; 49% said they had been 90 days or more past due on a loan payment in the past year; and 44% said they had been contacted by a collection agency over the same period. These numbers were similar among the most active land-based bettors.”

“God rewards gamblers and fools. The crucial thing, when you win, is knowing which you were.” (Mark Twain)

Stanford Study Says Polymarket Crypto Bets Are Being Manipulated

Researchers at Stanford University identified signs that traders may be manipulating one of Polymarket’s most popular Bitcoin betting markets by briefly influencing the cryptocurrency’s price used to decide the wagers.

The working paper, co-authored with a researcher at Singapore Management University, examined about two months of five-minute Bitcoin bets on Polymarket. It found repeated bursts of one-sided trading on the Binance exchange that temporarily moved Bitcoin’s price in the final seconds before bets closed, benefiting traders positioned in the same direction.

The activity was heaviest at times when small, temporary moves in Bitcoin’s price could determine whether a bet paid out. The researchers described the pattern as a “transitory push to manipulate the spot price.”

Prediction markets have traditio nally been used to forecast elections and sporting events, where traders cannot easily influence the outcome. The researchers argue bets tied to financial assets are vulnerable to manipulation because participants can trade the very asset that determines whether they win or lose.

“These contracts have a structural vulnerability,” Singapore Management University assistant professor Shihao Yu, one of the paper’s authors, wrote in a LinkedIn post about the research. “They settle on a price that traders can move by trading the underlying asset itself.”

The findings come as exchanges expand prediction markets tied to financial assets. Cboe has begun rolling out products tied to stock indexes, while Nasdaq has sought approval for similar contracts, potentially extending the questions raised by the paper beyond crypto and Polymarket.

While the researchers document unusual Bitcoin trading around when Polymarket’s short-term Bitcoin bets settled, the paper does not prove that the trading necessarily came from Polymarket users who stood to gain from momentary moves in Bitcoin’s price. The research also stops short of proving traders’ intent but still presents evidence consistent with manipulation, according to Elton Shehdula, head of research at crypto analytics firm Allium.

“The pattern looks real to me,” Shehdula said. “The harder question is whether the traders pushing the price on Binance and the Polymarket wallets collecting the winnings are connected.”

Wanna bet on that?

  US troops to get testosterone treatment to make them strong Announcement from defence secretary Pete Hegseth comes amid focus on low sperm count and virility on American right

The Pentagon will offer testosterone treatment for US soldiers, in a programme announced by defence secretary Pete Hegseth to create a “High-T” fighting force.

The initiative is the latest step in Hegseth’s campaign to reshape the military around a “warrior ethos”, rolling back diversity initiatives while emphasising traditional masculinity, combat fitness and physical appearance.

Hegseth said the defence department would begin “a new screening programme for testosterone deficiency for our service members, ensuring you have the right testosterone levels to operate at your absolute best”.

Adequate testosterone levels would make soldiers “strong, resilient and capable”, keeping them on the “leading edge of lethality”.

Troops 30 years old and over would have their testosterone levels tested annually, while younger soldiers could opt in to the test, Hegseth said. (…)

“Have you seen all these studies that basically connect testosterone levels in young men with conservative politics?” Vance said on Rogan’s podcast days before the 2024 election. (…)