The World Is Burning Through Its Oil Safety Net Global oil inventories have fallen at a record pace during the Iran war

(…) In a report titled “The illusion of plenty,” JPMorgan Chase estimated that if the strait remains blocked, stockpiles in a group of wealthy nations could plunge to “operational stress levels” early next month and to system-straining “operational floor level” by September. The bank said it doesn’t expect inventories to actually reach those levels because history suggests demand would be curtailed first.

The implications of an oil supply shortage are vast. Prices at the gas pump are already touching their highest levels in years in the U.S. and could shoot higher when stocks run low. Airlines are reorganizing flights to adapt to potential shortages of jet fuel. Central bank decisions over whether to raise interest rates will depend in large part on whether oil markets remain well supplied.

The chief executive of Saudi Aramco, Saudi Arabia’s state-owned oil company, said this week that global stockpiles for refined products such as gasoline and jet fuel could reach “critically low levels” ahead of the summer driving and travel season. (…)

But releasing stocks isn’t the same as replacing supply. It shifts the shortage problem from today into the future, when governments and companies eventually will have to rebuild depleted reserves. The IEA estimates that replenishing the cumulative deficit, including strategic reserves, would require roughly an extra one million barrels a day of supply for three years.

As a result of the inventory depletion, U.S. stocks of diesel are likely to fall below 100 million barrels, the lowest level since 2003, by the end of May, according to consulting firm Eurasia Group. Even sharper declines are hitting Asia, the region most reliant on Persian Gulf exports before the war.

Based on current supply trends and domestic inventories, countries like India, Thailand and Taiwan are rapidly approaching critical scarcity levels of refined products such as naphtha, fuel oil and diesel, according to estimates by Goldman Sachs. (…)

Trump demonstrated his deep understanding of the situation to Fox News: “They need the Strait more than we need it open, we don’t, we don’t need it at all,”

Also, Hormuz is much more than oil.

• Hormuz Oil Flows Creep Higher as More Supertankers Exit

(…) Four ships each hauling 2 million barrels of mostly-Iraqi crude have exited since May 10 — a rate close to 2 million barrels a day — according to vessel tracking data compiled by Bloomberg. Still, prior to the war, there were about 20 or so tankers of various sizes crossing the waterway daily. (…)

Of the four supertankers that departed with their signals on, three loaded crude oil in Iraq. The other is carrying cargoes from the United Arab Emirates and Kuwait, the vessel tracking data show.

Iran said on Thursday that it is now allowing Chinese ships to pass the Strait of Hormuz following discussions with the country’s foreign ministry. (…)

From Windward:

Taken together, the developments indicate that significant portions of the Strait are increasingly functioning as controlled maritime operating zones shaped by covert staging, surveillance, selective transit management, and constrained export activity. (…)

Windward assesses that Iran is increasingly holding export tonnage in reserve while attempting to restore loading operations and manage outbound crude flows under blockade pressure. (…)

Windward assesses that northern Hormuz, eastern Hormuz, and Chabahar are increasingly functioning as protected holding and staging zones buffering Iranian export capacity under blockade conditions. (…)

Additional dark vessel transits were also observed operating inbound and outbound without AIS transmission.

Persistent sanctions evasion and staging activity also continued throughout the northern corridor. (…)

Windward assesses that widespread AIS suppression, EMCON behavior, and dark staging activity are increasingly reducing maritime transparency across Hormuz and complicating the distinction between commercial shipping, sanctions-evasion operations, and state-supported maritime activity.

Regional reporting during the period reinforced indications that Iran is increasingly shifting from attempted Strait closure toward controlled access management.

According to open-source reporting on May 12, Iraq and Pakistan reached separate arrangements with Iran to secure passage for crude oil and LNG cargoes through Hormuz under Iranian oversight. Iraqi officials reportedly coordinated transit approvals directly with Tehran for VLCC movements carrying Basrah crude, while Pakistan secured separate arrangements covering Qatari LNG cargoes.

Windward assesses that the emergence of bilateral transit-clearance arrangements reinforces broader indications that Iran is increasingly attempting to formalize operational influence over vessel movement through Hormuz while preserving selective energy flows under wartime conditions. (…)

Windward assesses that the Strait of Hormuz is increasingly operating less as a conventional commercial shipping corridor and more as a controlled maritime operating environment shaped by surveillance, staging, selective transit management, and constrained export logistics.

• UAE Tried in Vain to Get Saudis to Coordinate on Iran Response

The United Arab Emirates tried to persuade neighboring states including Saudi Arabia and Qatar to take part in a coordinated military response to Iran’s strikes and was left frustrated when they refused, according to people familiar with the matter.

UAE President Sheikh Mohammed bin Zayed held a series of calls with fellow leaders, including Saudi Crown Prince Mohammed bin Salman, shortly after the US and Israel began bombing Iran on Feb. 28, said the people, who asked not to be identified discussing private conversations.

MBZ, as the UAE president is known, was convinced of the need to retaliate as a group to deter Iran, the people said, as the Islamic Republic responded to US-Israeli attacks by firing hundreds of drones and missiles at Gulf countries. Tehran targeted ports and airports as well as residential towers and hotels across the region. Iran also all but closed the vital Strait of Hormuz, forcing Gulf states to curb oil and natural gas production and denting their finances.

While MBZ quickly opted to work with US President Donald Trump’s administration and the Israelis, his Gulf Arab counterparts told him this wasn’t their war, according to one person familiar with Abu Dhabi’s thinking. An already fractious relationship between the UAE and Saudi Arabia worsened as a result.

During the calls, the UAE President reminded his counterparts that the Gulf Cooperation Council, a six-country body, was founded in 1981 specifically because of threats posed to them by Iran’s Islamic revolution two years previously, the person said. (…)

The UAE, which established diplomatic relations with Israel as part of the US-brokered Abraham Accords in 2020, became the country most targeted by Iran during the war, which has been in a state of fragile ceasefire since April 8. (…)

Saudi Arabia also opted to strike Iran in March, according to other people familiar with the matter, who asked not to be named given the sensitivity of the matter. Riyadh then pivoted to getting Pakistan to mediate between the US and Iran, they said.

The UAE was frustrated it was not sufficiently consulted about the Pakistan-led diplomatic effort, one person said. Abu Dhabi refused to extend a $3 billion loan to Islamabad in early April, and Saudi Arabia subsequently stepped in to help the Asian nation repay some of the money.

Qatar considered retaliating after Iran hit Ras Laffan, the world’s largest LNG plant, in mid-March, according to a Gulf official. Doha ultimately decided against the move, favoring playing a role in de-escalation, the official said.

Bahrain and Kuwait, which generally act in lockstep with Saudi Arabia, opted to stay out of the conflict, according to a separate person familiar with the matter. Oman was never realistically likely to join given its closer ties to Iran, people with knowledge of the situation said.

Trump’s administration was aware of the UAE-led Gulf deliberations and wanted the Saudis and Qataris to join a coordinated military response, one person familiar with the matter said.

All three of those Gulf nations tried to dissuade Trump from starting the war, fearing that Iran would lash out against them and the US bases they host. In the previous few years, they worked to improve ties with Iran, hoping that would stabilize the region and boost investment in their economies.

  In the FT, not seen anywhere else:

Saudi Arabia floats Middle Eastern non-aggression pact with Iran

Saudi Arabia has discussed the idea of a non-aggression pact between Middle East states and Iran as part of talks with allies on how to manage regional tensions once the US-Israeli war with the Islamic republic ends, diplomats said.

Riyadh is eyeing as a potential model the 1970s Helsinki Process that eased tensions in Europe during the cold war, said two western diplomats, as the region anticipates a postwar Iran that is weakened but still poses a threat to its neighbours. They added that the non-aggression pact was among various ideas being considered.

Gulf states in particular have been concerned since the US and Israel launched the war against Iran that they would be left with a wounded, more hawkish Islamic regime on their doorstep once the conflict ends and the large American military presence in the region is scaled back. (…)

But the months of war have created a new sense of urgency among Arab and Muslim states to rethink their alliances and the region’s security apparatus.

Many European capitals, and the EU institutions, have swung behind the Saudi idea and have urged other Gulf countries to support it, the diplomats said. They view it as the best way to avoid future conflict and provide Tehran with guarantees that it also would not be attacked.

The US and Iran have been holding back-channel talks over a deal to end the war and reopen the Strait of Hormuz. But the negotiations have focused on the republic’s nuclear programme, not its missile and drone arsenal or support for regional proxies, which are key concerns of Arab states.

An Arab diplomat said that a non-aggression pact modelled along the lines of the Helsinki process would be welcomed by most Arab and Muslim states, as well as by Iran, which has long sought to project to the US and other western powers that the region should be left to manage its own affairs.

“It all depends who is in it — in the current climate you are not going to be able to get Iran and Israel . . . without Israel it could be counter-productive because after Iran, they are seen as the biggest source of conflict,” the diplomat said.

“But Iran is not going anywhere and this is why the Saudis are pushing it.” (…)

Some Arab and Muslim states have also become increasingly concerned about Israel’s military conduct in the wake of Hamas’s October 7, 2023 attack. Many do not have formal relations with Israel.

They blame Israeli Prime Minister Benjamin Netanyahu for dragging US President Donald Trump into a war they lobbied against. Israel is increasingly seen by many Arab and Muslim states as a belligerent, destabilising force as it continues to launch attacks against Hizbollah in Lebanon and Hamas in Gaza, while also occupying parts of southern Syria.

There are also divisions among Arab and Muslim states — particularly between Saudi Arabia and the United Arab Emirates, the Gulf’s two most influential states — over conflicting visions for the region and economic competition.

The UAE has been the most hawkish Gulf state towards Iran during the war, and has criticised Arab institutions for not being more robust in their response to the Iranian aggression. It has made clear that in the wake of the war, it intends to double down on its relations with Israel.

Two of the diplomats questioned whether the UAE would be willing to join any arrangement. Saudi Arabia and other Gulf states, meanwhile, have been more supportive of Pakistan-led mediation efforts to broker a deal between the US and Iran to end the war.

The kingdom is part of a burgeoning alignment with Pakistan — with which it signed a mutual defence pact in September — Turkey and Egypt. Diplomats say that while they do not have a formal alliance, the states are likely to deepen defence, foreign policy and economic co-operation in the wake of the war.

Pakistan’s defence minister Khawaja Asif said on Monday that Islamabad had developed a proposal for Qatar and Turkey to join the Saudi-Pakistani defence pact to build an “economic and defence alliance . . . that will minimise dependence outside the region”.

The idea of expanding the defence pact was first mooted before the war, a Pakistani official said.

Finally, a way out. That would be a big, big deal!

Japan Producer Prices Jump by Most Since 2014, Backing BOJ Hike

The measure of input prices for Japanese firms rose 2.3% from a month earlier and March’s increase was revised higher, the Bank of Japan reported Friday. That was a full point above the highest estimate in a Bloomberg survey of economists and marked the biggest jump since April 2014, when the sales tax was raised for the first time in nearly two decades.

Outside of that instance, it was the largest increase since 1980.

The gain was led by higher prices of oil and naphtha — a key petroleum product used to make plastics and rubbers — according to the bank. From a year earlier, producer prices advanced 4.9%, the biggest increase in three years and also exceeding all projections. (…)

US Retail Sales Rise for Third Month Despite Gas Price Surge

The value of retail purchases increased 0.5% last month after a revised 1.6% gain in March, Commerce Department data showed Thursday. Because the figures aren’t adjusted for inflation, an increase could reflect higher prices rather than more sales volumes. (…)

The report suggests higher-than-usual tax refunds and a stock-market rally helped provide a financial cushion against mounting inflationary pressures. However, it’s unclear how long that will sustain robust demand. Inflation-adjusted wages are declining once again and Americans are saving less.

“The powerful equity market rally is supporting spending on the upper leg of the K-shaped expansion, more than offsetting any pullback from those on the lower leg who are struggling with higher fuel, transportation, and food costs,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note.

So-called control-group sales — which feed into the government’s calculation of goods spending for quarterly gross domestic product — increased a larger-than-expected 0.5%. The measure excludes food services, auto dealers, building materials stores and gasoline stations. Outside of receipts at gas stations, sales rose 0.3%, the least in three months. (…)

The retail sales report showed spending at restaurants and bars, the only service-sector category in the retail report, rose 0.6%. Despite household budgets coming under pressure, the figure indicates solid demand for dining out.

Using my proxy for retail inflation (0.35 x CPI Durables + 0.65 x CPI Nondurables), retail inflation jumped 1.1% MoM in April after +2.1% in March.

That would mean real sales down 0.5% MoM in March and down 0.6% in April.

On a YoY basis, retail sales grew +4.9% in April after +4.2% in March but “retail inflation” was +5.3% in April and +4.0% in March.

Core retail sales in April increased by +6.4% YoY after +6.1% in March.

BTW:

Import prices ex-petroleum jumped 8.7% annualized in April to +2.9% YoY (vs +0.9% and +1.0% in 2024 and 2025 respectively). They are up 2.3% since December or +7.0% annualized. FYI, import prices do not include tariffs.

Bloomberg:

Yields on US Treasuries have risen every day this week, pushing the 10-year to 4.54%, the highest in about a year. Sovereign bonds, as measured by Bloomberg indexes, have handed investors losses for the year in the US, the UK, the euro area and Japan.

Everywhere, it’s a story of price pressures fed by the war, as shown in this week’s stronger-than-expected US inflation readings.

Traders increasingly are betting on Fed interest rate hikes to keep prices in check.

AI Buildout Drives 76% Power Bill Jump on Largest US Grid

The total cost of wholesale power on the 13-state grid managed by PJM Interconnection LLC averaged $136.53 per megawatt-hour in the first three months of the year, according to a report from Monitoring Analytics, the grid’s independent market monitor. That compares to $77.78 per megawatt-hour during the same period in 2025. (…)

The report said data center load included in the last two PJM capacity auctions increased customers’ bills by $13.8 billion. “The price impacts will be even larger in the near term unless the issues associated with data center load are addressed in a timely manner.”

PJM said in a statement that the rising prices were an accurate indication of supply and demand conditions in the wholesale market and that prices were functioning correctly. The grid operator said it was taking further measures to support consumers, including by extending capacity market price caps.

PJM serves 67 million people across eastern states from New Jersey to Illinois, where a large concentration of data centers in the US are located. The company has found itself at the center of a storm of criticism from politicians, consumers and utilities for rising prices.

ComEd, a unit of Exelon Corp and the largest energy utility in Illinois, on Thursday blamed surging supply costs on the PJM grid for rising customer bills. (…)

The company said the average residential customer bill would increase between $2 to $3 per month, as a result of a PJM capacity auction held last year.

Average demand in the first three months of 2026 increased by 3.1% in the first quarter compared to the same period last year, according to the data from Monitoring Analytics. Generation from natural gas units, the primary energy source in PJM, increased 4.2%, while generation from solar units increased 15%.

The Blockbuster Cerebras IPO Is a Huge Bet on Nvidia Fatigue Startup known for its big chips now has a giant valuation to live up to

The maker of monster-size chips just completed a monster-size IPO. Cerebras saw its shares soar 68% in its first day of trading on Thursday. And that was after pricing the offering at $185 a share, 48% above what the company originally thought it would get as recently as last week.

Cerebras now has a market cap of around $67 billion. That might look tame in an uber-hot market for chip stocks. But Cerebras is a small, unprofitable company that is also burning cash as it builds up a cloud-computing service using its own chips. Growing into its ambitious valuation against strong competitors like Nvidia will be a challenge and likely won’t go smoothly. (…)

The stock’s closing price on Thursday values the company around 134 times its revenue for the past four quarters. That is more than five times Nvidia’s multiple on the same metric.

If one assumed Cerebras could grow its revenue by 150% this year—double the growth rate from 2025—the company trades about 54 times forward sales. The most expensive stock on the PHLX Semiconductor Index trades around 41 times forward sales. Futurum analyst Shay Boloor says Cerebras could become one of the most credible challengers to Nvidia’s dominance, but added that the market “is already pricing in years of flawless growth” at the company’s current valuation.

That doesn’t tend to happen in the cyclical chip business. And Cerebras also needs to show it can diversify its business, as 86% of last year’s revenue came from two government-backed outfits in the United Arab Emirates.

Recent deals with OpenAI and Amazon are helpful, but will take time to fully kick in. Cerebras will recognize only about 15% of the $24.6 billion on its current revenue backlog over the next two years. And the chip-supply deal for Amazon’s AWS service won’t go into “full production” until next year, Feldman said. (…)

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)