Today:

• FOMC minutes.
• A key Treasury auction.
• Earnings: Nvidia, Target, Lowe’s, and TJX.

AI’s Macroeconomic Challenges and Promises

From the NY Fed:

In the third quarter of 2025, America’s largest tech firms for the first time spent more on capital investment than they earned from operations. The implication is that AI, a technology with the potential to make the economy more productive, is, for now, absorbing resources faster than it is generating returns. This post discusses how the tension between AI’s long-run promise and its short-run costs affects the outlooks for inflation, real activity, and financial stability. (…)

A widely held view is that AI, by raising productivity, will be a powerful disinflationary force. This view may ultimately prove correct, but it skips a crucial step. What matters for inflation is not whether AI raises productivity, but whether it raises productivity faster than it increases the costs of adopting it.

During the transition, firms divert substantial resources toward reorganization, data infrastructure, and integration, which can temporarily raise production costs even as the technological frontier expands. This is the so-called “productivity J-curve,” depicted in the figure below. (…)

Measured Productivity Can Fall During the Adoption Phase

Recent data suggest that AI-driven demand has been pushing prices up over the past two years, and those costs are now passing through to prices of consumer electronics. For example, the prices for memory chips are up substantially. A recent report indicates that energy consumption and prices are also being affected.

AI may shift the economy’s fundamentals: the level of potential output and the natural rate of interest. The critical question is whether AI generates a one-time level shift in productive capacity or a sustained acceleration in growth (see figure below). A level shift temporarily raises the natural interest rate during the transition before growth reverts to baseline, while a growth acceleration raises it permanently.

Faster AI Adoption Can Signal Either That the Economy Is Overheating or That It’s Catching Up to Its AI-Lifted Potential

To date, estimates of the productivity impact span both scenarios, from modest gains of a few percentage points of GDP over a decade to considerably larger effects if AI augments the innovation process itself. The range is wide and the uncertainty is compounded by countervailing forces, including a possible increase in market concentration and shifts in household saving and spending.

Concentration matters because AI adoption tends to be skewed toward large firms: if rents accrue to a handful of incumbents, the investment boom that lifts the neutral rate may prove narrower than aggregate figures suggest, and winner-take-all dynamics may also slow the diversity of research that sustains long-run growth.

On the household side, the fall in consumption among workers whose tasks AI displaces may be only partially offset by the gains of those it complements. If the latter tend to save a higher share of their earnings, aggregate consumption may be weaker than productivity figures alone would suggest.

Until recently, the major AI companies funded capital investment almost entirely from retained earnings, insulating the AI buildout from credit-market conditions.

That changed in late 2025: capital expenditures began to exceed operating cash flows, and the firms raised over $100 billion of new debt. Beneath those headline bond issues lies a more intricate layer—off-balance-sheet project finance vehicles funding data center construction, securitizations backed by lease cash flows, and hundreds of billions in forward lease commitments that will not appear on balance sheets for years.

Much of this debt is predicated on AI productivity returns that have not yet materialized. If expectations shift, the correction could travel quickly and widely: the same institutions—insurers, asset managers, pension funds—hold overlapping exposures across corporate bonds, securitizations, and private placements, so a broad repricing would hit them from multiple directions at once. (…)

The IT revolution of the 1900s offers a cautionary precedent. In the 1990s, Fed Chairman Alan Greenspan resisted calls to tighten prematurely, betting that IT was expanding the economy’s productive capacity. He was right. But the dot-com crash that followed showed that even when the supply-side narrative is broadly correct, expectations can generate asset-price dynamics that create independent financial stability risks. Getting the trend right did not protect against the bubble.

Today’s AI cycle features some of the same tensions as that episode—uncertain productivity effects, difficulty distinguishing supply from demand, and expectations-driven asset dynamics. But it is unfolding within a layered and leveraged financial system. As a result, the path toward an AI-driven high-productivity economy might prove to be a bumpy one.

Canada: Inflation climbs again in April, but the Bank of Canada can afford to wait

Inflation edged higher again in April, as the annual increase in prices climbed from 2.4% in March to 2.8%. However, the increase was well below economists’ consensus forecast of 3.1%.

As in March, the month-over-month increase in consumer prices was largely driven by higher energy prices amid the conflict in the Middle East. Part of the monthly increase in gasoline prices was offset by the temporary suspension of the federal fuel excise tax introduced mid-April, but energy prices still surged 19% annually, as the April 2025 removal of the carbon tax was pushed out of the year-over-year calculations.

Excluding energy, CPI fell from 2.3% in March to 1.8% in April. Meanwhile, food inflation, which is another closely watched category amid ongoing global supply chain disruptions, rose by just 0.05% month over month, a sharp slowdown from the 0.40% increase recorded in March. That said, food prices could still feel the delayed effects of the ongoing Middle East crisis, meaning it would be premature to conclude that inflationary pressures in this category have fully subsided.

Excluding food and energy, prices were also surprisingly low, as they remained unchanged monthly, resulting in only a 0.3% gain on a three-month annualized basis.

As for the measures favored by the Central Bank, they rose at a slightly faster pace—though not to an alarming extent—to 0.18% for the CPI-Median and 0.14% for the CPI-Trim. On an annualized three-month basis, they are growing at rates that are comfortable for the Central Bank, at 2.2% and 1.5%, respectively.

Since inflation in Canada was already well under control before the recent oil shock, we have argued that the Bank of Canada should look through the rise in energy prices and leave interest rates unchanged. This morning’s report reinforces that view.

Core inflation remains contained, pointing to an economy still operating with excess supply. It also reflects the continued easing in shelter costs. Indeed, a declining population combined with higher interest rates has triggered a correction in housing prices, particularly in the country’s least affordable markets. With vacancy rates increasing amid recent demographic trends, rent prices have been the biggest driver of this slowdown.

In this context, and given that the labour market registered its worst start of the year since 2009 (excluding the pandemic), we believe that the risk of second-round effects (wage-push inflation) from the surge in energy prices is limited.

True, the conflict is still not resolved, and energy prices are on track to rise again in May, meaning that annual inflation has likely not peaked yet. But interest rates already appear far from accommodative in an environment characterized by geopolitical uncertainty and ongoing trade tensions with Washington. Overall, current conditions argue for a patient approach from the Bank of Canada.

• April Headline CPI YoY: Canada +2.8%, USA +3.8%
• April Core CPI: Canada +1.5%, USA +2.7%

Same Shock, Different Roads? A K‑Shaped Pattern at the Pump

(…) with the sharp increases in gasoline prices in March, a K-shaped pattern in gasoline consumption emerged—showing faster consumption growth for high-income households relative to low-income households. These gasoline consumption patterns qualitatively match those following the increase in energy prices at the beginning of the Russia-Ukraine war in spring 2022, even though the gap in consumption trends during the current episode is quantitatively larger. (…)

The left panel of the chart below shows nominal gasoline spending rose by over 15 percent in Numerator in March 2026, going from being 10 percent below the 2023 level to being 5.5 percent above. This increase was driven by the rising price of gasoline as real gasoline consumption fell 3 percent (right panel). MARTS recorded a similar increase in gasoline station spending for March 2026 (14.5 percent). (…)

Low-income households increased their nominal gas spending by the least (12 percent). However, this was accomplished because they cut their real gas consumption the most (7 percent). On the other hand, high-income households increased their nominal gas spending by the most (19 percent) in a large part because they reduced their real gas consumption the least (1 percent). Middle-income households had intermediate increases in nominal spending and decreases in real consumption at gas stations.

Thus, the K-shaped consumption pattern in both nominal and real gasoline spending was strongly evident in March 2026. (…)

With the current energy price shock, a K-shaped pattern in gasoline consumption has opened up much more than before. Higher-income households have reduced real gas consumption only modestly and increased gasoline spending considerably compared with 2023. In contrast, lower-income households increased spending by much less and decreased real consumption by much more, potentially by carpooling or substituting to public transit where available.

• Surging fuel costs risk creating new split in the eurozone

(…) The oil price shock has quickly filtered through to households. Filling up has become noticeably more expensive across the eurozone, albeit to very different degrees. Compared with the week before the joint US‑Israeli strike on Iran, the price of a 50-litre tank of unleaded petrol has risen by an average of between €5.00 in Spain and €13.50 in Germany. For diesel, the average increase has been even steeper, ranging from €15.65 in Italy to €23.00 in the Netherlands.

The biggest differences across eurozone countries were seen in late March and early April, coinciding with the spike in oil prices. Some of these gaps have since narrowed, partly due to temporary fiscal measures in several eurozone countries.

If fuel prices were to remain at current levels for the rest of the year, annual fuel expenses would rise by roughly €70 in Italy and up to €280 for petrol in the Netherlands compared to last year. For diesel, the additional burden would range from €190 to €430. And for those still remembering the 2022 energy price shock: annual fuel expenses (in nominal terms) in the eurozone would be between 2% (Austria) and 15% (the Netherlands) higher than in 2022.

While this increase in fuel prices alone could undermine private consumption, it will do so more unevenly than many might think.

Across the eurozone, the share of disposable income spent on fuel differs markedly. Last year, households in Italy spent around 4.0% of their disposable income on fuel, compared with 6.2% in Portugal. Interestingly, this gap does not reflect cheaper fuel in Italy. On the contrary, with higher taxes, fuel prices there are at the higher end of the scale in the eurozone. The gap instead points to differences in driving habits, with Italians driving relatively few kilometres per year, and lower income levels in Portugal limiting the ability to absorb higher costs.

The increase in fuel prices so far, excluding any additional fiscal measures, is likely to widen the difference between eurozone countries in the share of disposable income spent on fuel. In the Netherlands, the sharpest absolute rise in fuel costs is pushing households to spend a much larger share of their disposable income on fuel than a year ago. Germany, France, and Austria, where people tend to drive more, are likely to face greater additional financial burdens as well, while Italy and Spain should see a more moderate increase. In Spain, the temporary reduction in the VAT rate on fuel from 21% to 10% dampens the price effect. In Italy, the below-average mileage is providing some relief.

Share of annual disposable income per capita spent on fuel

(…) higher prices at the pump are more likely to hit consumption elsewhere than behaviour. As a result, higher fuel costs are likely to increasingly crowd out discretionary spending. (…)

According to the latest European Commission survey, willingness to spend has dropped sharply in Germany and Austria – countries where disposable income is set to be among the hardest hit by rising fuel costs. Here, willingness to spend is also well below the long-term average.

Italy and Spain have also seen a decline, but spending intentions remain above their long-term averages. In France and Portugal, consumer appetite has so far held up relatively well – possibly because households there are already used to allocating a larger share of income to fuel.

Higher fuel prices are not only an energy story in the eurozone. They are quickly turning into a consumption story, and an increasingly asymmetric one. As households across the eurozone are forced to spend more at the pump, cutting down on other discretionary spending will diverge sharply across countries.

China, U.S. Reach Limited Trade Agreements on Boeing Jets, Beef Imports China’s commerce ministry said it hopes the U.S. will further eliminate unilateral tariffs in future trade talks

China agreed to purchase 200 Boeing jets and resume imports of some U.S. beef products, marking one of the clearest signs yet of easing trade tensions following last week’s summit between President Trump and Chinese leader Xi Jinping.

China’s Commerce Ministry said trade teams from the two countries held in-depth discussions on tariffs last week and made arrangements regarding bilateral tariffs measures, according to an official statement released Wednesday.

The ministry said it hopes the U.S. will honor its commitments and ensure tariff levels on Chinese goods do not exceed those agreed at the October meeting in Kuala Lumpur. It also said it hopes the U.S. will further eliminate unilateral tariffs on China in future trade talks.

Both countries agreed in principle to discuss a framework for reciprocal tariff reductions on products of equivalent value under a trade council mechanism, with each side covering goods worth at least US$30 billion.

According to the ministry, products agreed upon by both sides could eventually be subject to most-favored-nation tariff rates or lower.

If the two countries cut tariffs on roughly $30 billion worth of products, it would cover about 10% of U.S. imports from China, said Zhiwei Zhang, economist at Pinpoint Asset Management. That wouldn’t be significant enough to change the market’s China growth forecast, but it’s is a positive step in the right direction, Zhang said.

“As long as the two countries are talking to stabilize the bilateral relations, it is good news for global investors.” Zhang said. (…)

On rare earths, the ministry said trade teams from both countries had extensive discussions on export-control issues and would jointly study and address each other’s legitimate concerns. It reiterated that the Chinese government imposes export controls on key minerals such as rare earths in accordance with laws and regulations, and reviews compliant, civilian-use export permit applications.

Bloomberg explains:

The ministry’s comments are a reason for cautious optimism that the one-year cessation in trade hostilities clinched by Chinese leader Xi Jinping and President Donald Trump will remain in place.

The ministry’s statement signals Beijing would accept US tariffs provided they do not exceed the level agreed in Malaysia that brought the effective rate to about 30%. That was later reduced to an estimated 21% after some tariffs were struck down by the Supreme Court.

The Trump administration has sought new Section 301 investigations to return levies to the level before the court ruling. Treasury Secretary Scott Bessent has said those tariffs may be restored by July.

The ministry also said the US should further remove unilateral tariffs upon follow-up talks to “create favorable conditions for expanding economic and trade cooperation.”

• Xi and Putin Hail Partnership While Signing Pacts to Deepen Ties

Xi welcomed Putin on Tiananmen Square at the start of their summit, giving him the same treatment received days earlier by Trump. A 21-gun salute rang out as a military band played their two national anthems, while dozens of children holding Russian and Chinese flags greeted them and shouted, “Welcome, welcome.” (…)

Calling Xi a “dear friend,” Putin said Russia remains a reliable supplier of energy to China. “In the current tense situation on the international stage, our close cooperation is especially needed,” he said.

Chinese President Xi Jinping and his Russian counterpart Vladimir Putin praised the strength of their relationship during talks in Beijing as both countries seek to reinforce bilateral ties in the shadow of wars in Ukraine and Iran.

The two leaders signed a pact on deepening strategic cooperation on Wednesday before looking on as officials from both nations inked a series of other documents on topics ranging from trade and technology to railway construction. Putin said approximately 40 agreements had been reached during the visit, even as they didn’t mention a key gas pipeline project. (…)

Topics on the agenda at the talks between Russia and China included the planned Power of Siberia 2 pipeline, the Kremlin said earlier, though neither leader mentioned the project in remarks while signing agreements. (…)

The Chinese president said earlier that both sides are working on deepening political trust and strategic coordination. (…)

“A comprehensive ceasefire is imperative, restarting war is even more unacceptable, and adhering to negotiations is particularly important,” Xi said in Beijing.

Yesterday:

• Trump Threatens Iran With ‘Big Hit’ If There’s No Deal Soon

(…) “I hope we don’t have to do the war, but we may have to give them another big hit,” Trump told reporters on Tuesday. When asked how long he would wait, he said: “Well, I mean, I’m saying two or three days, maybe Friday, Saturday, Sunday. Something maybe early next week — a limited period of time.” (…)

The FT adds:

Xi told Putin that the crisis in the Gulf was at a “critical juncture” and reiterated calls to end the fighting and stabilise energy supplies and trade, according to comments published by Chinese state news agency Xinhua.

“Unilateralism and hegemonism are deeply harmful, and the world faces the danger of regressing back to the law of the jungle,” Xi said in a veiled criticism of the US.

More practically, the FT’s Martin Wolf reminds us:

First came the war. Then came the blockade. Now come the shortages. The tankers full of essential commodities — oil, liquid natural gas, urea, refined oil products, hydrogen, helium and so forth — have not sailed through the Strait of Hormuz since the end of February. Those that left before the closure have mostly arrived. From now on, the shipments that did not leave will increasingly be missed.

As inventories are also drawn down, we will move into an era of physical shortages.

Up to now, shortages have been mostly imaginary. Now they will become real. They must be managed, ultimately by suppressing demand. The latter in turn will require some combination of rationing and recession. A blend of higher prices with tighter monetary policy could deliver both. The longer the strait remains closed and the bigger the physical damage, the longer shortages will remain and the worse their impact.

(…) the main shortages now are in jet fuel and diesel. Given these product-specific realities, the US is not self-sufficient in oil. (…)

Finally, the shortages are far from limited to energy. Also affected are supplies of helium, naphtha, methanol, phosphates, urea, ammonia and sulphur. The reduction in supply of helium damages production of microchips. The reduction in supply of commodities essential to making artificial fertilisers will reduce global food production. There is also a negative impact on world shipping, since the longer routes are more expensive. (…)

The US called its war “Operation Epic Fury”. But “Operation Epic Folly” would have been a more realistic name.

Martin should have expanded on how shortages of sulphur would be critically harmful:

The primary industrial use of sulfur is the production of sulfuric acid, the world’s most widely used industrial chemical.

• It is primarily used to dissolve phosphate rock to produce soluble phosphate fertilizers. Sulfur itself is also a vital plant nutrient required for crop protein synthesis. Fertilizer plants face immediate raw material deficits. This causes global price spikes for key agricultural inputs like urea and phosphate. Without accessible sulfur-based fertilizers, farmers worldwide are forced to scale back usage.
• Sulfuric acid is the primary agent used in ore leaching to extract and purify critical minerals like copper, nickel, cobalt, and lithium. Production of high-performance Lithium-ion batteries depends on cobalt, lithium, and High-Pressure Acid Leaching (HPAL) of nickel. A sulfur crunch could stall electric vehicle supply chains. Roughly 20% of the world’s copper supply relies on sulfur-dependent extraction. Shortages instantly inflate processing costs, threatening the rollout of electrical grids and renewable energy infrastructure.
• It serves as a vital component in semiconductor chip manufacturing (used for cleaning and cooling chips), the production of lead-acid batteries, rubber vulcanization (tires), and the synthesis of pharmaceuticals. A supply deficit slows down microprocessor fabrication lines. This ripple effect limits the manufacturing capacity for everyday essentials, ranging from smartphones and medical devices to automotive computer systems.

The issue is not price, it’s the physical availability.

• EU explores fertiliser stockpiling as food crisis looms

The European Commission said it would assess “preparedness options for key fertilisers”, including requiring member states to have seasonal or minimum stocks, and potentially putting in place joint procurement of fertilisers and their components.

The measure is one of several moves by the Commission to tackle the high prices of crop nutrients and secure supplies, in a package unveiled on Tuesday.

Presenting the plan, commissioner for agriculture Christophe Hansen said: “Food security starts with fertiliser security. Europe must produce more and depend less on others for the nutrients that sustain our agriculture.”

Before the war, as much as a third of globally traded fertilisers transited through the Strait of Hormuz, leaving food supply chains exposed to disruption from the US-Israeli war against Iran.

Nitrogen-based fertiliser prices last month were approximately 70 per cent above their 2024 average. Gas accounts for as much as 80 per cent of their costs. (…)

The proposal comes amid a broader shift towards strategic stockpiling of food and agricultural inputs, as governments increasingly treat supply chains as a national security issue after successive shocks from the pandemic, the Ukraine war and Middle East tensions exposed vulnerabilities in global trade. (…)

Hoarding is going broad and global.

Samsung Faces Chip Plant Strike That Threatens Global Supply

Talks between Samsung Electronics Co. and its largest labor union broke down, raising the prospect of a strike that may disrupt global chip supply and hamper an important engine of Korean economic growth.

A general work stoppage will go ahead on Thursday after Samsung’s management rejected a proposal from government mediators that had been accepted by the union, labor leader Choi Seung-ho told reporters. Hours later, South Korean labor minister Kim Young-hoon called for direct negotiations between the two sides, though it’s unclear whether even that intervention could resolve their differences. (…)

The collapse in negotiations puts the global technology supply chain at risk because Samsung is the world’s biggest supplier of the chips that go into devices from data center servers to smartphones and electric vehicles. The global AI infrastructure rollout has enriched South Korean companies on a scale not seen before, putting Samsung on track to become one of the world’s most profitable firms this year. Its semiconductor arm posted a 48-fold jump in profit for the March quarter.

More Koreans are demanding a greater share of those earnings after SK Hynix Inc. agreed last year to allocate 10% of annual operating profit to a performance bonus pool. Samsung’s lingering labor dispute, which puts the company at risk of production delays and complications accelerating development of its next-generation semiconductors, is being closely watched by other firms. On Wednesday, a union at Korean internet company Kakao Corp. said some of its members agreed to strike following failed wage negotiations, Yonhap reported. (…)

The union wants Samsung to scrap an existing bonus cap, allocate 15% of its operating profit to worker bonuses and formalize those terms in employment contracts.

Samsung had proposed allocating 10% of operating profit to bonuses, along with a one-time special compensation package that exceeds industry standards. Samsung executives argued that the union’s demands would be difficult to sustain over the long term. (…)

The government has previously hinted that it could resort to rarely used emergency powers to prevent a strike if the parties fail to reach an agreement. South Korea has invoked the emergency arbitration mechanism only four times since 1969. The last time was in 2005, when Korean Air pilots went on strike.

The Bank of Korea forecast that the strike could lead to as big as a 0.5 percentage point cut in Korea’s GDP growth this year, local media reported. (…)

Trump Says Planned Iran Attack On Hold After Gulf Leaders’ Request

President Trump said he would hold off on a planned U.S. attack on Iran at the request of Gulf leaders to make room for negotiations with Tehran over a prospective deal to end the war.

In a social-media post on Monday, Trump said he had directed Defense Secretary Pete Hegseth and other U.S. military officials not to proceed with the attack, which he said was scheduled to take place on Tuesday. But he warned that he had “further instructed them to be prepared to go forward with a full, large-scale assault of Iran, on a moment’s notice, in the event that an acceptable Deal is not reached.”

The president said the leaders of Qatar, Saudi Arabia and the United Arab Emirates asked him to hold off on the attack because “serious negotiations are now taking place.” (…)

Several Gulf officials from some of the countries Trump mentioned said they were not aware of the imminent plan to attack Iran he described. (…)

Trump has argued that the U.S. blockade of Iranian ports, and the broader economic pressure campaign officials have called “Operation Economic Fury,” will leave Tehran with few options. “It’s just a question of time, we don’t have to rush anything,” he said last week. “We have a blockade, which gives them no money, allows them no money.”

Since the naval blockade began on April 13, the U.S. military has diverted at least 85 ships and disabled four others, according to U.S. Central Command.

From Windward:

Two developments across May 17 and May 18 define the phase change: Iran’s move to formalize a sovereign transit-toll regime under the Persian Gulf Strait Authority, and the first observed coordinated bilateral cluster transit, conducted by six India-flagged vessels under operational assurances from Tehran.

Together, they signal a strategic pivot. Iran is moving from kinetic disruption toward administrative control of the chokepoint, while simultaneously carving out bilateral lanes for non-Western tonnage. The result is a bifurcating Strait, with dark and gray fleets and BRICS-aligned vessels absorbing the premiums of the new toll regime, and Western-aligned tonnage either frozen out, escorted, or exposed to interdiction.

The chokepoint is now being governed administratively, with bilateral carve-outs for selected partners and coercive interdiction held in reserve for everyone else.

The bifurcation is operational, not theoretical. Dark and gray fleets and BRICS-aligned tonnage are positioned to absorb toll premiums and continue moving. Western-aligned tonnage faces a compounding compliance dilemma: payment exposes vessels to OFAC secondary-sanctions risk, while non-payment exposes them to IRGC interdiction. Continuous naval escort is the only remaining alternative, and the volume of qualifying tonnage that can realistically be escorted is limited.

It now seems that Trump learns of “serious negotiations” from some GCCs, not from the US “negotiators” (Witkoff and Kushner). Pakistan?

Bloomberg adds:

(…) The US delayed the strikes “for a little while, hopefully maybe forever,” because “we’ve had very big discussions with Iran, and we’ll see what they amount to,” Trump said at the White House on Monday evening. (…)

“In their opinion, as Great Leaders and Allies, a Deal will be made, which will be very acceptable to the United States of America, as well as all Countries in the Middle East,” Trump posted on Truth Social, referring to Saudi Crown Prince Mohammed bin Salman, UAE President Sheikh Mohamed bin Zayed, and Qatari Emir Sheikh Tamim bin Hamad. (…)

There was no immediate confirmation from Tehran of renewed talks. (…)

Pakistan has been the main mediator, but the two sides haven’t met for talks since discussions in Islamabad around five weeks ago that ended without a deal. (…)

Iran’s semi-official Tasnim news agency said earlier on Monday the US had offered to lift sanctions on the sale of Iranian oil until a final deal is reached, as part of a new proposal to end the deadlock. A US official who requested anonymity due to the sensitivity of the matter said the story was false, but didn’t elaborate.

The FT:

Speaking at an event later on Monday afternoon, Trump clarified that he had been asked by the three Gulf states “and some others” to delay military action “for two or three days, because they think that they are getting very close to making a deal”. (…)

The US president was expected to meet his senior national security advisers on Tuesday to discuss options for resuming the war, Axios reported.

The Globe & Mail at 6:15 this am citing Reuters::

Tehran’s latest peace proposal to the United States involves ending hostilities on all fronts including Lebanon, the exit of U.S. forces from areas close to Iran, and reparations for destruction caused by the U.S.-Israeli war, state media reported on Tuesday.

In Tehran’s first comments on the proposal, Deputy Foreign Minister Kazem Gharibabadi said Tehran also sought the lifting of sanctions, the release of frozen funds and an end to the U.S. marine blockade on the country, according to IRNA news agency.

The terms as described in the Iranian reports appeared little changed from Iran’s previous offer, which U.S. President Donald Trump rejected last week as “garbage.” (…)

A Pakistani source confirmed that Islamabad, which has conveyed messages between the sides since hosting the only round of peace talks last month, had shared the Iranian proposal with Washington.

The sides “keep changing their goalposts,” the Pakistani source said, adding: “We don’t have much time.”

Although neither side has publicly disclosed any concessions in negotiations that have been stalled for a month, a senior Iranian official suggested on Monday that Washington may be softening some of its demands.

If it were not so serious, it would be totally comical.

NY Fed’s HOUSEHOLD SPENDING SURVEY

• Year-ahead earnings growth expected at 2.7%.
• 1-year inflation expectations up from 3.0% in February to 3.4% in April and to 3.6% in May.
• Yet, expected household spending growth over the next twelve months was unchanged at 3.4% in April. Spending on essentials is seen up 5.1% vs non-essentials up 1.8% vs 1.4% in December.
• The expected response to income loss: 72.6% would reduce spending, up from 70.2% in December and 68.9% in August 2025.

Goldman Sachs has mapped out its expected trends in real income and cash flow (including income tax refunds). Even with a subdued inflation scenario, spending capacity is shrinking. “We expect monthly core CPI increases around 0.2% over the next couple of months, though risks are tilted to the upside if disruptions to oil markets and associated oil price increases prove more persistent than expected.” YoY inflation would thus stay below 3.0%. My own and Dateline’s Gundlach is closer to 4.0%.

Real income softness ahead for the US

• Buy Now, Pay Later in U.S. Shopping

Ten percent of Americans report using installment plans frequently when making purchases online, and another 17% use them occasionally. A total of 51% have used installment plans for online purchases, while 48% say they never have.

Lower-income Americans (those with annual household incomes under $48,000) are more likely to frequently or occasionally use installment payments (37%) than middle-income (between $48,000 and $89,999) and higher-income (at least $90,000) Americans are (29% and 21%, respectively).

Business Leaders Survey Covering service firms in New York, northern New Jersey, and southwestern Connecticut

 

 

AI CORNER

Powering Up Europe (Goldman Sachs)

Last week, National Grid – the Transmission Operator in the UK – stated it is preparing the Grid for up to 10 GW of datacenters demand that could be connected to the power grid by 2031; this scenario would boost UK consumption by up to +25%. As a reference, currently the UK market is c.3 GW and the European market c.15 GW. The UK alone could therefore boost Europe’s installed base by around +65%.

Europe could reach 60-75 GW of DC capacity by 2035, depending on the adoption rates of AI Agents, which are – presently – 50x more energy-intensive than AI Chatbots. We believe that, as of 2029, the roll-out of DCs could boost power consumption in Europe by at least 1%-1.5% per year.

Following a second energy crisis in less than five years, Europe is increasingly pivoting its energy policy towards energy security and electrification. Together with rising AI adoption rates and the continued datacenter build-out, this should drive materially higher power consumption; our hyper-electrification scenario – which suggests merely that the National Energy Plans run-rates will be met by the end of the decade – points to +5% power demand growth pa by 2029-30.

On our estimates, this would drive €3.5 trn of investment needs in power generation (largely renewables) and power grids, which would support high-single-digit/low-double-digit earnings growth well into the 2030s for most Electrification Compounders, at attractive returns.

• Americans Oppose AI Data Centers in Their Area

Seven in 10 Americans oppose constructing data centers for artificial intelligence in their local area, including nearly half, 48%, who are strongly opposed. Barely a quarter favor these projects, with 7% strongly in favor. (…)

Half of opponents mention data centers’ excessive use of resources, including 18% each mentioning their use of water and energy. Sixteen percent mention a related environmental concern of pollution, including noise pollution and air and water pollution.

About one in five opponents are concerned with the impact on local quality of life, including increased population, increased traffic and preferring that the land be used for other purposes. A similar share mention potentially negative economic consequences, including higher utility bills, cost-of-living increases, and the cost of building the data centers (which could involve the use of taxpayer funds).

Most of the remaining opposition stems from general or specific concerns about artificial intelligence.

Majorities of all major demographic groups, including all party groups, say they would oppose having a data center built where they live. However, Democrats are much more likely than Republicans to be strongly opposed, 56% vs. 39%, with independents between the two at 48%. (…)

Majorities of all major demographic groups, including all party groups, say they would oppose having a data center built where they live. However, Democrats are much more likely than Republicans to be strongly opposed, 56% vs. 39%, with independents between the two at 48%.

In the same March survey, 53% of Americans say they oppose building a nuclear energy plant in their area, far less than the 71% opposed to data center construction. Since Gallup first asked the nuclear power plant question in 2001, the high point in opposition has been 63%.

Today’s WSJ turns this into a rebellion!:

• The American Rebellion Against AI Is Gaining Steam Booed commencement speakers, blocked data centers, plummeting poll numbers: Fast-growing industry has a faster-growing crisis

Delivering a commencement address at the University of Arizona, Schmidt told students the “technological transformation” wrought by artificial intelligence will be “larger, faster and more consequential than what came before.” Like some other graduation speakers mentioning AI, Schmidt was met with a chorus of boos.

In one poll after another in recent weeks, respondents have overwhelmingly voiced concerns about AI, a challenge to claims by industry executives that their technology would gain popularity by improving people’s lives.

Consumers resent energy-price jumps exacerbated by the spread of data centers. Workers fear widespread job losses. Parents worry about AI undermining education and harming children’s mental health. In recent months, the wave of anger has brought protests, swayed election results and spurred isolated acts of violence.

In April, a 20-year-old Texas man allegedly threw a Molotov cocktail at OpenAI Chief Executive Sam Altman’s home and made threats at the company’s San Francisco headquarters, according to a federal complaint filed against him. A few days earlier, someone fired 13 shots at the front door of an Indianapolis councilman who had recently approved a data center. (…)

Pollsters and historians say the souring of public opinion is all but unprecedented in its speed. “I don’t think I’ve ever seen something intensify this quickly,” Gregory Ferenstein, who conducted a recent poll with researchers at Stanford University and the University of California, Berkeley, said of the backlash.

The poll showed about 30% of Democrats think America should accelerate AI innovation as quickly as possible, compared with roughly half of Republicans and 77% of tech founders. (…)

Voters in Festus, Mo., ousted four city council members a week after they approved a $6 billion data center. Dozens of communities in states from Maine to Arizona are trying to ban new data centers. Some 360,000 Americans are in Facebook groups opposed to the facilities, roughly quadruple the number from December, figures from organizations fighting the AI build-out show.

(…) for AI companies and builders of the data centers that serve them, it is creating an acute crisis. Investors have staked tens of billions of dollars in capital on the ability of OpenAI, Anthropic and other companies to get access to ever-larger quantities of computing power, and they in turn have pledged much of that capital to fund data-center construction. (…)

Local opposition blocked or delayed at least 48 projects valued at some $156 billion last year, according to Data Center Watch, an organization tracking the trend. A record of 20 were canceled in the first quarter of the year because of local backlash, figures from climate-media outlet and data provider Heatmap show. Dozens more are currently facing similar obstacles on top of obstructions because of permitting snafus and equipment shortages.

On Monday, Texas Agriculture Commissioner Sid Miller called for a moratorium on new hyperscale data-center development in the state, citing concerns about the costs to farmers and strain on the power grid. (…)

A string of high-profile layoff announcements in which executives have attributed steep job cuts to AI have furthered Americans’ mistrust of the technology.

Dylan Patel, CEO of AI-infrastructure consulting firm SemiAnalysis, recently predicted there would be large-scale protests against OpenAI and Anthropic within a few months. “People hate AI. AI is less popular than [Immigration and Customs Enforcement]. AI is less popular than politicians,” he said on a podcast. (…)

Data centers built for training can be remote but inference requires local DCs to reduce latency to a minimum (e.g. autonomous driving, delivery drones, etc.).

Nvidia’s most recent chip architectures reduce DC footprint and energy needs by 30% but Jevons Paradox is very much in play here: as a resource becomes more efficient to use, we don’t use less of it; we use vastly more.

• The explosion of agentic AI and compute shortages are pushing up prices: Average LLM token costs are now $2.12/mil tokens,+12% this week alone and +65% since end of Feb. (@LizThomasStrat)

Anthropic Sends Jolt Through Market for Buying Shares in Hot Pre-IPO Startups

In the moments after Anthropic expanded a ban on popular ways to buy its shares, investor chatrooms around the world lit up.

“Are we screwed?” one person wrote in a WhatsApp chat for family offices with several hundred members. Similar questions reverberated more publicly across X, Reddit and Chinese-language social media, as investors worried whether their shares in the artificial intelligence developer — one of the most coveted private companies — had suddenly become worthless.

Days later, there is little clarity. Anthropic PBC issued a stern warning on its website last week about unauthorized sales, taking the unusual step of naming eight firms whose offerings would be considered void. It also expressly prohibited investors from buying shares through special purpose vehicles, a common tool to raise financing.

Both Anthropic and rival OpenAI have long warned against unauthorized transactions — fine print overlooked by eager buyers until last week when the Claude maker removed any ambiguity. Publicly traded funds touting exposure have plunged on the back of the update and private brokers are reeling.

Sim Desai, founder of Hiive, one of the secondary trading platforms called out by Anthropic, said his company only facilitated deals that had Anthropic’s approval. Sohail Prasad, whose closed-end fund has lost about 25% of its share value in the intervening days, was adamant on X that his fund’s Anthropic holdings were valid.

“Anthropic threw a bomb into the market,” said Idan Miller, who runs Unicorns Exchange, another platform named by Anthropic. “We were unfortunately involved in a really bad and unjust way.” (…)

The crackdown “marks the beginning of a reckoning over our modern private markets,” wrote Anat Alon-Beck, a law professor who specializes in corporate governance at pre-IPO companies at Case Western Reserve University. “It raises questions like, who actually owns what? Who bears the risk when shadow ownership structures collapse? Should trillion-dollar private companies continue to operate outside the disclosure framework that governs other big companies?” (…)

Both OpenAI and Anthropic have greenlit some secondary transactions, primarily through tender offers, where early employees and investors can sell stakes. (…)

As secondary sales grew, so did SPVs, now a standard part of financing for many pre-IPO companies and a way for smaller investors to buy in. (…)

But as funding rounds have grown, SPVs have become complicated and murky, with little end clarity for the buyer and reduced transparency for the startup.

“Anthropic does and should have the right to control its cap table and shareholder base,” said Matt Murphy, the Menlo partner who led the firm’s investment. He said his firm didn’t use the kind of SPVs banned by Anthropic.

“Unauthorized SPVs are not in the company’s best interest and can often be downright shady,” he said. “Buyer beware.”

In one recent email pitch reviewed by Bloomberg News, a broker for the “Family Office Network” in Dubai offered would-be buyers a block of Anthropic shares at a $1.2 trillion valuation through an SPV for a 10% cut. It was a “layered” vehicle, meaning that the vehicle being sold by the broker is invested into yet another SPV that claims to own shares.

“Need to wire funds by Monday,” the message read. (…)

“Anthropic said the SPVs are void, not voidable, meaning it was never valid to begin with,” said Alon Kapen, partner at law firm Farrell Fritz. “That essentially means these investors in the SPVs don’t have a claim against Anthropic.”
Many SPV investors bought interest in “an empty box,” he added. (…)

Two closed-end funds that disclosed holdings in Anthropic and OpenAI through SPVs, Fundrise Innovation Fund LLC and Destiny Tech100 Inc., fell about 29% and 33% since the Anthropic update. (…)

Justin Taylor, a London-based family office adviser, said the mad rush to buy into Anthropic, OpenAI and SpaceX means investors have skimped on due diligence process and missed the fine print on terms. (…)

In the family office chat about whether holders of Anthropic SPVs were hosed, one person offered a curt reply: “Ask Claude.”

Not totally unrelated:

Fear the greed!

China’s two-wheelers ride EV wave into Europe

Yadea, the world’s largest producer of battery-powered scooters and motorcycles, has enjoyed a sales surge across south-east Asia and South America since the conflict began. The group’s overseas sales this year are tracking about 70 per cent higher than 2025.

“The volume is rising in all these places,” Yadea’s senior vice-president Wang Jiazhong told the FT at its headquarters in Wuxi, eastern China. “Customers are asking if we can advance their orders — I need to speed up the shipments.”

Higher oil prices stemming from the closure of the Strait of Hormuz have also prompted the Hong Kong-listed group to accelerate expansion efforts in the UK and Europe, targeting cities such as London and Paris. (…)

In March the group said it was targeting overseas sales of 450,000 vehicles this year, up from 310,000. It plans to add as many as 10,000 sales points overseas in 2026, adding to its 3,700 sites.

This may only be the tip of the iceberg. Battery-powered vehicles accounted for about 15 per cent of the global two-wheeler market last year, according to International Council on Clean Transportation data, highlighting the massive potential for global growth. (…)

Yadea has six factories in China, where it has now sold about 100mn two-wheelers, as well as plants in Vietnam, Indonesia, Thailand, Turkey, Brazil and Mexico.

Wang said manufacturing in or near key foreign markets was necessary to avoid tariffs on Chinese exports. Yadea plans to build a factory in Hungary “as European demand increases”. (…)

Like battery maker CATL and EV giant BYD, Yadea was among the companies that pivoted early to Beijing’s supportive policies for transport electrification. There are about 300mn electric scooters in China, which Wang said averaged between 1.5 and 2 vehicles per household, while the declining population would limit growth. (…)

“In countries with power shortages, Africa for example, even charging mobile phones can be affected. I actually see this as an opportunity.”

He said vehicles could serve as a backup for households. An electric scooter with a 4kWh battery “can supply power during outages — enough to run basic household appliances like a TV, refrigerator or charge phones.”

As I wrote back from China last December, it was eerie to stand on the streets of Shanghai, Shenzhen or Beijing and hear zero noise. All electric!

• Housing
• Bots On The Ground (Robotics)
• Who got a plan?
• Lastly, From Our China Trip

FYI:

Last week, Trump gave an interview to Fortune’s Alyson Shontell. Some might say it was not his most shining moments:

• “Intel should be the biggest company in the world right now,” Trump says. “If I had been president when all these companies started sending their chips in from China, I would have put a tariff on that would have protected Intel.” Referring to Taiwan Semiconductor Manufacturing Co. (TSMC), currently the world’s dominant chipmaker, he adds, “Intel would have all that business now, and there would be no Taiwan.”
• Even the country’s intractable debt crisis draws real estate analogies. The country’s mounting red ink, the president notes, really is not so terrible if you think of it like a real estate mogul would: What’s the total value of America and its natural assets, he suggests, like the Grand Canyon, or even its surrounding oceans? “If you put down the value of these things, it’s like hundreds of trillions of dollars,” Trump says, and by that measure, “if you kept [the national debt] at $40 trillion, you’re way under-levered.”
• “It really pisses me off,” the president groans, as we delve into the Supreme Court’s recent ruling that roughly half of last year’s Liberation Day tariffs were unconstitutional. It’s not the ruling per se that he’s upset about, although he’s certainly not happy about it. But what has specifically ticked him off is the fact that the ruling didn’t come with an asterisk that would have allowed him to keep all of the tariff revenue collected prior to the ruling. “Can you imagine—to people who hate us, to countries that ripped us off for years, I’ve got to give them back $149 billion.”