US Flash PMI signals subdued growth in May amid price surge

Business activity continued to grow in May but at a reduced rate compared to that seen earlier in the year. The headline flash S&P Global US PMI Composite Output Index, covering both manufacturing and services, held steady at 51.7 in May. Growth over the past three months since the outbreak of war in the Middle East has been the weakest seen since the start of 2024.

Divergences persisted in terms of the impact of the war by sector. Service sector growth remained especially sluggish and is on course for its weakest calendar quarter since late 2023 as new business inflows rose only modestly, albeit improving on the slight decline seen in April. Service providers reported subdued demand reflected rising prices and uncertainty, notably among consumer-facing businesses and for exports. Service exports fell at the sharpest rate in just over four years, the rate of growth accelerating from the already-robust pace seen in April.

However, an accompanying marked influx of new orders for goods in part again reflected precautionary stock building by clients. Order book growth in manufacturing was also purely domestically driven, with goods exports falling again.

Sector divergences were also evident in terms of the labor market. Measured overall, employment fell in May for the second time in the past three months, the rate of job losses reaching the highest since August 2024 due to growing concerns over rising costs and deteriorating demand conditions. However, whereas service sector jobs were reduced at the second-fastest pace seen since May 2020 (surpassed only by April 2024), manufacturing payrolls showed the largest rise for 11 months as factories raised headcounts to meet the recent upturn in orders.

Companies’ expectations for output in the year ahead have also diverged. Service sector optimism fell to its weakest since April 2025, and second lowest since October 2022, reflecting growing concern over the outlook for demand thanks to surging prices, higher interest rates and heightened political uncertainty. In contrast, manufacturers were their most optimistic since February 2025 and one of the highest levels seen since the pandemic, thanks to the recent upturn in orders and the ongoing anticipation of tariff-related reshoring.

War-related issues led to a further deterioration of supply chains. Factories reported the greatest lengthening of supplier delivery times since August 2022. Lead-times have now lengthened continually over the past nine months, with factories reporting that war-related shipping disruptions and stock piling have exacerbated existing tariff-related supply constraints. Indeed, the amount of inputs bought by factories rose at its steepest rate since April 2022, driving input inventories higher.

Input price inflation surged to its highest since November 2022, in part due to supply constraints but also driven up by increased energy prices. Manufacturing input costs registered their largest monthly increase since June 2022. While the rise in services costs was muted compared to manufacturing, it was nonetheless the steepest recorded for a year.

Average prices charged for goods and services rose in April at the fastest rate since August 2022 amid the growing supply scarcities and jump in costs. Goods prices showed a particularly marked rise, the rate of increase hitting the highest since September 2022, but service sector selling price inflation also accelerated to a ten-month high and was one of the sharpest rates seen over the past four years.

 

The S&P Global US Manufacturing PMI rose to 55.3 in May, up from 54.5 in April to sit at its highest since May 2022. The expansion means factory business conditions have improved continually since last August.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“The damaging economic impact from the war in the Middle East is becoming increasingly evident in the business surveys. The ‘flash’ PMI data for May recorded only modest growth of business activity as demand was again squeezed by a further spike in prices and jobs were cut as firms worried over rising costs and the economic outlook.

“Coming on the heels of a subdued April reading, the May PMI indicates that the economy will struggle to manage annualized GDP growth of much more than 1% in the second quarter. However, even this subdued pace of growth may not last. On average, over the past three months order book growth has slowed to its weakest for two years, and a boost from precautionary stock building due to concerns over further price hikes and supply delays will not last forever.

“Demand also looks set to cool further in response to rising prices. Firms’ costs have jumped higher at a pace not seen since the energy price shock of 2022 and are being passed on to customers in the form of sharply higher selling prices. The survey price gauges therefore indicate that inflation looks set to rise further just as the economy cools.”

In the Eurozone:

The Memorial Day Barbecue Is Starting to Cost a Small Fortune With prices of beef, hot dogs and tomatoes up, feeding a crowd is costlier this year

(…) Inflation is back, and it is coming for Memorial Day gatherings and the summer activities beyond. Gas prices are up and cookout grocery lists are getting squeezed: Uncooked ground beef was up 14.5% in April from a year earlier, according to Labor Department data. Frankfurters rose 10.7% and tomatoes, a backyard-burger staple, were 39.7% higher.

Some 31% of Americans named inflation or the high cost of living as the most important financial problem facing their family, the top response in an April Gallup survey. That was about the same share as in April 2022, when year-over-year inflation was above 8%. Last month’s inflation reading was 3.8%. (…)

Moylan said that years of heightened inflation have made ordinary purchases feel like calculations. Rib-eye on sale used to run about $7 or $8 a pound two years ago. Now sale prices are closer to $16, and Moylan eats beef once every two weeks instead of twice a week.

He and his partner plan to stay in for the holiday. A two-hour drive to a weekend destination would burn half a tank of gas, and his fill-up has risen from about $60 to $90.

“We don’t want to drive anywhere,” he said.

• Home Depot Posts Lower Profit as Homeowners Hold Off on Large Projects

(…) “When we talk to our customers, they do tell us that they have concerns over uncertainty and housing affordability. They point out that fuel costs are rising, mortgage rates have risen again after falling throughout 2025, and layoffs are increasing,” McPhail said. “And as a result, they tell us they’re continuing to hold off on larger projects.” (…)

McPhail said homeowners are starting to tap more of their home equity but that those extractions are rising more for consumers with lower credit scores. He said it appears those funds are being used more for debt consolidation than they are for home-improvement projects. (…)

Comparable sales rose 0.6% (…). The company reiterated its guidance for fiscal 2026 comparable sales growth of flat to 2% and adjusted earnings growth of flat to 4%.

Walmart shares fell over 7% yesterday after warning that consumers are feeling pressure from higher fuel prices and inflation. From Axios:

U.S. comparable sales rising 4.1% but “When I look at the consumer, especially here in the U.S., they’re telling us they’re feeling some pressure,” CEO John Furner said, adding the company is expanding temporary price rollbacks and investing heavily in faster delivery.
CFO John David Rainey pointed to a trend at Walmart’s gas stations, where the average number of gallons customers pumped fell below 10 for the first time since 2022 — “an indication of stress.”

Walmart said it now has roughly 7,200 rollbacks across its assortment, up more than 20% from a year ago.

• Executives warned higher fuel prices could create upward pressure on prices later this year.

Bloomberg reported that Kroger plans some of its biggest price cuts in years to compete more aggressively with Walmart and Costco.

Mortgage rates hit their highest point since August, averaging 6.51% for 30-year fixed-rate loans.

The Desperation of AI Titans Is an Ominous Sign

The need for compute makes strange bedfellows. On May 6, just a few months after Elon Musk called Anthropic PBC “misanthropic and evil,” he agreed to lease the entire capacity of SpaceX’s Memphis data center to the artificial intelligence firm. Anthropic is now paying $1.25 billion per month to lease the data center. The reconciliation surely has something to do with the Anthropic’s coming initial public offering.

Anthropic’s willingness to partner with Musk to access more compute suggests that it, like its rivals, is profoundly constrained by compute’s availability. That desperation is an ominous signal for AI, because when the limitless scalability of software runs into concrete, it’s not the concrete that will break. (…)

For AI, the ecosystem is crucially dependent on compute, and data center construction is already lagging. So-called Construction in Progress has surged year over year at Amazon.com Inc., Google-parent Alphabet Inc., and Meta Platforms Inc., three of the four largest hyperscalers. Microsoft Corp., the fourth, does not disclose this line separately. The benign reading is that this is just a story of ramping up construction. (…)

The scale of the gap between what the industry needs and what exists is hard to exaggerate. Goldman projects a 45-gigawatt power shortfall by 2028. There are long wait times for substations, high-voltage cable, and steel. The firm estimates a need for 207,000 additional skilled US transmission and distribution workers by 2030. Each of them requires three to four years of apprenticeship.

Today, the IBEW has 887,000 members – and that includes all specialties, Canada and even retirees. Where are these workers supposed to come from in just four years? And if they can’t be found, what happens to the data centers they’re supposed to build?

The AI companies are betting that customers profitable enough to justify their spending will appear as their capabilities improve, particularly with the rise of agentic AI. These improved capabilities, especially AI agents, require even more compute, worsening the compute scarcity. Without the data centers, they can’t serve those (hypothetical) customers. (…)

The more effort the AI companies put into building data centers, the more the cost to do so will increase. That’s great for construction companies, but not for AI firms. (…)

Compounding the problem is that what it will take to scale the supply will worsen AI’s (already disastrous) public image. (…)

The more resources that flow into building data centers, and the more corners that are cut in the process, the more they will distort the rest of the economy. Every home, school, and hospital becomes more expensive to build or maintain, and more people are harmed by the centers that do get built. That will spur the protests already blocking data centers across the country.

Forecasts for AI growth have assumed that it scales like any other type of software. But the lagging component of the AI ecosystem is physical, not electronic. (…)

Investing in the era of scarcity Markets have yet to register the new fashion among governments for hoarding and huddling. (…)

(…) as I have written, governments and companies around the world are now quietly stockpiling key items. Call this, if you like, a new fashion for hoarding and huddling as fears that we are entering the era of scarcity intensify.

Thus the “Heavy Asset, Low Obsolescence”, or Halo trades, have all “been starved of capital” in relative terms, Currie wrote. However, this approach jars with the current direction of world events and the threat of scarcity.

The crisis around the Strait of Hormuz has already created shortages of energy and industrial inputs, and these are likely to worsen. The US war with Iran has also demonstrated the longer-term vulnerabilities around global trade, given that the strait is not the only transport chokepoint in the world and Iran is not the only country seeking to use such chokepoints for leverage.

And what investors sometimes overlook is that the eye-wateringly large capital investment plans being rolled out to support AI require not just hundreds of billions of dollars, but also molecules in the form of materials such as copper, water, gallium, lithium and concrete.

The supply of these has been undermined in the US, among other countries, by the lack of capital investment in key industries or mines. And the more that politicians erect nationalist or protectionist barriers, the more that pressure to use capital to invest in local markets in order to ensure ready access to molecules will increase.

“This is not an AI-disruption story. Halo is better read as Hard Assets, Local Operations,” wrote Currie, who forecasts a major repricing as investors shift from tech to Halo trades.

As Craig Tindale, an Australian investor, noted on X: “The financial world and the physical world are pulling in opposite directions, causing the old economic rules to fail entirely.”

Many observers in Silicon Valley might disagree. Indeed, on a recent visit to America’s West Coast I was struck by tech’s confidence that the stock market and AI boom can weather geopolitical turmoil. “Does anyone really care if the Strait of Hormuz is open?” one banker observed during the Milken conference, which was dominated by excitement about SpaceX’s upcoming initial public offering.

Maybe future historians will conclude that the techies were right. But investors today should nonetheless pay attention to how governments, in New Zealand and elsewhere, are already nervously adopting a scarcity mindset, and then ask if current weightings in the stock market index really reflect this.

After all, as Robert Rubin, former US Treasury secretary, wrote in the FT this week, “markets can be out of sync with reality for an extended period, and then react rapidly and harshly”. Once again, reality is likely to eventually exact its revenge.

Gillian Tett omits an important part to the “hoarding story”, as I wrote yesterday:

Add the fact that the worldwide push to more military spending, more AI spending and more renewables spending are all considered mandatory, urgent and thus cost insensitive. Plus Trump’s “little excursion” in Iran having upended world supply chains, forcing governments and companies to hoard broadly and keep inventories higher than normal. Higher costs, higher financing requirements.

Hoarding is going broad and global.

So “investing in the era of scarcity” also means preparing for accelerating inflation and rising borrowing costs. Two-year and 10-Y Treasury yields have risen 70 bps (+20%) since February 28. At some point, equity investors will notice…

At some point…

Investor demand for downside protection is plummeting. This measures how much more investors are paying for downside protection via put options than for upside exposure through call options. The lower the reading, the less investors are paying to protect themselves against a market decline. (…) Investors are no longer thinking about downside risk. (@KobeissiLetter)

RIGGED!

The “game” never changes, “organized” by investment bankers and blessed by regulators and aggregators. (My emphasis)

‘Fast entry’ SpaceX, OpenAI and Anthropic IPOs to ignite Wall Street trading frenzy Passive investors set to dump billions of shares to make way for new stocks

(…) The rules, implemented this month by Nasdaq, mean billions of dollars of passive money will automatically flow to the three companies shortly after they go public, driving their share prices higher but forcing investors to sell other stocks. (…)

SpaceX will make relatively few shares available to public investors at its IPO next month, a small “free float” which under old rules would exclude the rocket company from indices tracked by trillions of dollars of passive investments.

However, Nasdaq has loosened its rules as it battled to win the SpaceX listing over its rival NYSE, allowing the stock to join the Nasdaq 100 after just 15 days. SpaceX and other new entrants will also be given an index weighting equivalent to three times the value of the shares floated.

S&P Dow Jones Indices is also consulting on changes that could fast-track the stock’s entry into the S&P 500. The initial impact on the rest of the index will be limited by the relatively small number of shares on offer, but is likely to increase after a lock-up period expires, which will be staggered over the first 180 days of trading, according to the SpaceX prospectus.

JPMorgan estimates that if 50 per cent of the company’s shares are eventually floated with a valuation reaching $2tn, passive investors would have to sell $95bn of Wall Street’s eight biggest existing tech stocks. The FT has previously reported that SpaceX is aiming for a $1.75tn valuation. (…)

Investors are also bracing themselves for selling of smaller stocks that could be booted from indices later in the year to make way for SpaceX and other megacap arrivals. Valérie Noël, head of trading at Syz Group, said that the “most discussed trades” in the market around the SpaceX listing included betting against “marginal Nasdaq 100 names”, which are candidates for index deletion, as well as pressure on the existing large-cap stocks.

Todd Sohn, chief ETF strategist at Strategas, said the small volume of available shares following the SpaceX listing means the index inclusion will feel “almost a little frantic, because you’re dealing with ETFs and passive products that are tracking trillions of dollars of assets and yet you only have 5 per cent of float available”.

The anticipated post-IPO pop in the share price could leave passive investors buying at a hefty valuation, according to Sohn. “If SpaceX is up 100 per cent the week after the IPO, and they have to buy it, they have to buy it. They have to take that price . . . They can’t discriminate,” he said.

The limited timeframe between the new listings and index inclusion means that “it is going to be noisy”, said Christian Raute, head of markets trading strategy at Citi. “Because it is so large, it is a challenge,” Raute said. “It might get expensive.” 

But ultimately, “the market is not going to have a problem absorbing these IPOs”, said Raute. “The whole industry is braced and has participants trained to deal with this.”  A portfolio manager at a large US hedge fund said: “We’re going all in for maximum size on all of them [SpaceX, Anthropic and OpenAI] . . . We are not liquidity constrained at all.”

NVDA’s announced $80B share buyback is well timed.

Global Economy Slowing as Middle East Conflict Bites, Surveys Show S&P’s eurozone Purchasing Managers Index fell to 47.5 in May from 48.8 in April

Business activity in Europe and Asia has slowed in May as energy costs have risen and new orders cooled, an indication that the global economy has been weakened by the fallout from the conflict in the Middle East. (…)

S&P said its Purchasing Managers Index for the eurozone—which measures activity in the services and manufacturing sectors—fell to 47.5 in May from 48.8 in April.

That marked the sharpest decline in activity since October 2023. (…)

As in other parts of the global economy, manufacturing continued to receive support from businesses bringing forward purchases in an effort to avoid even higher prices in the future, or difficulties in securing needed products.

By contrast, activity in the much larger services sector declined at the fastest pace since February 2021.

“The service sector is being hit especially hard by the surge in the cost of living created by the war,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

He said the PMI measures for April and May point to a 0.2% decline in eurozone gross domestic product in the second quarter, following a small increase in the first three months of the year.

In the U.K., the sharpest drop in services since January 2021 led to a drop in overall activity. The U.K. economy recorded a stronger start to the year than most of its peers, but the surveys suggests that momentum has faded fast.

Of the countries surveyed, France was hardest hit, with its national PMI pointing to the largest drop in activity since late 2020, when the global economy was in the throes of the pandemic.

Activity also fell in Germany for a second straight month, although to a more modest extent.

Australia saw a swing to contraction, while new orders declined at the fastest pace in over four-and-a-half years. Indeed, new orders cooled in all of the surveyed economies, suggesting the slowdown in activity is set to continue over coming months.

While the conflict appears to be slowing economic growth, it is also reigniting inflation, which had been falling back from the surge that followed Russia’s invasion of Ukraine in 2022.

In the eurozone, businesses reported that their costs rose at the fastest pace in three-and-a-half years, while the prices they charge in turn rose at the most rapid clip in 38 months. Based on historic patterns, S&P estimates that those increases point to consumer-price inflation of around 4% over coming months, double the European Central Bank’s target.

Japanese companies raised selling prices again in May in response to climbing expenses, the S&P data showed. Notably, the rate of charge inflation—-which captures the pace at which businesses are raising sale prices—-across both goods and services was the sharpest in nearly 19 years, though the pace still lags behind the increase in input costs.

That combination of weakening activity and rising inflation presents central banks with some difficult choices, as any steps they take to contain inflation would likely exacerbate the economic slowdown and the accompanying job losses.

The surveys pointed to declines in payrolls in France, Germany, the U.K. and Australia, although businesses in Japan and India continued to hire additional workers.

“Job losses are also starting to become worryingly widespread as business confidence in any swift turnaround in the adverse economic climate fades further,” said Williamson.

Charlie Bilello’s table shows that globalization now also includes inflation:

Former NY Fed president Bill Dudley: Ignore This Bond Market Slump at Your Own Peril

(…) the economy’s performance has caused market participants to revise up their longer-run expectations about the level of short-term rates that is consistent with a neutral monetary policy. It isn’t credible to judge monetary policy as restrictive when short rates have been above current levels for more than three years and the unemployment rate remains at a level judged by monetary policymakers to be consistent with full employment and stable inflation.

The SOFR futures market, which shows the expected short-term rate path for several years, is around 4% after 2026, compared to the Fed’s current federal funds rate of 3.50% to 3.75%. If short-term rates are expected to be higher, then bond yields need to move up as well.

(…) the term premium that bond investors demand to hold longer-term Treasuries rather than shorter maturity ones has risen above the level prevalent in recent years. That should not be surprising given that the premium was unusually low following the Great Financial Crisis. Between 2009 and 2021, the worry was that short-term rates could be pinned close to zero and that the Fed would lose the ability to make monetary policy stimulative.

In that environment, bonds were attractive and the term premium was around zero and even lower. However, prior to the GFC in environments more similar to today, the average spread between three-month Treasury bill rates and 10-year Treasury note yields was about 100 basis points. That is comparable to where the spread is today.

Despite this sanguine assessment, there are several reasons for deeper concern. First, the US remains on an unsustainable fiscal path and the situation is worsening. On the expenditure side, the Iran war is boosting defense outlays, with President Donald Trump seeking a $500 billion increase to defense spending in fiscal 2027 at the same time higher interest rates are pushing up the government’s debt service costs.

The bipartisan Congressional Budget Office projects that debt service costs will move sharply higher as chronic budget deficits drive up the federal debt burden and as low-cost debt issued between 2009 and 2022 and is refinanced at higher interest rates.

In the CBO’s 10-year projections, debt service costs rise from 3.3% of GDP in 2026 to 4.6% of GDP in 2036. Moreover, if rates are markedly higher than the CBO assumes (around 3.2% for the 3-month Treasury bill and federal funds rates and 4.3% for the 10-year Treasury note yield) then debt service costs will be much higher too.

The CBO calculates that a 1 percentage point increase in the level of rates above what it has assumed would increase debt service costs by $600 billion in 2036 and$3.8 trillion over the next 10 years. On the revenue side, recent court rulings with respect to the legality of the Trump administration’s tariffs have created a new budget hole.

Second, concerns about the ability of the Fed to maintain its independence in its conduct of monetary policy could lead to a significant further rise in bond term premia. If investors fear that the Fed won’t be able to get the inflation rate back down to 2%, then inflation expectations will become unanchored and bond risk premia will increase even further. The fact that inflation has already been above the Fed’s 2% objective for five years increases the risk of such a loss of confidence and higher bond yields.

Third, the dynamics here are self-reinforcing. Higher deficits lead to higher interest rates. The CBO estimates that every 1 percentage point increase in the nation’s debt-to-GDP ratio raises long-term rates by 2 basis points. The 20 percentage-point rise in the federal debt-to-GDP ratio that the CBO projects over the next 10 years would imply a 40 basis point rise in long term rates. And, as the debt burden climbs, investors become more worried that the solution will be one of fiscal dominance in which monetary policy is subordinated to fiscal policy.

As the renowned economist Rudi Dornbusch explained it, financial crises take much longer than expected to arrive, but when they do, they come on much faster than one might have anticipated. If this occurs, a loss of confidence and a sharp rise in long-term rates would make the fiscal situation unsustainable—the bond market vigilantes—not seen since the 1990s–would be back.

Former US Treasury secretary Robert Rubin with a different angle, in the FT: Americans beware: markets can be out of sync with reality

(…) By now, markets and the economy seem largely inured to the chaos, leading some to conclude that Trump’s policies have not resulted in the serious economic damage many predicted. I disagree.

While not yet reflected in short-term data, I believe enormous damage has been done to the economy, with effects likely to play out over time. Markets can be out of sync with reality for an extended period, and then react rapidly and harshly.

In the 18 months leading up to October 1987, the stock market soared, despite concerns about looming risks. Then, on October 19, the Dow fell by 22 per cent in a single day. More recently, Greek sovereign debt traded at very narrow spreads to others in the Eurozone for years, despite worries about Greece’s fiscal and economic conditions. Then, all of a sudden, Greek debt collapsed, triggering the European sovereign debt crisis.

Some recent policy choices have made existing problems worse: rather than addressing our unsound fiscal trajectory, we’ve enacted trillions in deficit-financed tax cuts; we have failed to reform our costly and inefficient healthcare system; and we’ve undermined support for less expensive alternative energy sources at a time when AI is driving up electricity demand and China is racing ahead with renewables. These choices will probably increase prices and diminish growth, while leaving the country less resilient. 

Other actions have introduced largely new problems — like politicising the Fed; assailing our universities; slashing federal support for scientific research; attacking undocumented workers who play a key role in construction and agriculture; placing new constraints on legal immigration; and imposing tariffs that increase prices and reduce growth. And while regulation was excessive at times, Doge’s slash-and-burn approach was hugely harmful to government functions. (…) disruption and uncertainty can wear away at an economy over time.

America’s economy and national security have largely been well served by the postwar global order. But now we’ve become a source of instability. We’ve disparaged our Nato allies, pursued ownership of Greenland, seized the leader of Venezuela and waged a consequential war with Iran without coherent objectives. We’ve punished the dissent that is a hallmark of US democracy. And we’ve undermined faith in the rule of law — one of our economy’s underlying strengths, and a great advantage vis-à-vis China.

Our economy, and our society, has done well under Republicans, under Democrats and with power divided between them. But this administration’s approach is radically different. It is driven by an authoritarian mindset, with extreme approaches that lie outside the traditional public policy debate and are not grounded in intellectually serious analysis. 

I do not mean to sound pessimistic. With the great strengths that it has, the US should remain the most attractive market for investment and economic activity. But we must avoid being lulled into complacency by a stock market that has performed well and economic conditions that are still reasonably solid. 

By the time these measures react to the damage being done, it may be far harder to get the economy back on track. This is a moment when our citizens can engage in the hard work of re-establishing government that respects our laws, bases action on fact and engages constructively with the rest of the world. We can do that by supporting fair and free elections, and candidates — whether conservative or progressive — who pass a simple test: are they serious about addressing the economic challenges before us, including those that our own recent actions have created?

Dimon Says Rates Risk Going Much Higher Even After Bond Selloff

(…) “We may have gone from a saving glut to not enough savings.” (…)

“US government debt is $30 trillion, the average rate is 3.5%. Even today they can’t possibly refinance it lower than that rate,” Dimon said. “They have another $2 trillion to do this year but the thing is we don’t know when — we don’t know when the world gets too scared about that, when inflation makes it where people don’t want to own long-term duration securities.”

He added that the impact will also be felt in the credit market.

“Rates can easily go up more, and credit spreads can go up more,” Dimon said. “At one point you’re going to have lots of people having to refinance at higher rates.”

The FT reports that Dimon also said

In response to a question about whether China had emerged as a safe haven amid the upheaval in other parts of the world, Dimon said: “They are more consistent with other countries — that’s been true a little bit recently.” (…)

“America is still a safe haven — we just surprised people recently.” (…)

Global investors have begun to rethink China as the country moves up the value chain in fields such as renewable technology and industrial hardware. Dimon praised the country’s innovation, saying investors have long been interested in “their cars and their batteries and their solar and their machine tools”. (…)

• The Dangerous Brew That’s Rattling Bond Markets A mix of debt, inflation and populism has changed the interest rate landscape since 2020

But the bigger driver over the past year is that investors want more compensation for lending over many years instead of a few months.

That reflects a judgment that debt, inflation and populism—all prominently at work in the past week—are going to be around for a while. They don’t mean a bond market crisis in the offing. But together they are likely to put upward pressure on interest rates for years to come. (…)

[Trump] administration projects the budget deficit rising 16% this fiscal year to $2.1 trillion. Trump has requested a record $1.5 trillion for the Pentagon for next year. That is a lot of debt for investors to absorb. (…)

Sanae Takaichi was elected prime minister of Japan last year with a formidable majority but hasn’t used the resulting political capital to shrink Japan’s massive debt. Indeed, in the past week she said a new budget might be in order, to extend relief to families hit by higher energy prices, which sent Japanese bond yields up sharply.

In the U.S., Trump has proposed suspending the federal gasoline tax, which would cost $3.5 billion a month according to the Committee for a Responsible Federal Budget.

The rise of populists on the left and right make any serious attempt to reduce deficits even more remote. Despite a huge parliamentary majority, British Prime Minister Keir Starmer faces stiff resistance to spending cuts from his Labour Party’s left wing. His leadership may soon be challenged by Greater Manchester Mayor Andy Burnham, a socialist who has said Britain should not be “in hock to the bond market.” That prospect fed the recent rise in British yields. (…)

Since then [2020], shocks have tended to push inflation higher: the supply-chain disruptions following Covid, Russia’s invasion of Ukraine, Trump’s tariffs, and the closure of the Strait of Hormuz.

We think of these as “one-off” events after which inflation will naturally return to 2%.

But what if they are symptoms of a world more prone to supply shocks because of war, geopolitical rivalry, protectionism, populism and extreme weather? As the shocks accumulate, the public may expect higher inflation indefinitely.

In the latter scenario, central banks will regularly need to raise rates to return inflation to 2%, the opposite of before 2020. Bonds won’t insure against falling stocks, so investors will demand higher yields.

Deficits and inflation, treated so far as separate and distinct, may feed off each other. Anxiety about the cost of living has eroded politicians’ popularity everywhere, making them even less willing to propose cuts to government benefits or higher taxes.

If the Fed must repeatedly raise rates, that adds to deficits. The Committee for a Responsible Federal Budget estimates the recent rise in rates, if sustained for a year, would add $200 billion to deficits over a decade. Leaders might pressure central banks against raising rates, which would also lead to higher inflation. (…)

Remarkably, despite debt, tariffs, oil and Trump’s attacks on Fed independence, bond investors remain sanguine about inflation. Beyond the next few years, they see it returning to around 2%.

That’s a comforting vote of confidence in Warsh. But earning that confidence may mean overseeing higher rates than either he or Trump thought likely. Which a mixture of debt, populism and inflation just might require.

Add the fact that the worldwide push to more military spending, more AI spending and more renewables spending are all considered mandatory, urgent and thus cost insensitive. Plus Trump’s “little excursion” in Iran having upended world supply chains, forcing governments and companies to hoard broadly and keep inventories higher than normal. Higher costs, higher financing requirements.

David Rosenberg:

Trump’s continued grip on the Republican Party increases the odds that Republicans can push through a summer omnibus bill with new fiscal stimulus to bolster their midterm prospects. Recent primary defeats of Trump-skeptical
Republicans underscore the pressure on the caucus to stay aligned with the White House, even as razor-thin House margins leave room for lame-duck members to rebel.

The net effect is a more polarized but less predictable fiscal backdrop with higher odds of short-term stimulus.

Markets might be underestimating how much the world has changed.

Warsh and Peace (John Authers)

When nominated in January, Warsh was a dove who intended to cut rates. A month later, war broke out in Iran, and with it changed the entire nature of his job. On Feb. 27, futures implied that the fed funds rate would be about 2.8% next summer; now, even with Warsh in place, it’s expected to top 4%:

The Federal Open Market Committee that Warsh will now chair appears from the minutes of Jerome Powell’s final meeting to be comfortable with these expectations, and more hawkish than previously thought. The Fed is coy about exact numbers of votes, but word choices paint a picture of a building consensus for tightening:

Almost all participants noted even after the conflict ended, the prices of oil and other commodities could remain elevated for longer than expected;

Almost all expected “continued upward pressure on inflation arising from supply chain disruptions, high energy prices, or the pass-through of higher input costs to other prices” if oil prices did stay high;

The vast majority noted an increased risk that inflation would take longer to return to 2% than they had previously expected;

A majority highlighted that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%;

Many would have preferred removing the language from the post-meeting statement that suggested an easing bias.

The sole change in the committee will see Warsh replace Stephen Miran, its most extreme dove. So his chances to corral a majority for cuts look negligible. He will have delivered for Trump if he can just dissuade his colleagues from hiking. Steve Englander of Standard Chartered Plc describes the Warsh FOMC as “capping rates rather than cutting,” while TS Lombard’s Steven Blitz suggests that for the new chairman, “no hike in June is a rate cut.”

Englander suggested that Warsh could “delay hikes by pointing to low unit labor cost growth, trimmed-mean inflation and a couple of other indicators.” Still, this wouldn’t justify cuts.

Ed Yardeni:

(…) the minutes of the April FOMC meeting showed that the vote to maintain an easing bias was close. There was considerable support for dropping it and adopting a tightening bias. Changing to a neutral stance wasn’t seriously discussed. (…)

The minutes state that “a majority of participants highlighted that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent.” Furthermore, “the vast majority of participants noted an increased risk that inflation would take longer to return to 2 percent than previously expected.”

Several participants also flagged the risk that elevated inflation could begin to entrench itself in wage- and price-setting decisions, the precondition for hiking interest rates in response to a supply shock.

The minutes project a committee acutely concerned about its credibility and willing to tighten if inflation persists above the 2% target. Participants explicitly discussed the nightmare scenario in which sustained elevated energy prices, combined with tariff effects, could lift the anchor on inflationary expectations. Fed members characterized inflation persistence as “a salient risk” that is “skewed to the upside.”

The ongoing closure of the Strait of Hormuz and the latest batch of strong economic indicators suggest that upside risks to inflation now outweigh the downside risks to employment. The April minutes show that the FOMC was turning more hawkish, even though the easing bias was maintained.

We are sticking to our call that the Fed will shift from the easing bias in April to a tightening bias at the June FOMC meeting, followed by an FFR hike in July. The Bond Vigilantes can take comfort in the fact that the FOMC has become more vigilant about the current inflation problem.

Iran Says the US’s Latest Proposal Has ‘Narrowed the Gaps’

(…) Tehran is in the process of responding to a text submitted by the US, which “has narrowed the gaps to some extent,” the semi-official Iranian Students’ News Agency reported on Thursday, without saying where it got the information. “Further narrowing requires an end to the temptation for war on Washington’s part.”

The exchange of messages is based on Iran’s 14-point text from several weeks ago, the Iranian foreign ministry said separately. That plan essentially suggests a short-term deal that would see Iran reopen the Strait of Hormuz and the US lift a blockade of Iranian ports, with the warring sides then going into deeper negotiations over Tehran’s nuclear program.

Field Marshal Asim Munir, who has positioned himself as the most powerful person in Pakistan, is visiting Tehran on Thursday, ISNA reported. Islamabad is the main mediator between the sides. (…)

US President Donald Trump told reporters on Wednesday that the US was in the “final stages” with Iranian diplomacy, sparking investor hopes a deal was close. (…)

Iranian President Masoud Pezeshkian insisted the country was not on the brink of giving in. “Forcing Iran to surrender through coercion is nothing but an illusion,” he posted on X on Wednesday. (…)

Axios, citing unnamed sources, reported that Trump and Israeli Prime Minister Benjamin Netanyahu had a tense call on Tuesday.

The report came shortly after Trump told reporters that Netanyahu would “do whatever I want him to do.

Earlier, Iran warned it would retaliate beyond the Middle East if the US or Israel renewed hostilities.

“If aggression against Iran is repeated, the regional war that had been promised will this time extend beyond the region,” the Islamic Revolutionary Guard Corps said, according to the semi-official Tasnim news agency. The IRGC, which has gained even more influence over Iranian decision-making since the war erupted, vowed “crushing blows in places you do not expect.”

AI CORNER

Two hours that changed AI

Over the course of two hours Wednesday afternoon, the AI industry produced an extraordinary stream of headlines mapping out the vast architecture of its ambitions.

One historic news cycle peeled back virtually every layer of the AI revolution — smarter systems, exploding revenues, roaring markets, staggering infrastructure demands and a federal government racing to catch up.

Together, Wednesday’s developments helped crystallize the core pillars of the emerging AI order.

1. Brains: OpenAI announced that one of its general-purpose reasoning models autonomously cracked a famous geometry problem that had stumped mathematicians for 80 years. The implications are enormous: an AI capable of original mathematical discovery could eventually unlock breakthroughs across science, engineering and medicine.

2. Demand: Anthropic’s explosive growth has the company on track for its first profitable quarter, with revenue set to more than double to $10.9 billion in Q2, the Wall Street Journal reported. The estimated $559 million operating profit arrives two years ahead of internal projections — a turning point for an industry whose spending has long outrun its earnings.

3. Power: Anthropic expanded its compute partnership with SpaceX, agreeing to spend roughly $1.25 billion per month through 2029 for access to the company’s Colossus supercomputing infrastructure. Ahead of SpaceX’s IPO next month, the deal cements Elon Musk as a major power broker in the AI economy, where access to compute infrastructure is becoming as strategically valuable as the models themselves.

4. Chips: Nvidia delivered another monster quarter, posting $81.6 billion in revenue — with its data center business alone bringing in $75.2 billion. CEO Jensen Huang said demand has gone “parabolic” and described the AI boom as the “largest infrastructure expansion in human history,” reinforcing Nvidia’s dominance over the hardware powering the economy.

5. Wall Street: SpaceX’s long-awaited IPO filing revealed a company rapidly transforming into an AI infrastructure giant, with massive compute operations and ambitions stretching far beyond rockets and satellites. The blockbuster filing arrived as OpenAI and Anthropic also race toward potential public offerings this year that could value all three companies in the trillions of dollars.

6. Government: President Trump has summoned top tech CEOs to Washington Thursday for the signing of his highly anticipated AI executive order, prompted by mounting cybersecurity fears. The order is expected to establish a voluntary framework for labs to share new models with the government 90 days before release — formalizing a new dependency between Washington and the frontier labs.

Lurking behind the AI industry’s extraordinary momentum is a deepening sense of public anxiety about the pace and scale of disruption.

• Meta began laying off roughly 8,000 workers Wednesday, even as CEO Mark Zuckerberg ramps up one of the most aggressive AI spending sprees in corporate history.
• Recent polling shows that 70% of Americans fear AI is advancing too quickly. Nearly two-thirds say it’s unlikely AI will create economic gains that benefit everyone.

Nvidia Tells Skeptical Investors AI Is Ready to Go Mainstream

(…) Though spending has continued to surge from large data center clients — a group known as hyperscalers — Nvidia predicted that a vast array of other businesses and governments would soon become a bigger source of revenue. They’re poised to snap up Nvidia’s chips and other computing products to support their own artificial intelligence ambitions.

Down the road, so-called physical AI will bring a colossal new opportunity in the form of robots and automated vehicles, Chief Executive Officer Jensen Huang said on a conference call with analysts. “We’ve got it all covered,” he said. (…)

Sales in the three months ending in July will be about $91 billion, the company said in its quarterly report. That topped the average estimate of $87 billion, though analysts’ projections ranged as high as $96 billion, according to data compiled by Bloomberg. (…)

“The build-out of AI factories — the largest infrastructure expansion in human history — is accelerating at extraordinary speed,” Huang said in a statement.

Data center spending, which is the main source of Nvidia’s revenue, hasn’t shown signs of letting up. Hyperscalers plan to shell out a combined total of roughly $725 billion on AI this year. And based on Nvidia’s latest results, revenue from those companies continues to outpace other sources. (…)

The company has said it has more orders than it can fill and is investing to add supply to meet that demand.

In the three months ended April 26, Nvidia’s sales gained 85% to $81.6 billion. Analysts had estimated $79.2 billion on average. Profit, minus certain items, climbed to $1.87 a share. That beat a projection of $1.77.

Adjusted gross margin, the percentage of revenue remaining after deducting costs of production, was 75%. [Net income was $58.3 billion for the quarter, more than three times the year-earlier result and 36.5% higher than the $42.9 billion analysts had predicted.]

Nvidia boosted its quarterly dividend to 25 cents a share from a penny. And the chipmaker announced $80 billion in stock repurchases. [Chief Financial Officer Collette Kress said in a conference call that the company intends to return 50% of its free cash flow this year to shareholders.]

Nvidia’s all-important data center unit generated revenue of $75.2 billion, compared with an estimate of $73.5 billion. Networking, part of the data center division, delivered $14.8 billion in sales, versus an estimate of $12.7 billion. [That was triple last year’s] (…)

The company is on course to record total revenue of more than $370 billion this year, according to estimates. By that measure, it will be roughly 22 times the size it was in fiscal 2021. Nvidia easily chalks up more sales in a quarter than its next three largest rivals combined. (…)

The company said Wednesday that it’s still not getting any data center revenue from China. [Huang has said the Chinese market for AI chips could be as large as $50 billion a year. On Wednesday, Nvidia said it wasn’t assuming any revenue from sales of data-center chips in China for the current quarter.]

Meanwhile, Nvidia continues to branch out into new areas. It’s beginning to sell general-purpose processors and is offering chips tailored to the inference stage of artificial intelligence. That’s the point where models are already trained and beginning to handle real-world inputs.

The company said it expects to get $20 billion in CPU revenue this year, which would make it the world’s largest supplier.

John Authers: “Nvidia’s revenue growth shows that the momentum of the AI data-center buildout is if anything accelerating:

 

• Mind-Blowing Growth Is About to Propel Anthropic Into Its First Profitable Quarter 

Anthropic’s revenue is set to more than double to $10.9 billion in the second quarter, an explosive rate of growth that will help it turn an operating profit for the first time.

The company disclosed the figures to investors as part of an ongoing funding round that is likely to push its valuation above OpenAI’s. The projections, which were reviewed by The Wall Street Journal, provide a window into the meteoric rise of a startup that was once a laggard in the artificial-intelligence race, and defy the conventional wisdom that AI companies’ huge spending needs hamper near-term profitability.

Anthropic generated $4.8 billion in sales in the first quarter. Its quarterly revenue is now growing faster than Zoom did during the pandemic, and Google and Facebook in the run-up to their initial public offerings. It is set to turn an operating profit of $559 million in the June quarter.

Anthropic shared financial figures with investors last summer that suggested the company didn’t expect to turn a full-year profit until at least 2028. The company might not remain profitable for the full year as it plans spending increases due to its vast computing needs. Its operating profit includes the cost to train new models and excludes stock-based compensation. (…)

Demand for Anthropic’s products has strained its computing resources and forced it to limit access for certain users. The company signed a string of new data-center deals in recent weeks to help it expand capacity, including with Elon Musk’s SpaceX.

In the first quarter, Anthropic spent 71 cents on computing power for every dollar it made. In the current quarter, it expects to spend 56 cents per dollar, a sign that the business is becoming more efficient as it grows. (…)

Compute demand is much stronger than supply. From Google this morning:

Hi Denis,

We wanted to let you know about changes to the usage limits included with your Google AI Pro subscription.

What’s changing starting today, May 20, 2026:

Usage limits in the Gemini app: For the Gemini app, we’re introducing compute-based usage limits that factor in the complexity of your prompt, the features you use and the length of your chat. Your limit refreshes every five hours until you reach your weekly limit. As an AI Pro subscriber, you’ll enjoy a four times higher usage limit than non-subscribers.

AI credits: The product-based usage limit model is also rolling out to other products, starting with Flow and Antigravity. You can extend your limits by purchasing AI credits. While 1,000 AI credits will no longer be included as a benefit in your base plan each month, the new usage limit model we are introducing should allow you to maintain the same experience you are used to.

Manus Weighs Raising $1 Billion to Unwind Meta Takeover

The co-founders of Manus are exploring options to fulfill Beijing’s demand to unwind a controversial takeover by Meta Platforms Inc., including raising about $1 billion from external investors to buy back the Chinese-founded AI operation.

Manus’s three founders — Xiao Hong, Ji Yichao and Zhang Tao — are in discussions about a round of funding at a valuation that would at least match the $2 billion Meta paid to acquire the agentic AI outfit, according to people familiar with the matter. The founders may chip in with their own money to finance the rest of the transaction, the people said. If they go ahead, the next step would entail setting Manus up as a Chinese joint venture with those backers, ahead of a Hong Kong initial public offering, one of the people said, requesting not to be named discussing private deliberations. (…)

It’s unclear how new owners would carve out Manus’s agentic AI technology, much of which has been integrated into Meta’s systems. (…)

With last month’s demand, Beijing’s regulators conveyed their determination to prevent the transfer of sensitive technology to geopolitical foes at all costs. It followed a decision to bar major tech firms including ByteDance Ltd. and Moonshot AI from taking American capital without approval, and a clampdown on offshore Chinese companies seeking to list in Hong Kong. (…)

Still, it’s unclear how Meta would unwind the deal on a practical level. Manus employees have joined Meta, capital has been transferred and the startup’s executives are now part of the US firm’s rapidly expanding AI team.

Manus staffers have already moved into Meta offices in Singapore, while investors including Tencent Holdings Ltd., ZhenFund and HSG have received their proceeds, people familiar with the matter said previously.

Raúl Castro Charged With Murder in U.S. Court

• With Castro Indictment, Trump Bets His Venezuela Playbook Will Work in Cuba

(…) “The indictment and removal of Maduro sent a clear message to his socialist allies in Havana: this is our Hemisphere and those that destabilize it and threaten the United States will face consequences,” Trump said in a message released for Cuban Independence Day on Wednesday. (…)

The island is inching closer to a humanitarian crisis (…).

But no worries:

“No, there won’t be escalation,” Trump told reporters. “I don’t think there needs to be. Look, the place is falling apart. It’s a mess and they’ve sort of lost control. They’ve really lost control of Cuba.” (…)

A de facto US blockade has cut off fuel shipments, and the country’s government has reported running out of diesel and fuel oil for its power plants, worsening blackouts that have shut down critical services on the island.

“We’ll see,” Trump said when asked how long the embargo would remain in place. “We’ll be announcing it pretty soon.”