Month: January 2025

Philly Fed’s January 2025 Nonmanufacturing Business Outlook Survey

The critical data early in 2025 is services employment, wages and prices. Tomorrow we get S&P Global’s flash PMI. Yesterday we got the Philly Fed’s own services survey.

The diffusion index for current general activity at the firm level edged down from a revised reading of 4.6 in December to 2.2 this month. Almost 29 percent of the firms reported increases, slightly exceeding the 27 percent that reported decreases; 43 percent reported no change in activity.

The new orders index rose from -4.6 to 1.6 this month.

Overall, the firms reported mostly steady full-time employment, as the index edged down from 3.2 in December to 1.5 this month. Sixty-four percent of the firms reported steady full-time employment levels, while 16 percent of the firms reported increases, and 14 percent reported decreases.
The part-time employment index fell from 8.9 to -0.3 this month, its lowest reading since March.

Price indicator readings suggest continued increases in prices for inputs, while prices for the firms’ own goods and services fell. The prices paid index moved down 2 points to 28.9. Almost 31 percent of the respondents reported higher input prices, 52 percent reported no change, and 2 percent reported decreases.

Regarding prices for the firms’own goods and services, the prices received index fell from 23.3 to -0.3 after rising 21 points last month. Roughly equal shares of respondents (8 percent) reported increases and decreases in prices received. Most of the firms (71 percent) reported no change in prices for their own goods and services.

The Daily Shot has the most important chart:

• Business Inflation Expectations Increased to 2.2 Percent

From the Atlanta Fed:

Firms’ inflation expectations for the coming year increased to 2.2 percent. Sales levels compared to “normal times” remained unchanged, but profit margins decreased, according to the Atlanta Fed’s latest Business Inflation Expectations survey.

Federal Reserve set for an extended pause

(…) In fact, the risk is that the Fed is actually more hawkish than they indicated. The convention has been that potential government policy changes aren’t typically factored into forecasts until they have been implemented. However, with President Trump having just won re-election and his policy plans differing so starkly from President Joe Biden’s, Fed Chair Jay Powell acknowledged that some felt the need to incorporate the potential policy shifts into their December 2024 projections ahead of time. However, not all did and since his inauguration, there has been little sign of any moderation in Trump’s key policy thrust.

President Trump wants to ensure a low taxation environment with light touch regulation in order to boost growth prospects while implementing tariffs to improve US manufacturing competitiveness and promote re-shoring of economic activity. At the same time, trade protectionism will raise prices in the near term while immigration controls could prompt some labour shortages in sectors such as agriculture and construction that also add to inflation pressures. Consequently, Fed officials will likely need to see a marked slowdown in job creation and cooler inflation pressures to justify cutting rates further.

That means no change to monetary policy is a certainty on 29 January and it makes our previous call of a March rate cut look unlikely – currently just 6bp of a 25bp move is discounted by financial markets.

Macrobond, Bloomberg, ING

IMF Raises U.S. Growth Estimates The agency reduces growth projections for big European economies, Canada

The United Nations financial agency raised its estimate for full-year U.S. growth in 2025 to 2.7%, up from 2.2% in the previous round of projections from October. Meanwhile, growth expectations for big European economies such as Germany’s, France’s and Italy’s were all downgraded, as was Canada’s.

The estimates underscore a potent formula that has powered the U.S. economy through a turbulent global backdrop: a stretch of strong productivity growth, a labor market that has softened but stayed resilient, and a largely effective policy response to rising prices from the Federal Reserve.

The IMF projects that American gross domestic product expanded by 2.8% in 2024, after rising by 2.9% a year earlier. That vastly outpaced the eurozone, which likely recorded a 0.8% growth rate last year. (…)

In Europe, countries such as France and Germany have experienced an energy crisis that followed the outbreak of war in Ukraine, and manufacturers, especially in the car industry, are contending with an influx of Chinese imports.

Businesses in the U.K. are girding for higher taxes as financial markets exert pressure on the government to discipline its spending.

In Canada, weaker natural-gas prices have hit the country’s important energy sector. As in the U.S., the labor market cooled through 2024, but from a weaker starting place. Canada’s estimated 2024 growth was 1.3%, according to the IMF.

In addition to regional setbacks, these economies have also been largely passed over by notable growth in U.S. labor productivity, a trend that promotes low-inflation growth and that American economists are still working to understand fully.

(…) increasingly, the split between the U.S. and Europe looks like something different: evidence of structural divergence between the regions that could push the U.S. even further ahead, he wrote.

“Over time, this translates into higher returns on U.S. investment, increased inbound capital flows, a stronger dollar and U.S. living standards pulling away from those of other advanced economies,” Gourinchas wrote. (…)

Global inflation-adjusted growth is projected to stay steady at 3.3% both this year and next. The agency thinks that inflation around the world could fall to 4.2% in 2025, from 5.7% last year—and fall further to 3.5% in 2026.

Cooler inflation should generally allow global central banks to ease interest rates down toward more neutral levels, putting the worldwide economy closer to an equilibrium, the IMF said. (…)

The IMF sees China’s full-year growth roughly in line with other emerging markets next year, at 4.6%. But the agency warned that the country could fall into a deflationary trap if fiscal and monetary stimulus aren’t strong enough to boost the country’s economy.

The World Bank:

The World Bank raised its growth forecast for the U.S. in 2025 to 2.3% from 1.8%, and its forecast for China to 4.5% from 4.1%.

But it lowered its growth forecast for developing economies other than China to 3.8% from 4%, a rate of expansion that makes it difficult for them to catch up with the income levels enjoyed in developed economies.

“All of our studies indicate a declining growth potential across the board,” said Indermit Gill, the World Bank’s chief economist. “One of the bright spots is the U.S.. The other bright spots are India and Indonesia and a few others. But in general it’s a bleak picture.”

The World Bank estimates that an increase in U.S. tariffs of 10 percentage points would reduce global economic growth to 2.5% this year. If other countries retaliate by raising tariffs on imports from the U.S., growth would cool further, to 2.4%. (…)

Developing economies account for a larger share of global economic activity than they did in 2000, generating 45% of global GDP, up from 25%. And as their share of activity has increased, so has trade between them, with 40% of exports from developing economies now going to other developing countries, compared with 20% in 2000.

But while large developing economies such as China, India and Brazil matter more for the fortunes of other developing economies than they did at the start of the century, the big developed economies—the U.S., the eurozone and Japan—still matter more, about twice as much, according to World Bank estimates.

“The welfare of developing economies, in short, is still strongly tied to growth in the big three advanced economies,” the World Bank said.

Trump’s Arrival Brightens U.S. Outlook, Darkens Everyone Else’s The bankers, government officials and CEOs at Davos see his deregulatory, energy and tariff policies sucking investment from other regions and hurting their exports

When participants at the World Economic Forum look at President Trump’s plans, they become more optimistic about the U.S. and more pessimistic about the rest of the world, especially Europe. (…)

His agenda could extend that outperformance by making the U.S. the preferred destination for foreign investment via lower taxes and regulation and even cheaper energy, while his promised tariffs hurt others’ exports. (…)

One particular source of anxiety in Europe is that its top companies will move to the U.S. in search of higher stock valuations, less regulation and kinder treatment by Trump.  (…)

Share of U.S. companies in China looking to relocate hits a record high, survey finds

About 30% of the respondents considered or started such diversification in 2024, surpassing the prior high of 24% in 2022, according to annual surveys from the American Chamber of Commerce in China.

That also exceeded the 23% share reported for 2017, when U.S. President Donald Trump began his first term and started raising tariffs on Chinese goods. (…)

While India and Southeast Asian countries remained the most popular destination for relocating production, the survey showed 18% of the respondents considered relocating to the U.S. in 2024, up from 16% the prior year.

The majority of U.S. companies did not plan to diversify. Just over two-thirds, or 67%, of respondents said they were not considering relocating manufacturing, a 10 percentage point drop from 2023, the survey showed.

The latest AmCham China survey covered 368 members from Oct. 21 to Nov. 15. Trump was re-elected U.S. president on Nov. 5. (…)

Competition from local state-owned companies or privately owned Chinese companies was the second-biggest challenge for U.S. businesses operating in China, according to the survey. (…) About a third of businesses reported unfair treatment in China compared with local firms, particularly in relation to market access and public procurement. That was around the same level as last year.

The proportion of companies no longer listing China as a preferred investment destination climbed to 21%, doubling from pre-pandemic levels, the survey said.

In the WSJ:

Like Europe, China faces headwinds; tariffs would be just one more.

China’s problem “is not Trump,” said Keyu Jin, a British-based economist specializing in the Chinese economy. “It’s the unemployment numbers. So many companies going under. So much debt the government owes to the private sector. The problems with young people. The ‘lying flat’ problem.”

She said Chinese authorities know the economy needs stimulus, but face a dilemma: “How do you stimulate in the right way” without a “debt explosion?”

Some key charts illustrating China’s challenges. You can get Apollo Management’s complete China chartbook from the link on the sidebar.

Chinese are notorious high savers, but they are now also debtors, mostly mortgages which need to stay above water…

Private entrepreneurs are also feeling the pinch …

… and banks:

This needs to improve for everything else to improve:

AI CORNER

Salesforce chief predicts today’s CEOs will be the last with all-human workforces

The rise of generative AI “agents,” which Benioff described Wednesday as “digital labor,” is among the next wave of advancements for the tech. “We are really moving into a world now of managing humans and agents together,” he said, highlighting his own company’s Agentforce.

Salesforce launched Agentforce in September, with Benioff applauding the technology at the time as “AI as it was meant to be.”

• “Because I’m using Agentforce, I just have that much more productivity,” he told Axios Wednesday, highlighting the increased ability of his Agentforce to resolve support inquiries.
• He added he’s thinking of ways to “redeploy” support agents in sales positions because those employees “don’t have as much to do because Agentforce is so productive for them.”

He also claimed Wednesday that Microsoft “has really disappointed everybody with this CoPilot.” (…)

President Trump, Crypto Billionaire His new family tokens, which have soared in value, are courting legal and political trouble.

The WSJ Editorial Board:

Donald Trump doesn’t always separate his personal interests from his public obligations, and a howling example is his sudden new status as a crypto billionaire. The President is inviting trouble with what looks like remarkably poor judgment.

(…) Mr. Trump and his family have tried to cash in on the mania by minting Trump-branded coins.

On Friday, as a private citizen soon to be President, Mr. Trump announced sales of his $TRUMP crypto token. “It’s time to celebrate everything we stand for: WINNING!” he posted on X.com. Melania Trump debuted her own coin on Sunday. Step right up, Americans, you can’t lose betting on $TRUMP. But what happens when some inevitably do? (…)

Twenty percent of Trump tokens are currently available for trading on crypto exchanges. Trump Organization affiliates hold the other 80%—worth $31.4 billion at its trading price late Wednesday—which is subject to a three-year unlocking schedule. (…)

All of this creates flashing-red political risks and ethical conflicts. Start with who may be buying the tokens. A business or foreign official with interests before the federal government might seek to curry favor with Mr. Trump by announcing plans to buy millions of his token to pump up the price. Or, worse, whispering to Mr. Trump that he’s made the purchases, since crypto holdings aren’t disclosed. If Mr. Trump’s regulators then act in a way that aids crypto or the person seeking the favor, he’ll be accused of aiding the buyer in service of presidential self-dealing. (…)

No careful President would get anywhere near this kind of political risk, and we can’t recall any President who has. Where are Mr. Trump’s lawyers? In his first term, Mr. Trump was often deterred from some of his worst impulses by legal advisers who saw their job as serving the Presidency as much as this President. The crypto caper is a worrisome sign that Mr. Trump’s current advisers don’t understand the difference any better than he does, or that they are too cowed to speak up.

El Chapo Claims He Was Jan 6 Rioter

In a bid for a presidential pardon, Joaquín “El Chapo” Guzmán claimed on Thursday that he had participated in the Capitol insurrection on January 6, 2021.

The imprisoned drug lord did not explain how he managed to appear in DC for the riot, saying only, “As a felon, I ask President Trump to pardon me out of professional courtesy.”

Vowing that he was ready to turn over a new leaf, he asserted, “If pardoned, I promise to stop selling drugs and will focus on crypto.”

In his closing argument, El Chapo acknowledged he was a controversial figure but added, “I’m not some total maniac like Hegseth.”

Trump Widens Tariff Threats to China, Europe on Day 2 in Office Any tariffs would be on top of existing levies Chinese goods

(…) “We’re talking about a tariff of 10% on China, based on the fact that they’re sending fentanyl to Mexico and Canada,” Trump said during an event at the White House on Tuesday, specifying Feb. 1 as a possible date.

“Other countries are big abusers also, you know it’s not just China,” Trump said. “We have a $350 billion deficit with the European Union. They treat us very very badly, so they’re going to be in for tariffs.” (…)

But the only actual action taken so far is the call for a review of trade practices that’s due by April 1, potentially giving China and others almost 10 weeks to avert new levies or address his demands. (…)

It is unclear under what legal authority Trump could order these tariffs imposed. In the executive action on Monday, he told officials to “assess the unlawful migration and fentanyl flows” from Canada, Mexico, and China and report back by April 1.

Before his inauguration there were reports he was considering declaring a national economic emergency to allow new tariffs, but such a move hasn’t been announced. (…)

Trump spoke to his Chinese counterpart Xi Jinping days before his second inauguration, in a call in which they discussed trade, fentanyl and ByteDance Ltd.’s social media app TikTok.

“We didn’t talk too much about tariffs, other than he knows where I stand,” Trump said Tuesday, defending his approach to the issue.

“Look, I put large tariffs on China. I’ve taken in hundreds of billions of dollars. Until I was president, China never paid not 10 cents to the United States,” he said.

• North American Free Trade Is Already Great Again Trump is playing a game with tariff threats, and he may find that Canada and Mexico hold pretty strong hands.

(…) The executive order on America First Trade Policy issued on Inauguration Day should be viewed as the first move in a game. George Saravelos, chief global foreign exchange strategist at Deutsche Bank AG, believes it sets the stage for “the most expansive presidential powers on trade in the post-Bretton Woods era,” and that Trump’s vague pronouncements are part of a deliberate strategy of uncertainty:

There is an intention to generate ambiguity around tariff policy with an extremely wide range of ultimate outcomes. It is highly unlikely this gets resolved any time soon. Uncertainty is clearly a negative for global (manufacturing) growth and we believe will play a material role in preventing the release of dollar risk premium, despite elevated positioning.

Others see signs of cold feet. Louis-Vincent Gave of Gavekal Economics argues that Trump’s policies may be less aggressive than feared “not because he has fallen out of love with tariffs — the threat clearly remains in force — but because the US economic situation is very different from 2017.” Back then, he points out, the fear was deflation. This time, he has returned to office thanks to “the inflation which had destroyed the purchasing power of the US consumer.” Trump’s freedom to levy tariffs isn’t unobstructed.

Further, game theorists are beginning to grasp that the USMCA junior partners do have power to retaliate. US exports to each country run at almost triple American exports to China, so retaliatory tariffs could inflict real pain on US exporters:

Further, as Marc Chandler of Bannockburn Global Forex points out, the preponderance of Canadian and Mexican imports to the US come from American companies. While tariffs would potentially endanger Canadian and Mexican jobs, they would also damage the profits of US businesses. Put only slightly differently, Nafta and the USMCA have produced benefits for the US that tariffs would endanger. This isn’t as simple as it seems. Expect the lurches in the foreign exchange market to continue.

Ed Gresser, Vice President and Director for Trade and Global Markets at PPI (Progressive Policy Institute), was the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR) during the first Trump administration. In this position, he led USTR’s economic research unit, oversaw the Generalized System of Preferences, and chaired the 21-agency Trade Policy Staff Committee. He wrote on December 4, 2024:

Canada and Mexico buy about a third of all American exported goods. Canada is the top export market for 36 U.S. states and Mexico for another six, including the four border states Texas, Arizona, New Mexico, and California. By one measure, New Mexico is most reliant of all states on Mexican customers, who buy $3.5 billion — 70% — of their $5 billion in total overseas sales. 

By another, it’s Texas, whose massive $130 billion in exports to Mexico is 5% of state GDP, even before adding the $36 billion in Texan sales to Canada.  North Dakota meanwhile relies most heavily on Canada – 82% of $8.8 billion in worldwide exports of wheat, oil, farm machinery, etc. — with Maine, Michigan, and West Virginia all around 50%. To give the overall picture, U.S. export data in 2023 looked like this:

A big tariff on incoming goods from Canada and Mexico would have three basic effects.  The most direct would be higher U.S. prices, especially in the energy, car, appliance, and food industries that make up the largest share of North American trade.  Mexico, for example, is the U.S.’ largest source of winter vegetables and fruit, supplying grocery stores this past February with 188,640 tons of tomatoes, 128,330 tons of peppers, 106,460 tons of avocadoes, 44,440 tons of lemons and limes, and other fresh produced valued at $2.25 billion — along with TV sets, cars, and home appliances, plus more cars, the largest single stream of energy imports, beef, cooking oil, and beer from Canada. 

The second and third effects are less direct but predictable: American exporting factories, labs, farms, ranches, and mines with Canadian and Mexican customers would (a) risk retaliation in kind, and (b) lose customers as Mexican and Canadian firms reliant on U.S. goods go bankrupt or lose out to competitors elsewhere in the world. (…)

To sum up: Among big powers, the U.S. is unusually fortunate in having friendly and peaceful relationships with its two large neighbors.  These involve deep and complex economic ties, which often raise policy problems and challenges but, in general, serve all three countries well. 

Replacement of the earlier North American Free Trade Agreement with the “USMCA” in 2020 has had mixed results — some useful innovations, also some things that seem to be working less well and may have been over-negotiated. If the agreement is still there next year, its scheduled review in 2026 might help fix some of the problems.

Abandoning it to provoke an economic shock and pick fights with neighbors and allies, though, is much more likely to inflame than ease border problems – and generally seems unsound and a bad idea.

Again, it isn’t clear how serious this really was.  But just in case, and moving from unwise national policy to its possible personal impacts: make the down-payment this month if you’re buying a car or refrigerator, and with heating and gas as well as food prices maybe about to jump, take some time in mid-January to fill your tank and stock up on groceries.

Goldman Sachs:

• The last trade war provides clues about how other countries might retaliate against US tariffs. China imposed retaliatory tariffs on US agricultural, raw material, and other exports. Other countries retaliated against the US steel and aluminum tariffs with retaliatory tariffs on those products as well as food, vehicles, ships, furniture, and chemicals.

• Foreign retaliation led to large declines in US exports of targeted products to China and a roughly 20% decline in targeted exports to other retaliating countries over the next year in response to a 15pp average tariff rate increase. Retaliatory tariffs hit exports of homogenous goods such as agricultural and natural resource products especially hard, at least in the short run before trade patterns could evolve. Other economic research has found that foreign retaliation led to lower US export prices as well as volumes, lower manufacturing employment, and fewer job openings.

• Foreign tariff announcements also led to declines in the US equity market, augmenting the initial impact of US announcements. Equity prices fell by a total of 7% on days when other countries announced retaliatory tariffs, on top of a 5% total decline on days when the US announced tariffs.

• Which parts of the US economy could be most vulnerable to foreign retaliation? An obvious guess is that countries would target the same US products as the US targets (autos, for example) or the same products as last time, including food and animal products; wood, metals, minerals, and other raw materials; ships; furniture; chemical products and plastics; and machinery. We would expect most countries to stick to retaliatory tariffs, but China might also impose controls on critical exports to the US that are difficult to source from other countries in sufficient volume.

(…) auto tariffs between the US and the EU would affect a fairly modest share of US auto consumption and production. But tariffs on imports from Canada and Mexico—beyond the preventative tariffs against electric vehicles produced by Chinese companies in Mexico that we expect—would be much more disruptive, as these countries account for nearly one fifth of the value of US vehicle consumption and production. In part for this reason, we think tariffs on Canada and Mexico are unlikely. (…)

Canadian officials have discussed blocking the flow of oil and gas to the US, but this proposal faced opposition from the energy-producing province of Alberta.

China is the country most likely to retaliate with other measures in addition to tariffs. In particular, China could impose controls on critical exports that the US sources overwhelmingly from China, and that remain difficult to source from other countries in sufficient volume. Shortages of these materials could be disruptive for US industries that use them, which include electronics, batteries, metal alloys, semiconductors, and medical products.

Wells Fargo:

(…) Importers technically pay the tariff, but that could be offset by the foreign seller to the extent that they lower their price as an offset to shore up demand. But in the real world, a foreign producer could only offer such concessions as far as profit margins could absorb it. At the end of the day it comes down to the elasticities of supply and demand, but research suggests it is the importer who pays the price. There’s evidence that a vast majority of tariffs levied on Chinese imports during President Trump’s first term were paid by U.S. importers. ^(…)

To put it directly if not particularly diplomatically, U.S. trade matters a lot more for Mexico and Canada in terms of economic growth than trade with Mexico and Canada matters for the United States. While U.S. exports to the two countries are equivalent to just 2.5% of U.S. GDP, exports to the United States represent more than a quarter of Mexico’s output, and about a fifth of Canada’s GDP. On the other side of the ledger, imports from the United States account for a little less than half of total Canadian imports (~14% of GDP), while U.S. imports represent around 43% of Mexico’s imports (~15% of GDP).

Having said that, it is not as though the United States can impose tariffs upon its neighbors with impunity for the U.S. economy. If the U.S. imposes a 25% tariff on all imports from Mexico and Canada beginning February 1, and the two countries retaliated in kind, the United States would experience slower domestic economic growth and higher consumer price pressure, all else equal. Model simulations we conducted suggest that U.S. real GDP growth would fall by a full percentage point relative to baseline this year, and the annual rate of consumer price inflation would be half-a-percentage point higher by year-end than it otherwise would be in the absence of these specific tariffs. (…)

Our modeling exercise suggests that the combination of U.S. tariffs and retaliatory levies by Canada and Mexico would lop about two-and-a-half percentage points off Canadian economic growth in 2025 relative to baseline, and push the annual inflation rate up by four percentage points. The growth impact is smaller for Mexico, shaving growth down about a percentage point relative to baseline, though the inflation impulse is also quite large, boosting consumer price inflation by nearly two percentage points. (…)

In the event the United States imposed a 25% tariff on Canada and Mexico, we would expect the U.S. dollar to strengthen broadly, not just against the Mexican peso and Canadian dollar. (…)

Should tariff threats become reality, we would expect policymakers at each central bank to reconsider easing cycles, but in a way where BoC and Banxico take diverging paths for interest rates. In that sense, while Canadian goods exports to the United States have declined over time, Canada maintains a strong trade relationship with its southern neighbor. Should the Trump administration impose tariffs on Canadian goods, we would expect downward pressure on Canada’s economy to build. Although tariffs may result in modest inflationary pressures in Canada, we believe BoC policymakers would respond by turning more dovish. Canadian inflation is currently below the BoC’s target, meaning tariff-related inflationary pressures may be something BoC policymakers look through, or possibly view as transitory. Avoiding recessionary conditions may take priority, and in an effort to avoid economic contraction, we believe BoC policymakers would respond with a more aggressive easing cycle.

Banxico is another story. Tariffs would also have an impact on Mexico’s growth trajectory and new levies could result in capital outflows from Mexico. Currency volatility would likely ensue and a weaker peso could result in Mexico importing inflation. Policymakers there would likely turn less dovish in an effort to defend the value of the peso and prevent a period of above-target inflation. In response, Banxico policymakers would likely end the easing cycle early.

Generally speaking, tariffs and tariff threats generate uncertainty across financial markets, and with the U.S. dollar still the pre-eminent safe haven currency, the greenback would likely strengthen not just against currencies of impacted countries but also against most G10 and emerging market currencies.

To be sure, U.S. dollar strength would apply relative to the Canadian dollar and Mexican peso. As far as the Canadian dollar, a more dovish Bank of Canada against a less dovish Fed would likely place depreciation pressure on the Canadian dollar for an extended period of time. Combined with investor sentiment toward Canada that would likely also soften, widening interest rate differentials, in our view, likely means the USD/CAD exchange rate can test CAD1.5000 by early 2026. Risks around our Canadian dollar outlook would also be tilted to the downside (i.e., more CAD depreciation).

Currency depreciation could be more extreme in Mexico. While Banxico could end the easing cycle early and preserve healthy carry relative to the U.S. dollar, risk appetite toward Mexico would likely be eroded. From a valuation perspective, we can make an argument that the Mexican peso is overvalued. The current Real Effective Exchange Rate (REER) is above its long-term average by a wide margin, a sign that if risk sentiment worsens as we expect, the peso’s adjustment back to “fair value” could result in a rather significant selloff (Figure 4). Mexico is also struggling with local idiosyncratic risks that could compound market participants avoiding Mexico and peso-denominated assets. Those country-specific developments include a widening fiscal deficit, governance challenges and rising local political risk, which could also contribute to peso depreciation pressures. As of now, we believe the USD/MXN exchange rate can hit MXN22.50 by YE-25; however, tariff risks present clear downside risks (i.e., weaker Mexican peso) to our outlook.

OpenAI, SoftBank, Oracle announce ‘Stargate Project’ to build U.S. AI infrastructure

President Trump on Tuesday announced an eye-popping investment in artificial intelligence infrastructure in the U.S., funded through a joint venture called the Stargate Project.

According to Trump, the investment will be accompanied by a spate of executive orders to ensure new data centers built in connection with the investment will have enough energy.

Trump was joined by Oracle founder Larry Ellison, OpenAI CEO Sam Altman, and SoftBank CEO Masayoshi Son, who said the investment would start with $100 billion, plus a goal of $500 billion over the course of four years.

The project’s initial equity funders are SoftBank, OpenAI, and Abu Dhabi-based investment partner MGX. OpenAI will have operational responsibility and Son will be the chairman of Stargate. Arm, Microsoft, Nvidia, Oracle, and OpenAI are the project’s “key initial technology partners.”

Ellison said the applications produced through advancement in AI would revolutionize health care, offering the example of early cancer detection and the potential for a cancer vaccine.

The Oracle founder added that Stargate already had 10 data centers under construction and expects to build infrastructure in areas beyond its first location in Abilene, Texas. (Fortune)

Donald Trump threatens to double tax rates for foreign nationals and companies President orders officials to draw up retaliatory measures against ‘extraterritorial’ taxes

The FT was the only media with this today. Short extracts:

Donald Trump has threatened to double tax rates for foreign nationals and companies in the US to hit back at “discriminatory” levies on American multinationals, in a move that threatens to trigger a global confrontation over tax regimes. (…)

The threat came as Trump primed his administration for a wide-ranging international tax fight, with digital services taxes against Big Tech groups and an OECD-brokered minimum corporate tax regime in its sights. (…)

“Ultimately we are seeing international taxation moving from a multilateral domain to a bilateral one based on strong unilateral assertions. It is a new taxation world,” he added. One senior EU official said Trump’s billionaire technology entrepreneurs were pushing him to act on tax rather than trade. “The conversation on tariffs will be transactional but the real fight will move to where fortunes are at stake and Big Tech has an interest,” they added. (…)

China Steps Up Vanke Intervention as Developer Woes Deepen

Chinese officials are taking steps to stabilize operations at China Vanke Co. after deepening liquidity stress and questions surrounding the whereabouts of its top executive triggered turmoil for its bonds and shares last week, according to people familiar with the matter.

Officials of Shenzhen, the southern metropolis where Vanke is based, held a closed-door meeting to discuss Vanke on Friday, said the people, asking not to be identified discussing a private matter. Vanke’s largest shareholder is a state firm controlled by the city, giving the local government tremendous sway over the developer. (…)

“Vanke’s liquidity could reach breaking point in 2025 in the absence of a state rescue, given its weakest cash coverage of short-term debt since 2004,” Bloomberg analysts Kristy Hung and Monica Si wrote in a note on Monday.

The company’s cash coverage of short-term debt stands at 65% and could fall further, they said, adding that its largest backer state-owned Shenzhen Metro Group Co.’s liquidity remains similarly tight.

Once deemed as too big to fail, Vanke’s debt troubles show how even the highest quality developers have been ensnared by the property crisis, now in its fourth year. The downdraft is taking a toll on the closely watched builder, as the government’s efforts to stem the sector’s decline struggles to materially reinvigorate homebuyer demand.

Vanke has $4.9 billion in yuan- and dollar-denominated bonds maturing or facing redemption options in 2025, the highest annual amount of debt repayment ever and the most for any Chinese developer this year, data compiled by Bloomberg showed. (…)