Hiring Blew Past Expectations With 256,000 Jobs Added  The data put further rate cuts by the Fed in doubt.

The U.S. economy added 256,000 jobs last month and the unemployment rate edged down, the Labor Department said Friday.

December’s gain in nonfarm payrolls was well above the 155,000 jobs that economists had expected, according to a Wall Street Journal survey. The 4.1% unemployment rate was also better than the expected 4.2%.

The results were the latest sign that the U.S. labor market has recovered from its midyear stumble and may even be gaining steam. But Friday’s job report also shuts the door on a rate cut at the Federal Reserve’s next meeting, which is Jan. 28-29, and reduces the chances of a cut at its subsequent meeting in March. (…)

Perfect!

Financial markets did not see it that way but, in most, if not all aspects, Friday’s employment report was perfect.

Monthly data can be volatile and confusing and subject to bizarre seasonal adjustments. For example, job growth rebounded in the retail trade sector in December (+43k) following November’s decline, a +72k swing, likely reflecting the reversal of residual seasonality from a later-than-usual Thanksgiving holiday:

But smoother quarterly data reveal the real trend: the labor market has stabilized in Q3 and Q4 at +155k/month on average. Not too hot, not too cold.

The stacked MoM contributions from the 3 components of labor income has also stabilized at about +0.4% or 5.0% annualized, thanks to stable wages:

Last 4 months of 2024:

• employment growth averaged 155k per month, a stable 1.4% annualized rate. Weekly hours are steady.
• total hourly earnings rose 4.0% a.r., slowing to +3.9% in the last 2 months and +3.4% in December when they were up 3.9% YoY, stable since August.
• service-providing wages rose 4.1% a.r., slowing to +3.9% in the last 2 months and +3.1% in December when they were up 3.9% YoY, stable since October.

Wages for production and non-supervisory employees are growing more slowly, up 3.8% YoY in December, down from 4.0% in October. Services wages: +3.7% YoY in December.

Labor income keeps growing at a 5.0% nominal rate with employment contributing 1.4% and wages 3.5%, compatible with inflation around 2.0% given 1.5% productivity growth.

Importantly, the fear that services wages would linger or rise above 4.0% and boost inflation is dissipating, confirming what PMI reports have been saying in recent months. Demand for services is strong (employment +231k in December) but wages are not exploding, actually now growing at less than 4.0%.

December CPI is out Wednesday. Wells Fargo sees core CPI up 0.2% after +0.3% in November with services up 0.3% (after +0.27%). This would reassure investors that we might be in a slowflationary growth economy thanks to rising productivity.

Which ties with what follows:

AI CORNER

We are getting more and more real world examples of AI applications

• How Are Companies Using AI Agents? Here’s a Look at Five Early Users of the Bots These businesses are using AI agents for drug discovery, customer service, marketing, writing code and research. .

Artificial intelligence agents have emerged as one of the most exciting aspects of generative AI for business because they take chatbots to the next level, performing complex tasks without help from humans.

These autonomous AI agents can follow instructions and do things from checking a car rental reservation at the airport to screening potential sales leads.

Software companies from Salesforce to ServiceNow, Microsoft and Workday last year all announced their own AI agents, which they say can help businesses be even more hands-off in areas like recruiting employees, contacting potential sales leads, creating marketing content and managing their information-technology.

If these AI agents work as promised, they could also provide businesses with the return on investment they have been looking for out of generative AI. According to some corporate technology leaders, that means the ability to tie the technology to a reduction in the number of hours employees work, or even how many new people they need to hire. (…)

By 2028, at least 15% of daily business decisions will be made autonomously through agentic AI—up from 0% in 2024, Gartner said. But, also by that time, 25% of enterprise breaches will be tied to AI agent abuse. (…)

At New Jersey-based Johnson & Johnson, AI agents are being used to help the healthcare giant with the chemical synthesis process in drug discovery. (…)

Without the help of these technologies, J&J’s scientists would go through multiple iterations of the same process manually, ensuring the right conditions are in place to optimize the switch. (…)

AI agents are becoming key players in research at Moody’s, the New York-based financial analysis and software company.

Many aspects of research, including industry comparisons and looking at companies’ Securities and Exchange Commission filings, were already outsourced to lower-cost areas outside the U.S., said Nick Reed, the company’s chief product officer. Now, some of that work is being done by autonomous AI agents—specifically those that work in conjunction with other agents.

The company has developed a total of 35 agents, some for smaller tasks like project management, and linked them up with agents for supervising them, creating what Reed calls a “multi-agent system.”

Moody’s agents are given specific instructions, personalities and access to data and research. As a result, they can come to different conclusions, especially for complex topics like analyzing the financial fitness of a company that appears healthy, but is facing geopolitical risk. (…)

EBay is using AI agents to help write code and create marketing campaigns. The company also plans to roll out agents that can help buyers find items and sellers list goods. (…)

As its agents become more sophisticated, they’ll be able to act more autonomously—writing more code on their own, line by line, as human developers would, he added. (…)

Telecommunications giant Deutsche Telekom, which has roughly 80,000 employees in Germany, has rolled out an AI agent for its employees to ask any question about internal policies and benefits, and for its service staff to ask questions about its products and services.  (…)

The Spanish company Cosentino, which makes countertop surfaces and other stone materials for homes and buildings, has brought on a “digital workforce” of AI agents to fill the gaps in its customer service staff, said Rafael Domene, the company’s CIO. (…)

Now, its “digital staff” have entirely replaced the work of three to four people previously involved in clearing customer orders, and those staff are focusing on other areas of service, according to Domene.

Want to know more about “agents”? The new wave: Agentic AI

• KPMG AI Quarterly Pulse Survey High hopes, high hurdles, and the pursuit of realizing value in 2025

The KPMG Quarterly Pulse Survey captures perspectives from 100 U.S.-based C-suite and business leaders representing organizations with an annual revenue of $1 billion or more.

Most leaders (67%) expect AI to fundamentally transform their businesses within the next two years. (…) “The data also shows growing momentum around AI agents, with over half of organizations exploring their use. Leaders are putting real dollars behind agents, but with mounting pressure to demonstrate ROI, getting the value story right is critical.” (…)

Over half (51%) of organizations are exploring the use of AI agents today. Leaders expect to utilize the capability for administrative duties (60%), call center tasks (54%) and to develop new business materials (53%) within the next 12 months. Yet, we are still in the early stages of implementation as only 12% are deploying AI agents currently. (…)

Half of leaders are currently scaling their GenAI technology, up from 10% six months ago. However, only a third (31%) of leaders anticipate being able to measure ROI in the next six months, and as of today, none believe they have reached that stage in their GenAI implementation.

“The dynamic nature of AI demands new ways to measure value—beyond the limits of a conventional business case. As leaders work to define the right metrics, those measures must be tightly aligned with the business strategy and should account for the cost of not investing,” Chase continued. (…)

More than 80% are planning to include GenAI as part of their organization’s formal performance development track. Yet just a quarter (24%) of employees are currently leveraging AI embedded into existing workflows (…).

Productivity is now the top ROI metric (79%) for the first time since Q1 2024. Profitability is a close second and increased more than any other metric from Q1 to Q4, jumping from 35% to 73%. (…)

Today, only 7% of organizations have appointed board members with GenAI expertise, although 91% plan to do so. (…)

Employee adoption is a top three challenge in 2025, and 81% of leaders are planning on including GenAI in their performance reviews,19% are doing so already.

54% of organizations are using GenAI productivity tools at least once a week. Another 24% are using GenAI embedded into existing workflows at least once a week.

• 6 Ways AI Changed Business in 2024, According to Executives

(…) While most organizations (76.2%) report that they have been using earlier forms of AI, such as machine learning, for more than three years, it has been the arrival of generative AI that has fueled the rapid growth of AI utilization and adoption. This year’s survey findings suggest that we are experiencing a once-in-a-generation transformational moment, akin to the founding of the internet in the 1990s. (…)

Even with fears of disinformation, misinformation, potential job displacement, risk of ethical bias, and other concerns, 96.6% of organizations see the overall impact of AI as beneficial. In fact, this year seemed to convince many leaders that AI is, in fact, the real deal, with 89.0% reporting that AI is expected to be the most transformational technology in a generation, up from 64.2% in last year’s survey.

• 98.4% of organizations said that they were increasing investments in AI and data, up from 82.2% last year. In addition, 90.5% say that AI and data investments are a top priority, up from 87.9%.
• 93.7% report that they’ve seen some business value from their AI investment, meaning that they are seeing quantifiable business results, which can be measured by metrics including increased customer acquisition and retention, improved customer satisfaction, and revenue and productivity improvements.
• The source of this value is significant: 74.8% see it as coming from productivity gain and customer service improvement, notably through efficiencies resulting from the application of generative AI into traditional production processes.
• 23.9% reported implementing AI in production at scale this year, up from just 4.9% last year.
• This year marked the appearance of the chief AI officer as a rapidly emerging role, with 33.1% reporting having now filled this role, and 43.9% saying that a chief AI officer should be appointed at their organization.
• A growing percentage of AI and data leaders (36.3%) now report to the most senior business leadership of their organization: the CEO, president, or COO. This signifies a recognition that reliance on data has become increasingly central to all aspects of corporate decision-making. (…)

Thankfully, David is immersed in AI deployment. He found a recent Carnegie Mellon University paper which attempts to measure the actual usefulness (ROI) of AI uses:

• TheAgentCompany: Benchmarking LLM Agents on Consequential Real World Tasks

(…) To measure the progress of these LLM agents’ performance on performing real-world professional tasks, in this paper, we introduce TheAgentCompany, an extensible benchmark for evaluating AI agents that interact with the world in similar ways to those of a digital worker: by browsing the Web, writing code, running programs, and communicating with other coworkers. We build a self-contained environment with internal web sites and data that mimics a small software company environment, and create a variety of
tasks that may be performed by workers in such a company. We test baseline agents powered by both closed API-based and open-weights language models (LMs), and find that with the most competitive agent, 24% of the tasks can be completed autonomously.

(…) Unsurprisingly, current state-of-the-art agents fail to solve a majority of the tasks, suggesting that there is a big gap for current AI agents to autonomously perform most of the jobs a human worker would do, even in a relatively simplified benchmarking setting. (…) tasks that involve social interaction with other humans, navigating through complex user interfaces designed for professionals, and tasks that are typically performed in private, without a significant open and publicly available resources, are the most challenging.

However, we believe that currently new LLMs are making significant progress: not only are they becoming more and more capable in terms of raw performance, but also more cost-efficient. Open-weights models are closing the gap between proprietary frontier models too, and the newer models are getting smaller (e.g. Llama 3.3 70B) but with equivalent performance to previous huge models, also showcasing that efficiency will further improve. (…)

AI is also increasingly used in Asia:

Singapore’s Atlas, a B2B travel technology provider, utilizes Alibaba Cloud’s LLM Qwen and Model Studio platform for its digital chatbot that offers 24/7 customer support, addressing partner inquiries related to booking processes and payment options while achieving a 45% reduction in operational costs.

Drunk Elephant, a skincare brand acquired by Shiseido in 2019, deployed Alibaba Cloud’s latest foundation model Qwen-max in its customer chatbot to enhance customer interactions in China.

David also monitors progress in LLMs throughout the world. He sees Chinese models performing very well, at lower costs, against Western LLMs in spite of their technological challenges. Contrary to most Western models, Chinese LLMs are open source, allowing for better collaboration and faster innovation at reduced costs.

In late 2023, Bloomberg argued that “without adequate processing power Alibaba cannot hope to compete in the AI arena (…)”.

In 2024, Alibaba unveiled a full-stack AI infrastructure with optimized computing efficiency, achieving over 99% model training efficiency and 20% improved resource utilization. It also introduced CUBE DC 5.0, a next generation data center architecture that reduces deployment times by up to 50%.

BABA has had 5 consecutive quarters of triple-digit AI-related revenue growth per its Q3’24 earnings report. It has a 7.9% global cloud market share (AWS 39%, MSFT 23%) but holds a 39% share of China’s cloud market and is challenging Western companies in all markets (other than North America) with high performance and low prices.

Forrester says that Alibaba offers a “powerful cloud-native infrastructure into more accessible offerings for both developers and operators, with data and analytics as a standout. It is a good fit for Chinese-based enterprises or international corporations requiring cloud scale across APAC and parts of Africa, Europe and Latin America.”

• What just happened A transformative month rewrites the capabilities of AI

Ethan Mollick, the co-director of the Generative AI Labs at the Wharton School at the University of Pennsylvania, last December 19:

The last month has transformed the state of AI, with the pace picking up dramatically in just the last week. AI labs have unleashed a flood of new products – some revolutionary, others incremental – making it hard for anyone to keep up. Several of these changes are, I believe, genuine breakthroughs that will reshape AI’s (and maybe our) future. Here is where we now stand. (…)

A bombshell of a medical working paper from Harvard, Stanford, and other researchers concluded that “o1-preview demonstrates superhuman performance [emphasis mine] in differential diagnosis, diagnostic clinical reasoning, and management reasoning, superior in multiple domains compared to prior model generations and human physicians.” The paper has not been through peer review yet, and it does not suggest that AI can replace doctors, but it, along with the results above, does suggest a changing world where not using AI as a second opinion may soon be a mistake. (…)

We have had AI voice models for a few months, but the last week saw the introduction of a new capability – vision. Both ChatGPT and Gemini can now see live video and interact with voice simultaneously. For example, I can now share a live screen with Gemini’s new small Gen3 model, Gemini 2.0 Flash. You should watch it give me feedback on a draft of this post to see what this feels like.

Or even better, try it yourself for free. Seriously, it is worth experiencing what this system can do. Gemini 2.0 Flash is still a small model with a limited memory, but you start to see the point here. Models that can interact with humans in real time through the most common human senses – vision and voice – turn AI into present companions, in the room with you, rather than entities trapped in a chat box on your computer. The fact that ChatGPT Advanced Voice Mode can do the same thing from your phone means this capability is widely available to millions of users. The implications are going to be quite profound as AI becomes more present in our lives.

AI image creation has become really impressive over the past year, with models that can run on my laptop producing images that are indistinguishable from real photographs. They have also become much easier to direct, responding appropriately for the prompts “otter on a plane using bluetooth” and “otter on a plane using wifi.” If you want to experiment yourself, Google’s ImageFX is a really easy interface for using the powerful Imagen 3 model which was released in the last week.

But the real leap in the last week has come from AI text-to-video generators. (…) OpenAI released its powerful Sora tool and then Google, in what has become a theme of late, released its even more powerful Veo 2 video creator. You can play with Sora now if you subscribe to ChatGPT Plus, and it is worth doing, but I got early access to Veo 2 (coming in a month or two, apparently) and it is… astonishing. (…)

What’s remarkable isn’t just the individual breakthroughs – AIs checking math papers, generating nearly cinema-quality video clips, or running on gaming PCs. It’s the pace and breadth of change. A year ago, GPT-4 felt like a glimpse of the future. Now it’s basically running on phones, while new models are catching errors that slip past academic peer review. This isn’t steady progress – we’re watching AI take uneven leaps past our ability to easily gauge its implications. And this suggests that the opportunity to shape how these technologies transform your field exists now, when the situation is fluid, and not after the transformation is complete.

Chinese Trade Surplus Soars to $1 Trillion Ahead of Trump Return Exports hit record in 2024 as threats of US tariffs loom

Exports rose 10.7% YoY in December in dollar terms, while imports climbed 1.0%. In November, exports rose 6.7% while imports declined 3.9%.

(…) Exports accounted for nearly a quarter of the economy’s expansion in 2024, although that support now faces external challenges from the US and other trade partners. (…)

Exports to the US rose to the highest in more than two years in December, hitting almost $49 billion and taking the total for the year to $525 billion.

The value of shipments to all markets rose almost every month last year, pushing it above the 2022 highs during the pandemic. Exports rose nearly 11% to $336 billion in December, the second-highest month on record and behind only December 2021, when Chinese firms saw a surge of pandemic-led demand. Outbound shipments for the whole of last year were worth $3.6 trillion. (…)

Efforts to dodge levies have also boosted exports to Southeast Asia, with shipments of electronic components to Vietnam soaring since the first trade war. The country overtook Japan as China’s third-largest export destination for the first time last year, driven mostly by a surge in shipments of electronics parts that are assembled and then exported to the US and elsewhere.

Despite shipping record amounts of goods, Chinese exporters have been getting less money for their products, with export prices falling for more than a year as deflation inside China gets worse and pushes down the cost of goods.

As a result, the growth in the volume of Chinese trade has outpaced value, with total export volumes rising 7.3% through November, according to the Ministry of Transport, faster than the 5.4% rise in values. (…)

The surplus with the US fell to $361 billion last year, the lowest in three years, but that was still well above the pre-pandemic levels. The surplus with the 10 Southeast Asian nations in Asean soared to a record, and that with the European Union rose to almost $250 billion. (…)

• China corporate profits set for third year of declines Oversupply drives intense competition that is undermining prices and profitability

The FT reports that corporate profits in China for companies with more than Rmb20mn ($2.7mn) in revenue declined by an average of 4.7% YoY between January and November on revenues up 1.8%. One quarter of companies lost money in 2024.

State-owned companies’ profits fell 8.4% while private or foreign companies had a 1.0% decline. Deflation is tough to navigate.

EARNINGS WATCH

The Q4’24 earnings season begins this week but we already have the 22 early reporters: a 77% beat rate and a +4.9% surprise factor with aggregate earnings up 26.8% YoY on revenues up 5.3%.

Three months ago, the same companies (21 in fact) recorded a 76% beat rate and a +3.5% surprise factor with aggregate earnings up 23.8% on revenues up 2.7%.

Three months ago, analysts expected S&P 500 earnings to rise 5.0% on revenues rising 4.0%.

Today, in spite of more subdued pre-announcements, analysts are expecting earnings to rise 9.5% on revenues up 5.3%. Ex-Energy: +12.4% in Q4 after +11.8% in Q3.

Double digit growth forecasts persist throughout  2025.

Banks kick off the season Wednesday and Thursday facing a high bar of 18.0% earnings gains following +8.6% in Q3. Revenue growth is also sustained, actually accelerating from +4.8% ex-E in Q4’24 reaching +6.9% in Q4’25. Only Health Care and Utes will experience slowing revenue growth if analysts are right. No disinflation in those numbers!

Goldman Sachs warns that the bar for 4Q earnings season is elevated relative to recent quarters.

Consensus expectations for 4Q 2024 earnings growth are nearly the highest since 4Q 2021, exceeded only slightly by the expected 9% year/year EPS growth ahead of 2Q 2024 earnings season. Over the last 11 quarters, realized S&P 500 EPS growth has exceeded consensus estimates by a quarterly average of 4 pp. We expect that corporates will continue to report solid earnings growth this quarter but that the magnitude of beats will likely be smaller than in recent quarters given the higher bar.

The S&P 500 trailing earnings are now $241.94. Full year 2024: $243.34e. Forward EPS: $272.92e. Full year 2025: $273.91e.

The P/E is now 24.0x vs 21.8x at the end of 2023 and 2022 respectively. We sure need good earnings growth this year.

The Rule of 20 P/E is 27.3 on trailing earnings with inflation at 3.3%.

This 36% overvaluation (from 20.0) shrinks to 18% using 2025 EPS and inflation of 2.5%, two rather optimistic but not blue sky forecasts.

The spread between the blue (S&P 500) and yellow (R20 Fair Value) lines above is the graphic measure of the overvaluation from the long term median R20 value (20.0). Valuation per se is not a timing tool but the trend in the R20 Fair Value has generally been critical.

Positive earnings growth amid a slowflation environment could keep equity markets buoyant. A cautious Fed, mindful of inflation but not overly restrictive is thus preferable to one too lenient or too hawkish.

TECHNICALS WATCH

The S&P 500 has a habit of at least correcting to its 200-day moving average (now 5572)…

… but not once in 2024. In April and September, the setback stopped at the 100-dma, currently 5820:

FYI

• NVDA is 2.7% above its 100-dma and 12.2% above its 200-dma ($119).
• GOOG is 10.4% above its 100-dma and 10.8% above its 200-dma ($119).
• AMZN is 9.2% above its 100-dma and 12.7% above its 200-dma ($119).
• AAPL is 1.7% above its 100-dma and 9.0% above its 200-dma ($119).
• META is 7.1% above its 100-dma and 13.7% above its 200-dma ($119).
• TSLA is 24.4% above its 100-dma and 37.8% above its 200-dma ($119).
• MSFT is 1.3% below its 100-dma and 1.5% below its 200-dma ($119).

All these moving averages are still rising except MSFT which is also the only stock on that list showing flattening exponential moving averages, indicating a potential major change in direction:

(Ed Yardeni)

Between 1950 and 2021, the first quarter post elections has been wobbly for equities:

@granthawkridge

But how useful are these S&P 500 stats when the top 10 stocks account for 38.5% of the index:

@edclissold

Ed Yardeni:

(…) Some of these pullbacks, which are 5%-10% declines, could turn into corrections of more than 10% but less than 20% this coming week if Tuesday’s CPI inflation rate for December is higher than expected, causing the 10-year Treasury bond yield to revisit 2023’s high of 5.00%. (…)

The buying opportunity in stocks and bonds might be better after Inauguration Day when President Donald Trump is expected to sign a bunch of Executive Orders covering tariffs, deportation, deregulation, taxes, and energy. One of the reasons that bond yields rose on Friday, in addition to the strong jobs report, was the reported increase in consumers’ short-term and long-term inflation expectations so far during January. That suggests consumers expect higher tariffs to boost inflation. to

CONSUMER WATCH

Spending per household was up 2.2% year-over-year (YoY) in December, following the 0.6% YoY rise in November, according to Bank of America aggregated credit and debit card data. December’s growth was the second-fastest YoY spending growth in 2024. And spending per household rose a healthy 0.7% month-over-month (MoM) on a seasonally-adjusted (SA) basis in December.

Spending on services was strong in December, with seasonally-adjusted Bank of America card spending per household on services including restaurants up 0.5% MoM. Notably, retail saw a bounce in December, with spending on retail, excluding restaurants and gas, up 1.3% for the same period – the biggest monthly rise of 2024 in this category.

The strength in retail was broad-based. Spending growth for clothing, up 8.5% MoM, was particularly strong in December. And gas spending growth accelerated in December, up 3% MoM. However, the rise does not appear to be due to higher gasoline prices, but more reflective of consumers continuing to travel through the end of the year.

Looking across income cohorts, higher-income households’ card spending in December continued to grow at a faster rate than that of their middle- and lower-income counterparts, though the recent relative recovery in lower- and middle-income households’ spending means the difference is small.

Of course, a major factor in consumer spending is the strength of the labor market. After-tax wage growth, based on Bank of America deposit data was 3% YoY last month across all income cohorts, with a broad-based uptick in growth.

  

At the start of 2025, wage growth, particularly among lower-income households, may be supported by minimum wage increases occurring across 21 states. Many state-level minimum wage increases are linked to the rate of consumer price inflation. Additionally, retirees’ income growth may also be supported by the 2.5% cost-of-living increase to social security benefits effective from January.

Bank of America card data does not currently show that consumers are increasing their share of card spending on large big-ticket items to get ahead of potential price increases.

Canada Plots Broad Tariff Retaliation If Trump Starts Trade War One proposal would touch most products the US sells to Canada

(…) One list being circulated internally includes nearly every product the US exports to Canada, said one government official, with the general aim of going “dollar for dollar” on tariffs. (…)

Canada is the world’s largest national buyer of US goods, having imported about $320 billion worth in the first 11 months of last year — slightly less than the European Union, which bought $341 billion. The US trade deficit on goods with Canada was $55 billion during that period of time, according to US Commerce Department data. (…)

Under a 25% tariff by the US, Canadian gross domestic product would take a hit of as much as 3.8%, according to calculations by Bank of Nova Scotia economists. If Canada chooses “full retaliation,” that cost rises to as much as 5.6%, though it would take a number of years for that damage to accumulate.

“The GDP hit is higher if we retaliate than if we don’t. Of course, that is a cost that might be worth paying, since retaliation also increases the economic cost in the US,” Trevor Tombe, a University of Calgary economics professor, said by email. (…)

Another option that has been examined by Trudeau’s government is using export taxes on strategic commodities, such as oil, uranium and potash. This would be an extreme step, but such a move would put immediate pressure on American energy prices. (…)

Trump complained that the U.S. “subsidizes” Canada to the tune of US$200 billion in trade saying “we don’t need anything” that Canada trades with the U.S..

The reality is that the entire trade deficit stems from oil and gas imports from Canada. Excluding energy, the U.S. has had a trade surplus for 20 years.

But why would the U.S. import oil from Canada when it is a net exporter of crude oil?

Because many U.S. refineries, particularly in the Midwest and Gulf Coast, are specifically designed to handle heavy crude oil from Canada’s oil sands. They can’t use the light oil that gushes from American wells.

Canadian oil is thus critical in supplying refineries producing 24% of U.S. oil products. The only alternative is Venezuela, not as cost effective and not as close a friend as Canada is…

From the American Petroleum Institute:

From 2010 through 2019, total petroleum trade volume between the United States and Canada doubled from approximately 1.0 to 2.0 billion barrels annually. Most of the volume growth over this period came from increased trade in crude oil, driven by U.S. imports of heavy crude oil by pipeline and rail from Western Canada (…).

(…) driven by discounts on heavy crude grades, many U.S. refineries have equipped their facilities with the additional processing and treatment capacity needed to transform heavy, high-sulfur crude oil into high-value end products. (…)

Given the limited global supply of heavy oil and the landlocked locations of many U.S. heavy oil refiners, the United States is not able to easily replace Canadian heavy oil with supply from other sources.

U.S. refining of Canadian heavy crude oil contributes to the economic output of several U.S. States. ICF estimates that, in 2019, U.S. refiners enhanced refinery margins (product revenues minus crude costs) by approximately $6.1 billion by processing Canadian heavy oil instead of regionally available replacement grades.

These enhanced margins contribute directly to value added in the industrial sector, which in turn contributes to U.S. Gross Domestic Product (GDP) and to the Gross State Product (GSP) of 21 states. Most of these benefits—approximately $5.0 billion—accrued to refiners in the U.S. Midwest/Midcontinent region (Petroleum Administration for Defense District [PADD] 2), where approximately 70% of all Canadian heavy oil barrels were imported and where low-cost, cross-border pipelines reduce the delivered cost of Canadian crude.

BTW:

The Era of Free Government Is Over Rising bond yields around the world signal new fiscal realities.

The WSJ Editorial Board:

Say what you will about 2025, the year is off to a rocky start for anyone who needs to figure out how to fund a government. Bond yields are rising across the developed world, raising some awkward questions about when politics will catch up with new economic realities. (…)

As go U.S. bonds, so go borrowing costs in the rest of the world. The 10-year Japanese government bond, at nearly 1.2%, is at a level last seen in 2011. The German 10-year bund, the eurozone’s benchmark, is at a five-month high above 2.5% after a steep ascent in the past month.

You can pick from among several theories to explain this, all of which may play some role. In the U.S., a benign explanation is that investors expect stronger economic growth under President-elect Trump’s tax and regulatory policies. Less benign is concern that the Fed has cut rates too much, too soon and is willing to accept more inflation than its 2% target. (…)

Interest repayments on federal debt already are higher than defense spending. Ultralow interest rates allowed the enormous spending expansion of the post-2008 era, and the dollar’s status as a reserve currency gives Congress more leeway to borrow than is healthy. Presumably this privilege isn’t limitless. (…)

No one is immune from a widespread repricing of risk, no matter how safe they think their balance sheets are. It’s still possible to imagine the U.S. economy will come safely through higher bond yields and macroeconomic uncertainties, but markets are sending a message that the era of “free” government is over.

AI Chip Curbs Trigger Rare Public Fight: Tech Giants vs. China Hawks Silicon Valley battles both Biden and Republicans in clash over chip trade

Tension between national-security hawks and the biggest American technology companies over China policy has burst out into the open.

The trigger: a Biden administration plan to limit the global sale of advanced artificial-intelligence chips. It seeks to ensure the U.S. keeps control over the future of AI by blocking Beijing from accessing AI technology through third countries.

The plan drops the “mother of all regulations” and “does more to achieve extreme regulatory overreach than protect U.S. interests,” said an Oracle executive vice president, Ken Glueck, in a blog post. On the other side, a Republican-led House committee urged the administration to go through with tough curbs, calling it a “once-in-a-generation moment” to block Beijing’s ambitions. (…)

In October 2022, the Biden administration placed restrictions on the export to China of high-end American chips and some tools used to make them. It also prohibited other countries from selling those goods if they used any U.S. technology to produce them. It followed by expanding the curbs several times, most recently in December when it banned the export to China of certain memory chips essential to the training of AI algorithms.

Both sides in the current dispute agree the rules were a milestone in American policy and have at least hindered China’s AI ambitions by making it hard for Chinese entities to buy the most advanced chips from AI leader Nvidia and others.

The hawks say the rules have been well-intentioned, but left backdoor routes for China to access U.S. technology. Some say U.S. officials moved so slowly that Beijing was able to stockpile much of the banned technology.

Many tech companies counter that the regulations so far risk hobbling America’s industry leadership.

Even before the public clash this week, tensions had bubbled beneath the surface. Weeks after the first round of U.S. export controls, Nvidia released new chips for the Chinese market that were modified so they didn’t require a U.S. export license. A year later, the U.S. updated its controls, and Nvidia updated its China chips so they would again avoid the export ban.

Such moves drew the wrath of U.S. officials, who felt that Nvidia wasn’t aligning itself with the spirit of the law, according to people familiar with the matter. Nvidia says the company complies with all applicable export-control laws and requires its customers to do the same. (…)

Now tech companies are openly fighting back against policymakers.

A “last-minute rule restricting exports to most of the world would be a major shift in policy that would not reduce the risk of misuse but would threaten economic growth and U.S. leadership,” Nvidia said. (…)

Industry officials say if U.S. companies had to go through red tape in Washington every time they tried to sell an advanced chip or server overseas, customers would get fed up and opt for more stable and reliable Chinese alternatives, even if inferior.

That, they said, would give the Chinese industry the foothold it needs to catch up and dominate the AI business globally, replicating Chinese companies’ lead in high-tech areas such as electric vehicles and solar panels.

Lawmakers and former White House staffers under both Trump and Biden say that any time advanced American AI technology is sold abroad, it could end up in China’s hands and needs to be regulated for that reason, just as the U.S. wouldn’t allow an American jet fighter sold to Saudi Arabia to be resold to China. (…)

Trump hasn’t recently detailed his position on export controls, but in his first term he blocked Chinese telecommunications equipment leader Huawei and other Chinese civilian tech companies from accessing U.S. technology.

The Trump transition team has yet to reach out to Alan Estevez, the top Commerce Department official, to discuss export controls, U.S. officials say. That leaves less than two weeks for the incoming administration to coordinate on AI and China export controls. Raimondo, however, has spoken to Trump’s nominee to succeed her, Howard Lutnick. A Commerce spokesman didn’t immediately respond to a request for comment.

Trump’s personnel picks, including incoming national security adviser Michael Waltz, are known for their tough views on China. Jacob Helberg, Trump’s choice as the State Department’s top economic policy and trade official, is a founder of a consortium of tech investors and lawmakers concerned about the rise of China.

“The American people elected President Trump to stand up to China, enforce tariffs on Chinese goods, and Make America Strong Again. He will deliver,” said Karoline Leavitt, a spokeswoman for the incoming administration, in an email.

Xi Jinping to send top-level China envoy to Donald Trump’s inauguration Unusual diplomatic overture comes as Beijing braces for escalating tensions with new administration

(…) China has previously been represented by its ambassador in Washington. (…)

The envoy would also hold substantive discussions with Trump’s team, several people said. (…)

Mike Waltz, Trump’s incoming national security adviser, and his deputy Alex Wong are both viewed as being very tough on China. Trump has also named Republican US Senator Marco Rubio, one of Congress’s most vocal China hawks, to be his secretary of state.

Trump said this week that his team was already in contact with Beijing. “We’ve been talking through their representatives,” Trump said in an interview with the Hugh Hewitt radio show, when he also blamed China for the Covid-19 pandemic in 2020.

Chinese Developers Begin New Year With Deepening Debt Woes

Chinese property developers are starting 2025 facing liquidation petitions, sliding share prices and mountains of debt, as the nation’s real estate crisis enters its fifth year with little sign of improvement.

On Friday morning, shares of defaulted Chinese builder Sunac China Holdings Ltd. fell as much as 30% in Hong Kong, the most since Oct. 8. That was after the company, a white knight to a major peer a few years back, received another winding-up petition.

Sunac, whose projects including high-end residential complexes in Beijing, restructured its offshore debt in 2023, but has been hit by concerns about its ability to meet new repayment obligations.

Meanwhile, China Vanke Co., one of the country’s largest property developers, has $4.9 billion of debt coming due this year as worries grow about its liquidity and whether it will be able to find new financing to avoid defaults. Vanke’s 3.5% dollar bond due 2029 is down about 7 cents year to date, falling to its lowest level since September, Bloomberg-compiled data show. (…)

On Friday, a key offshore subsidiary of China Evergrande Group was ordered to liquidate by a Hong Kong court. Three other major developers including Country Garden Holdings Co. and Times China Holdings Ltd. are also set to defend against liquidation petitions in Hong Kong this month. (…)

Country Garden just proposed new terms with key banks that would slash its debt and lower borrowing costs, but a key bondholder group isn’t on board, people familiar with the matter said.

Defaulted developer Logan Group Co. also recently unveiled a revised term sheet for its $8 billion offshore restructuring.

But without a significant recovery in the sector, developers will continue to struggle meeting repayment deadline. Chinese builders who were previously affected by the property crisis will be the biggest source of defaults in Asia in 2025, according to analysts at JPMorgan Chase.

2024 was Earth’s hottest year on record, exceeding Paris target

Last year was Earth’s warmest on record, eclipsing 2023’s record and for the first time exceeding the Paris target of 1.5°C above preindustrial levels, the Copernicus Climate Change Service announced Thursday. (…)

• Studies show that if warming exceeds 1.5°C relative to preindustrial levels, the odds of potentially catastrophic impacts, such as the shutting of key ocean currents and melting of Arctic and Antarctic ice sheets, would increase considerably.
• Regarding exceeding the 1.5°C marker, Copernicus’ news release stated: “Global temperatures are rising beyond what modern humans have ever experienced.”