Weekly Research Briefing: Stressed Chains

“At some point, I’m going to lower them, because otherwise, you could never do business with them, and they want to do business very much,” Trump said in an interview that aired Sunday on NBC’s Meet the Press with Kristen Welker…

Trump also praised some statements that China made recently as “positive”, while reiterating that any deal between the two countries would reach has to be “fair.”

China said on Friday it was assessing the possibility of trade talks with the US since Trump’s tariffs were announced last month, the first sign that negotiations could begin between the two sides.

“China is currently evaluating this,” the ministry’s statement said. US stocks rose on Friday following those signals from Beijing.

When the Covid pandemic hit, factories in China shut down and global shipping traffic slowed. Within a matter of a few weeks, products began disappearing from U.S. store shelves and American firms that depend on foreign materials were going out of business.

A similar trend is beginning to play out, but this time the catalyst is President Trump’s decision to raise tariffs on Chinese imports to a minimum of 145 percent, an amount so steep that much of the trade between the United States and China has ground to a halt. Fewer massive container ships have been plying the ocean between Chinese and American ports, and in the coming weeks, far fewer Chinese goods will arrive on American shores.

While high tariffs on Chinese products have been in place since early April, the availability of Chinese products and the price that consumers pay for them has not changed that much. But some companies are now starting to raise their prices. And experts say that the effects will become more and more obvious in the coming weeks, as a tidal wave of change stemming from canceled orders in Chinese factories works its way around the world to the United States.

The number of massive container ships carrying metal boxes of toys, furniture and other products departing China for the United States plummeted by about a third in April.

The reason consumers haven’t felt many of the effects yet is because it takes 20 to 40 days for a container ship to travel across the Pacific Ocean. It then takes another one to 10 days for Chinese goods to make their way by train or truck to various cities around the country, economists at Apollo Global Management wrote in a recent report. That means that the higher tariffs on China that went into effect at the beginning of April are just starting to result in a drop in the number of ships arriving at American ports, a trend that should intensify.

“U.S. consumers will within a few weeks see empty shelves in clothing stores, toy stores, hardware stores and retail drugstores, and higher prices of the goods that still are on the shelves,” he said.

@dailychartbook: "US retailers expect a drop of 20-30% in imports in the coming months." - Goldman Sachs

Estimates show that more than 90% of fireworks used in the United States are imported, and 95% of fireworks imported into the US come from China, see charts below. Similarly, there are many different categories of products that are imported into the US where demand is inelastic, and China is the only provider of that product, see below. The bottom line is that inflation will increase significantly for the product categories where China is the main producer of that good, likely including fireworks.

"I'm also -- I also looked at inventories. Inventories have really not held up very well. And my concern there is that businesses are afraid that a recession will come into place. And they don't want to be stuck with inventory on their shelves. They'd rather have their shelves empty than be stuck with something that they'd have to sell at a much lower price." – U.S. Bancorp Chief Economist Beth Bovino

"North American market has been tough for quite some time, but clearly turned tougher after the announcement of the tariffs in February. Consumer sentiment is weak and retailers are clearly cautious to build inventory ahead of high season." – Thule Group AB CEO Mattias Ankarberg

Brides are buckling under the uncertainty over tariffs, which are threatening to push costs to new heights as wedding season kicks off. They are panic-buying candles and speed-ordering wedding dresses. They are downgrading from roses to carnations, cutting back on party favors and ditching the professional videographer for a guy with a smartphone…

Though a 90-day pause on many of the planned tariffs has blunted the impact, brides say vendors have raised prices on everything from linens to dresses in response to new and anticipated levies.

Brides are taking to social media to share tales of woe. In one Reddit wedding forum, a woman shared that the custom-made gown she ordered over a year ago was suddenly $1,500 more expensive, after her designer cited tariff-related production charges. Pashion footwear, a popular shoe company for brides, began adding a roughly $60 U.S. import tariff tax to its shoes in May.

Some wedding boutiques are raising bridal gown prices 10% to 30%, said Sandra Gonzalez, vice president of the National Bridal Retailers Association, a trade organization. About 90% of dresses are manufactured in China, she said…

The current 10% tariff on all imported goods, along with rising shipping costs, led florists like Alison Fleck to raise prices. Fleck, whose wedding floristry business, Bloom Culture, is in Oklahoma City, said she’s now giving couples quotes that are 10% to 20% higher.

“People look at me like I’m insane when they see the prices, but I tell them it’s what I’m paying, too,” said Fleck. “The carnation is now the cost of a rose, the rose is now the cost of a garden rose.”

The F-35 is a symbol of U.S. military and technological might. It is also reliant for more than 80 parts on a little-known company based in a quiet Danish suburb.

Overall, the jet fighter, made by Lockheed Martin, has more than 1,900 suppliers from about a dozen countries that provide everything from tiny chip boards to the ejector seat.

The F-35’s sprawling supply chain is one example of how even the U.S. defense industry, which exports billions of dollars worth of weapons while importing few in return, could be challenged by the Trump administration’s sweeping trade policies.

Tariffs are primed to make many of the components and raw materials that go into modern weapons more expensive. Defense companies are now wrestling with the potential impact and have, like other industries, lobbied the White House for exemptions. In the meantime, the Pentagon could end up footing much of the bill.

A tariff-free environment “has been instrumental to the [aerospace and defense] industry maintaining one of the largest trade surpluses across American manufacturing industries for decades,” said Christopher Calio, chief executive of RTX, which makes the F-35’s sensors and engine.

“But like many companies in the industry, our supply chain and customer base are global, and we import raw materials, parts and modules from around the world,” Calio said on a recent earnings call.

TD COWEN: PRICE HIKES FROM TARIFFS EXPECTED TO APPEAR IN MAY INFLATION REPORT

The first signs of tariff-related cost pass-throughs to consumers are expected to appear in the May inflation report. The most significant impact will likely emerge over the summer as businesses and retailers deplete lower-cost inventories. For April, core inflation is expected to remain subdued, driven by softening travel and hotel rates and persistently high retail inventories. However, already-strained consumers are in a challenging position—facing a choice between absorbing higher prices from tariffs or increased costs stemming from shipping surcharges.

‪@carlquintanilla.bsky.social: BREAN: ISM Services Prices Paid, “which we have found to be a useful indicator of PCE price inflation trends, jumped by 4.2 points to the highest level since January 2023 ..”‬‬‬

"While tariff announcements mean manufacturing dominates the news, a worrying backstory is developing in the vastly larger services economy, where business activity and hiring have come closer to stalling in April amid plunging business confidence... The resulting bottom line from the services sector is a heightened risk of stalling growth and rising inflation, or stagflation."

T. Rowe Price is slowing hiring. JetBlue is reducing nonessential hiring. Polaris, which makes off-road vehicles, has paused some hiring for now. And more than a dozen universities, from Harvard to Duke, have enacted hiring freezes. All the organizations, and many more, say bringing in fewer employees will help them cut costs and weather a turbulent moment.

“We have instituted our recessionary playbook,” Robert Mack, chief financial officer of Polaris, told investors last week, citing a downturn in its industry.

A stop-start trade war, sinking consumer confidence and dramatic cuts to federal funding in education, research and the sciences have piled up in the past month. They come on top of companies’ years long desire to embrace artificial intelligence to make workers more efficient.

During earnings calls over the past two weeks, companies big and small shied away from mentioning layoffs, but repeatedly said they would be more cautious before bringing in new workers.

BoA (Subramanian): Hyperscalers confirmed that the AI investment cycle remains very much intact, with GOOGL/MSFT reiterating spending plans, META raising capex guidance and AMZN highlighting continued capacity constraints.

In aggregate, capex for the group grew 62% YoY in 1Q (vs. 68% in 4Q). Although capex growth is set to decelerate throughout the year, hyperscalers are still expected to grow capex 35% YoY in 2025, far outpacing forecasts for the rest of the index (+6% YoY).

"Our global comp sales in the first quarter declined by 1%, and while we expected global QSR industry traffic would be down in the first quarter, actual industry traffic fell more than we anticipated in several of our large markets, including the U.S. In the U.S., overall QSR industry traffic from the low-income consumer cohort was down nearly double digits versus the prior year quarter. Unlike a few months ago, QSR traffic from middle-income consumers fell nearly as much, a clear indication that the economic pressure on traffic has broadened. However, traffic growth from the high-income cohort remains solid." – McDonald's CEO Chris Kempczinski

"Our carryout business comps were up 1%, while delivery was down 1.5% in the quarter. Our delivery business continues to be impacted by macro pressures that are impacting the low-income consumer." – Domino's Pizza CFO Sandeep Reddy

"...there is significant weakness in our main cabin demand, significant weakness among our most discretionary travelers." American Airlines CEO Robert Isom

A superb quarter in trading for European banks:

• UBS CEO: "In some days, trading volumes exceeded their COVID era peak by around 30%."
• SocGen CEO: "Market volatility is broadly supportive of global market businesses for banks, as is the case for us
• Barclays CEO: "...weaker client confidence is delaying investment banking transactions, but for us, this has been more than offset by the benefits of the impact of volatility on trading revenues in markets"

@Schuldensuehner: German stocks are leading the way as the week begins. Investors are increasingly willing to pay a premium for strong-performing German equities. According to Bloomberg, the Dax now trades at its highest price-to-earnings (P/E) premium over the Stoxx 600 since 2009.

Robert Greenberg never ran Skechers like a typical public company. The longtime chief executive avoided quarterly earnings calls. He tapped his son as his No. 2 executive. Soon, he won’t have to worry about reporting financial results or securities filings.

The Skechers founder agreed to sell the maker of comfy sneakers in a deal worth about $9.4 billion to 3G Capital, a private-equity firm that has a history in the consumer-goods sector and had a hand in deals with AB InBev ABI 0.07%increase; green up pointing triangle and Kraft Heinz.

Greenberg, 85, stands to collect a more than $1 billion payout from the stake he controls in the company through trusts. The CEO and other executives, including his son Michael Greenberg, have agreed to stay on to run the business. They will also take a stake in the privately held company.

The deal offers shareholders $63 in cash for each share they hold, sending Skechers shares surging 25% in Monday morning trading.

@KevRGordon: Brent Crude #oil down to its lowest since February 2021

Mr. Buffett, who turns 95 in August, is often described as a symbol of American capitalism. In truth, he is an outlier. He is more the conscience of capitalism, willing to speak uncomfortable truths about the system’s ills while others remained silent. (His public comments on issues like tariffs over the weekend are a prime example.)

The billionaire always comes across as a gentleman, and in an age of distrust he has become a trusted figure. Fellow business moguls and government officials admire him because of his success, yes — Berkshire reported $89 billion in net profit last year, and it is one of the biggest buyers of U.S. Treasury bonds — but also because he has appeared unchanged by wealth. He lives in a modest house in Omaha, and for years drove his own car, including to the drive-through at McDonald’s.

He isn’t perfect, something he would acknowledge, and urged his followers to stay humble as he discussed his own investing misses (what he called his “sins of omission”). But that also got to one of his biggest accomplishments, using his annual Berkshire letters and marathon Q&A sessions with shareholders to educate generations about business, investing and life itself.

@TheTranscript_: The two questions Buffett asked CEOs:

"Ask them this: 'If you were stuck on a desert island for 10 years and could only own the stock of one of your competitors, which one would it be — and why?' Then ask the reverse: 'If you had to short the stock of one competitor — and stake your net worth on it while you’re away — which one would it be, and why?' Every manager loves to talk about their competitors. They’re like a bunch of schoolkids when it comes to that. I probably learned more about industries by asking those two questions than through anything else"

Some of America’s Most Important Economic Data Is Decaying

A former head of the BLS on why gathering official statistics is getting harder.

Gathering official economic data is a huge process in the best of times. But a bunch of different things have now combined to make that process even harder. People aren’t responding to surveys like they used to. Survey responses have also become a lot more divided along political lines. And at the same time, the Trump administration wants to cut back on government spending, and the worry is that fewer official resources will make tracking the US economy even harder for statistical departments that were already stretched. Bill Beach was commissioner of labor statistics and head of the US Bureau of Labor Statistics during Trump’s first presidency and also during President Biden’s. On this episode, we talk to him about the importance of official data and why the rails for economic data are deteriorating so quickly.