Friday, May 15, 2026

Macro Musings · Daily Briefing · Friday, May 15, 2026

China's surplus is $300 billion bigger than advertised and bond markets are pricing it in the hard way

China's current account surplus may be understated by up to $300 billion, with its expanding industrial dominance and currency management posing a growing challenge to G7 economies even as the Trump administration de-escalates trade tensions.

Personal Stakes · Est. read time 5 min

In 30 seconds: China's current account surplus may be understated by up to $300 billion, with its expanding industrial dominance and currency management posing a growing challenge to G7 economies even as the Trump administration de-escalates trade tensions. A mixed batch of US economic data shows strong Empire Manufacturing and industrial production readings alongside rising household debt, declining home-buying intentions, and consumer sentiment surveys potentially distorted by political partisanship. Government bond yields across the US, UK, Germany, Japan, and other advanced economies are hitting multi-year highs amid war-driven inflation fears, raising questions about bond market fragility and the incoming Fed Chair Kevin Warsh's ability to manage the situation. Brent crude is trading above $100-$110 per barrel driven by the ongoing Iran war, with supply chain disruptions intensifying inflation concerns globally while US public opinion remains skeptical of the war's stated goals.

China's official current account surplus over the last four quarters came in at $750 billion, built on a goods surplus of $1.2 trillion. Those are large numbers. They may also be wrong. The mechanics are interesting. China reports an income deficit of $120 billion, which is a strange thing for a country with a net foreign asset position of $4 trillion to report. Part of the gap traces to a 2022 methodology change in balance-of-payments goods accounting, which at its peak shaved $200 billion off the reported current account and still subtracts about $100 billion today. Effective tariff rate on China (term 1): 10%. China goods surplus (last 4 quarters): $1.2 trillion. China announced 200 aircraft purchases against expectations of well over 300 — a shortfall that suggests the concessions flowing the other direction have been modest at best. Busan term 2 tariff under IEEPA: 20%.

The hard data keep refusing to cooperate with the vibes. The May Empire Manufacturing Index printed at 19.6, its highest in four years, crushing an estimate of 7.2 and a prior reading of 11.0. The six-month outlook was even more exuberant, jumping 14 points to 33.5 from 19.6. Optimism about the future rebounded in May. April industrial production rose 0.7% month over month, well above the 0.3% estimate. US battery production hit a record, up 36% year over year, and has more than doubled since 2022. Consumers, for their part, are spending like people who have not read a sentiment survey. April retail sales came in at 4.9% year over year, an acceleration of 0.7 percentage points from the prior period. The restaurant and bar three-month average grew 0.5% month over month. You do not get those numbers from a population bracing for impact. The balance sheet tells a less cheerful story. Total household debt reached $18.79 trillion in the first quarter of 2026, with mortgage and auto loan debt carrying the highest balances. An annual housing survey showed the average probability of buying a new home, conditional on moving in the next three years, fell to 52.9%, the lowest since 2014. Then there is the sentiment puzzle. Consumer sentiment sits near a 75-year low. The question, he suggests, may be less 'Do you like the economy?' and more 'Do you like the president?'

The world's sovereign debt markets are selling off in unison, and the numbers are starting to look like artifacts from a different era. UK 10y yields hit 5.17%, the highest since 2008. Germany 10y Bund yields reached 3.15%, their highest since 2011. The US 30-year yield last traded at this level when George W. Bush was President. Borrowing costs have been propelled to multi-year highs from Japan to the US amid intensifying fears that war-driven inflation will force central banks to pursue higher interest rates. The bond vigilantes, it turns out, have already been at work — testing France, Japan, and the UK between 2022 and 2025. The potential fragility of some G-7 bond markets is, as one observer put it, worth keeping in mind, which is the kind of understatement that precedes something expensive. Into this environment steps Kevin Warsh, who prepares to take over as Chair of the Federal Reserve, while Jerome Powell has decided to stay on the Board. Market testing new Fed chairs has long been the popular mantra on Wall Street. The good news, such as it is: investors are not anxious about a politically induced rate cut by the Federal Reserve. The bad news is that the market may not need political interference to create problems on its own. Bonds and stocks are now positively correlated, which breaks the traditional diversification logic of a balanced portfolio. A 60/20/20 allocation remains a potentially good hedge against both right and left tails. Meanwhile, some allocators have been overweight equities and underweight bonds for going on more than three years now, a trade that has looked prescient and now looks load-bearing. One analyst argues that interest rates must come down — that apart from skyrocketing inflation, there is no alternative. The bond market, apparently, disagrees.

The same oil prices driving Global Bond Yields Surge to Multi-Year Highs is also a factor in Oil Prices Surge Past $100 Amid Iran War.

Oil prices are up 3-4% this morning. The stated logic of the war strategy involved choking out China's oil supplies. Brent crude: $110 per barrel. On the supply side, supply chain breakdowns are accelerating. This matters more than you might think: roughly 70% of US goods move by truck. El-Erian has framed current inflation concerns as a direct part of this progression, which started with a concentrated price shock (energy and borrowing). Energy is the shock. Everything else is the transmission mechanism. Japanese PPI came in hotter-than-expected, and yields on advanced-economy government bonds are soaring. Baker Hughes US oil-directed rig count up 5 on the week.

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