In 30 seconds: The US May trade deficit widened to $77.6 billion, driven by a record surge in tariff-exempt computer imports for AI data centers, while consumer goods imports remain suppressed by tariffs and trade flows shift away from China toward Taiwan, Vietnam, and Thailand. Brad Setser and others argue China is masking currency intervention by routing foreign exchange through state commercial banks rather than the PBOC's formal reserves, keeping the yuan managed while appearing not to intervene. June NY Fed data showed 1-year inflation expectations rising to their highest since September 2023, while hiring slowed for a second week and vehicle sales ticked up, painting a mixed picture of the US economic outlook. Iran has attacked multiple oil and LNG tankers in the Strait of Hormuz, causing vessels to go dark on AIS, while analysts note speculator short positions in crude and China's role as a swing energy consumer moderating price extremes.
The US trade deficit widened to $77.6 billion in May, up from $54.6 billion the prior month and slightly better than the $78.4 billion estimate. The US imported $58 billion in computers tariff-free last month, a record, roughly matching the next three largest tariff carveouts combined. Other capital goods imports are doing nothing. The geography of trade is shifting visibly. The trade deficit has consequently shifted toward Taiwan, Thailand, Vietnam and Mexico as final assembly relocates away from China. The underlying deficit is actually larger than the headline figure.
The same Brad Setser driving the analysis in US Trade Deficit Widens Amid AI Import Surge is also a key voice in China FX Intervention Hidden in State Bank Balances.
If you want to manage your currency but would prefer that nobody notice, the trick is not to stop intervening. The trick is to intervene somewhere people aren't looking. The CNY USD rate is, by one prominent economist's account, obviously managed. Yet the stability of the PBOC's balance sheet is not consistent with the obviously managed CNY USD rate. That is a strange coincidence, unless it isn't one. The argument is straightforward: some of China's exchange rate management results in changes to the balance sheet of the state financial sector, not just changes to the PBOC's formal reserves. The central bank's books stay eerily flat. This is not a new playbook. The fx deposit series jumped back in 2012 even though the PBoC balance sheet was quiet, because the state banks were overpaying for fx to keep it out of settlement; more recently the deposit series hasn't moved with USD versus CNY rates. Before the global financial crisis, swaps moved large volumes of foreign exchange over to the state commercial banks, and entrusted loans, $95 billion of which were converted, served the same warehousing function. FX settlement — which historically has been an intervention variable, with purchases and sales still correlating with how spot trades inside the band — is no longer showing up on the PBOC's balance sheet, as the black and red lines have diverged. The plumbing changed; the policy didn't. The broader question is what China actually wants from its currency. One view, articulated since 2009, holds that China has no interest in the yuan as a reserve asset and has been explicit about it. Gold is the reserve asset they prefer, and as it rises it will aid the rebalancing toward consumption. Gold: $4,125.70. The state banks' balance sheets are doing the heavy lifting. And if you only look at the first one, you will conclude, incorrectly, that China has stopped managing its exchange rate. It hasn't. It just moved the furniture.
New York Fed median 3-year inflation expectations: 3.34%. The picture gets more interesting beneath the headline. Gas price growth expectations fell to 1.5%, a drop of 3.5 percentage points and the lowest since August 2022. That is a fun combination to model. Private payrolls (weekly average): 21,000. Not catastrophic, but the direction matters more than the level when you are trying to read the cycle. A partial offset: the ISM Services employment component expanded for the first time since February. Wards total vehicle sales: 16.52 million. One analyst observes a broad momentum unwind, likely driven in part by higher USD real rates, and argues the root cause will resolve once the Fed acknowledges its forecasting mistake — a process that could take one to two months. Since the pandemic, CPI surprises have become a much stronger driver of front-end yields as inflation has taken center stage.
Iran attacked. When the ships you are trying to track vanish from your screen, the market is left pricing risk against a void. Iran attacked at least 3 oil and LNG tankers in the Strait of Hormuz while simultaneously loading its own tankers at Kharg Island, where activity has picked up significantly from previous weeks. So Iran is simultaneously disrupting other nations' cargoes and accelerating its own exports. This is less "closing the strait" than selective piracy with commercial intent. Meanwhile, the gap between empty tanker entries into the Persian Gulf and volume of fresh loadings is closing, driven by improved loadings especially from Saudi Arabia and a pullback in the pace of empty tanker entries. China can quickly reduce oil consumption by 3-4 million barrels per day without a major hit to GDP, acting as a natural brake on price spikes. Gold settled at $4,125.70, down 0.71% on the day. China can quickly reduce oil consumption by 3-4 million barrels per day without a major hit to GDP.
Here is where the labor market stands for your paycheck.
Initial jobless claims: 215,000, down 0.46% on the week
Continuing claims: 1,814,000, up 0.11% on the week
Job openings (JOLTS): 7,594.00, up 0.12% on the month
Quits rate: 1.90, flat 0.00% on the month
Unemployment rate: 4.20, down 2.33% on the month