In 30 seconds: A wide-ranging debate over the China trade shock's impact on US and European manufacturing employment is playing out alongside Europe developing a 'second-strike' tariff framework in response to China's surging EV exports and weaponization of rare earth supply chains. The ongoing Middle East conflict has caused the largest volumetric oil supply shock in history, driving tanker charter rates to record highs, prompting Saudi Arabia to cut November prices to Asia to 6-year lows, and creating divergent economic impacts between Western nations facing stagflation and China facing weak demand. Hyperscaler AI capital expenditure is expected to nearly double to $789 billion in 2026 and approach $1.2 trillion by 2029, driving a stark divergence between booming data center construction and declining traditional construction, while credit spreads for the weakest US companies blow out to near 4-year highs. European bond spreads are widening sharply as France faces core contagion risk, Spain calls a snap election, and the euro falls to multi-year lows, while policymakers debate whether to follow China and Russia in selling US Treasuries to buy gold as a defensive measure.
The arithmetic of the China trade shock is blunt. Manufacturing output stopped growing with overall output after 2000 (a break from 70 to 99...). The sequel is playing out in cars. China is not supply constrained. Europe is responding with a two-round game: tariffs to counter China's export surge, and a second-strike capacity if China weaponizes supply restrictions. The reasoning is straightforward: China's position in the rare earths supply chain will give it a veto over all trade action (unacceptable) absent moving towards a framework that seeks to deter the use of supply restrictions. The failure to anticipate rare earth restrictions is almost universally accepted as a major error last year that weakened the US position last summer/fall.
This is, by any reasonable measure, the biggest volumetric oil supply shock ever. Kuwait offers a useful case study in the damage. CEO Sheikh Nawaf Al-Sabah says the country was pumping 2.6 million barrels per day before the war and now manages just over 2 million barrels per day, or about ~75% of pre-war output. The Strait of Hormuz remains the chokepoint. UKMTO has logged 11 confirmed attacks since last Wednesday, out of 13 total incidents. The latest struck a tanker whose crew was reportedly still fighting a fire in the engine room. Oil tanker charter rates have hit record highs, even after adjusting for inflation. Brent crude: above $100. The pricing signal from the Gulf is strange: Saudi Arabia unexpectedly cuts November oil prices to Asia to 6-year lows, setting the Saudi Arabia November Arab Light crude official selling price to Asia at $5 a barrel below the average of Oman and Dubai prices, a 3-dollar cut from the previous month. China 10-year yield: 1.67%. One side of the world gets inflation without growth. The other gets neither. You would not want to be the central banker on either end of that trade.
The numbers are getting silly. The logic, presumably, is that if you do not spend the money someone else will, and then they will have the artificial intelligence and you will not. This is the kind of reasoning that produces arms races, and arms races produce very large invoices. You can already see the physical footprint in the construction data. Data center construction spending has risen by $4 billion since 2023-12. That sounds nice until you notice the other side of the ledger: all other construction spending has fallen by $10 billion over the same period. Crushed by higher rates. So the construction industry is not growing. It is bifurcating. If you are a general contractor who does not know what liquid cooling is, this is not your cycle. The equity market, naturally, loves it. AI-related stocks are booming. But credit markets are telling a different story. Credit spreads for the weakest US companies have blown out to 12.15%, their widest level in nearly 4 years. Risk is rising beneath the surface. This is the market's way of pricing a world where capital flows toward one thesis with extraordinary conviction, and everything outside that thesis pays the spread.
This time the geometry is different. The pressure point is France at the core rather than originating in the periphery. The surge in French yields over recent weeks is weighing on the euro. Eurozone bond spreads keep widening as Spain's snap-election announcement adds to France's debt and budget fears. Germany remains a safe haven; only Austria, Latvia and Lithuania outperform Bunds. Spanish Prime Minister Pedro Sánchez calls an early election, after parliament rejected a housing plan last week. Then there is the gold question. Germany hasn't bought central bank gold in 27 years, and not on net since the early 1960s. The argument is that if the crisis worsens and the ECB hits a 'break glass in emergency' moment, the EUR strengthens, because Eurozone gold reserves get marked to market quarterly and ECB printing EUR to buy physical gold would strengthen the currency. The deeper concern is second and third order effects. If that happens, the EU could pull the $2-4 trillion it holds in aggregate in US Treasuries to deal with its own situation. That is the kind of feedback loop that makes everyone's Tuesday worse simultaneously.
Here is what your weekly spend looks like right now.
Gas (per gallon): $4.46, down 0.29% on the week
Groceries (CPI food at home): 347.10, up 0.12% on the month
Eating out (CPI food away from home): 350.31, up 0.12% on the month
Average hourly earnings: $37.81, up 0.13% on the month