Inflation Ticks Up, U.S. Lifts China Chip Ban & The Department of Defense Teams Up with Big Tech

0:00This episode is brought to you by On Investing, an original podcast from Charles Schwab. I'm Kathy Jones, Schwab's Chief Fixed Income Strategist. And I'm Lizanne Saunders, Schwab's Chief Investment Strategist. Between us, we have decades of experience studying the indicators that drive the economy and how they can have a direct impact on your investments. We know that investors have a lot of questions about the markets and the economy, and we're here to help. Join us each week as we explore questions like, how do you evaluate corporate bonds? And what sectors of the stock market are outperforming?

0:31So Kathy will analyze what's happening in the bond market and at the Fed, and I'll give you our latest analysis of the equities market and the U.S. economy. And we often interview prominent guests from across the world of investing and business. So download the latest episode and subscribe at schwab.com slash oninvesting or wherever you get your podcasts.

0:54Today's number,$10 million. That's how much the original Birkin bag sold for at a Sotheby's auction last week, making it the most expensive handbag in history. The Tokyo-based buyer said they will not be reselling, thus redefining what it means to be the bag holder.

1:25Welcome to Prof G Markets. I'm Ed Elson. It is July 16th. Let's check in on yesterday's Market Vitals. The S &P and the Dow ended the day down as investors digested the latest inflation data and a batch of earnings from banks. Despite beating expectations, bank stocks mostly fell after the company's issued soft forecasts for the rest of the year. The outlier was Citigroup, which hit its highest level since 2008 after the bank reported a 25 % rise in profit and announced a buyback plan. And as we predicted on Monday, trading was a major highlight. JPMorgan and Citigroup saw increases of 15 % and 16 % in trading revenues, respectively.

2:04Meanwhile, a rally in chip stocks drove the Nasdaq to a record high. We'll talk more about that later. And Bitcoin fell as the crypto bills we discussed on yesterday's episode hit a roadblock in the House of Representatives. Okay, what else is happening? The June inflation report is out. And while the data was roughly in line with Wall Street's expectations, consumer prices did increase last month. This print complicates the Federal Reserve's path towards a rate cut this summer. According to FedWatch, interest rate traders are now pricing just a 2.6 % probability of a rate cut in July. After the report, the yield on 30-year treasuries climbed above 5 % for the first time in more than a month.

2:45Okay, let's examine this inflation data. We're up to 2.7 % year over year in June. In May, it was 2.4%. In April, it was 2.3%. So inflation appears to be picking back up, not in a huge way, not in a way that we need to start panicking, but certainly in a way that is at least material. We can also look at this on a monthly basis. Between May and June, prices rose 0.3%. That is the largest monthly gain since January. So there is no question here. Prices are rising. But the big question that we probably need to address is whether or not this is just a blip in the data. Is this just transitory? I mean, prices rise and prices fall.

3:31It could be that this is some natural moment in the economic cycle that is possible. Or are prices rising because of you-know-who and you-know-what? This is something we've discussed many times. The argument from the administration is that tariffs are necessary for America and, more importantly, that they will not raise prices. In fact, according to Scott Besson, tariffs are actually moderating prices. That is what he said after we saw that positive inflation report back in April. But now prices are coming back up. And so what we need to know is, is it because of the tariffs or is it because of something else?

4:12Well, let's look at the data. First, there were many items that did decline in price. Things like flight tickets and internet services and public transport. All of those things got cheaper last month, but of course, none of those things are really affected by tariffs because we don't really import those things from abroad. So when you look at the things that we do import, things that probably would be more sensitive to tariffs, things like home appliances and furniture, toys, clothes, coffee, all of the stuff that is imported from abroad. You look at that, and what you find is that last month, the prices on those items rose more than anything else.

4:53In just one month, furniture prices rose 1%. Toy prices rose 2%. Coffee prices rose more than 2%. And you compare that to the overall monthly increase of all items in America. As I said, all items rose by only 0.3%. So put another way, the items that are pushing up inflation the most right now are the ones that are exposed to tariffs. And so it is very clear to us from this report that, yes, the tariff impact is beginning to take effect. The tariffs are beginning to raise prices. That was our takeaway, at least. But we did want to get a second opinion. So Claire spoke with Nicole Servi, an economist at Wells Fargo.

5:39So what we're seeing from the CPI report is kind of those initial signs of tariffs being passed through to consumer prices. We know that the Trump administration started levying tariffs kind of in full force in April. And so there was a little bit of a lag. This is the CPI report for June. And so a little bit of a lag between when those tariffs actually got implemented to when we're actually starting to see them get passed through to consumer prices. But some of that can be explained away by just the inventory stockpiling that we saw ahead of the tariff implementation during the first quarter.

6:18You had a lot of businesses who knew that tariffs were coming. And so they built up inventories to the extent that they could so that when they actually had to start paying tariffs, they could start to raise their prices kind of gradually. in an effort not to alienate your consumers. And so that's one of the reasons that this consumer price index, we did see a little bit of signs of tariff pressure, but again, it's still pretty muted. If you look underneath the surface, it's primarily coming from core goods. So looking at goods, excluding food and energy, food and energy prices tend to be pretty volatile on a month-to-month basis.

6:53So economists like to look at core inflation, which excludes those components to get a better read of the underlying trend. You are seeing signs of tariffs, particularly with food at home. I looked up kind of ahead of the report, apparently some avocados, for instance, are not covered by the USMCA trade agreement. So they are subject to tariffs. And you did see a little bit of fresh fruits and vegetables. There was pretty strong price growth there. Those are items where you can't really stock up inventory, right? They're a little bit perishable. And so you're going, those grocery stores, especially who are running on kind of razor thin margins, you're starting to see some price growth there.

7:32Where you're not really seeing it is vehicles. And that's one of the reasons that you've seen that core goods inflation in particular has been kind of tame over these past few months is vehicle prices are actually declining. So we'll start to see probably tariff pass through in that category, I'd say, in the second half of the year. But those are the elements where we're seeing most of the price pressure right now. Is this just the beginning for tariff-driven inflation? What do you think we can expect in the coming months? This is kind of the first sign. We had some inklings of it over the past few reports, but this report in general felt like more of the first broad-based sign of consumer price inflation actually picking up on top of tariffs.

8:14So by the end of the year, we look for core inflation to hit around 3%. And that's higher than spot right now. But if you think about where we've been with core inflation kind of overall, since the pandemic, it's not nearly as high as it was, you know, in the summer of 2022. to. But it is another bump in the road. You are going to see core inflation, which may be in an alternative universe, would have been trending back down to 2 % in the absence of tariffs, going to be probably trending higher to close to 3 % by the end of the year. And so when we pull that back to the Fed, this bump from tariff inflation is going to keep overall price growth away from their 2 % target.

8:59That was Nicole Servi, economist at Wells Fargo. It sounds like we agree the tariff impact hasn't fully hit us yet, but it has officially begun.

9:17The Trump administration will ease export controls on selling AI chips to China. NVIDIA and AMD can now resume the sale of their chips to China after the bans cost them roughly$8 billion and$700 million respectively last quarter. Both stocks rallied on that news with NVIDIA up 4 % and AMD up more than 6%. So US chips are now back up for sale in China. You might remember back in April, the administration banned American companies from selling any chips to China. That was a big blow to AMD and also to NVIDIA. But according to the Commerce Department, the ban was necessary to, quote, safeguard our national and economic security.

10:01They were very concerned that China was going to use those chips specifically to build a supercomputer. That was their big concern, which they believed would harm US interests. Well, that concern is apparently no longer a concern. The ban has been lifted. We're going to keep selling AI chips to China has the green light to go full steam ahead on AI. Now, you'd think that something happened that triggered this decision, some evidence that, I don't know, China wasn't building a supercomputer, or that they are no longer a national security threat, you know, a reason. But as far as we can tell, as of now, there is no reason.

10:43Or if there is one, it doesn't really make any sense. Scott Besant was asked about this yesterday. He said, quote, you might say that it was a negotiating chip. It was all part of a mosaic. They had things we wanted. We had things they wanted. That's what he said. Well, we know what they wanted. They wanted NVIDIA chips, and now they've got them. As for what we wanted, I don't know what we wanted. I mean, it can't be rare earths. We got that weeks ago. So, you know, what was the trade here? What was the deal? And the answer is, we don't know. And it would appear that this is the same thing that we keep seeing with these negotiations.

11:21And that is, you get chaos, you get conflict, confusion, and there's no real purpose, no real motivation, and no real outcome that comes of any of this. In fact, the only real outcome we've seen is that NVIDIA has gone from 90 % of the chip market in China. And now, after those export controls, it's down to 50%. Great. So that's the policy side of this. Now, the other side of this is NVIDIA. What does this mean for NVIDIA, who can now sell their H20 chips to China again? Well, the stock kind of speaks for itself. This is great news for NVIDIA. China makes up 13 % of NVIDIA's business. That is$17 billion per year.

12:05That business was just switched off in April, but now has been switched back on basically overnight. So for more on this, Claire spoke with Vivek Aria, a senior semiconductor analyst at Bank of America. We think it's a positive step for NVIDIA, of course, but also a lot of their semiconductor peers, AMD, Broadcom and others, because of three reasons. One is that I think it just broadly signals another step towards lowering of trade tensions between U.S. and China. That's very important because, as you know, U.S. is the largest designer of chips and China is the largest buyer of chips. So having a fruitful dialogue between the two countries is extremely important.

12:51Number two, as it relates specifically to AI, I think it does help NVIDIA and AMD remain engaged with Chinese software developers who are extremely innovative. Despite all the restrictions, we have examples such as DeepSeek, where they have managed to do extraordinary things because of their range of innovation and the kind of data that they have available. So it's always useful as an industry to stay engaged, right? Because AI is kind of this symbiotic relationship between hardware and software. So it always helps the hardware side to stay engaged with improvements on the software side. And then the third reason, I do think it helps the U.S.

13:34overall to maintain its leadership over the AI technology stack and not really give too much opportunity for Chinese competitors such as Huawei. Now, the success of this, I think, will really depend on the level of restrictions going forward. But no, broadly speaking, I do think it's a positive step. So assuming NVIDIA obtains a license to resume selling into China, what kind of incremental sales are you expecting from NVIDIA? So at least for the second half of this year, you know, we have estimated there is the chance for an incremental$5 billion in quarterly sales. from the time the licenses are granted.

14:15Because at this point, it's about the Chinese customers going and asking the U.S. Department of Commerce for a license to buy the chip, right? So from the time they are given this license to the time NVIDIA makes the product available, you know, a quarterly run rate is about$5 billion. Because if you look at what NVIDIA was doing before, it was$7 or$8 billion a quarter. But I do think at that time, maybe some of the sales were front-end loaded because I think customers in China were expecting these kind of restrictions. So they were probably buying a little bit above the trend line in the first half of the year.

14:52So I don't think we can just use that trend line from the first half. So we estimated it's in that$4 billion,$5 billion quarterly range in the second half. When it comes to 2026, I think, as I mentioned before, it depends on the level of restriction. because the product that NVIDIA is selling to China, the H20 product, is already a handful of generations older and defeatured relative to the best-in-class NVIDIA can make today, right? Which is the Blackwell generation. So will China want to buy an older generation product even in 2026? I think that that's going to be the debate and whether NVIDIA can keep on pushing the envelope to have the Department of Commerce, yes, be a few steps behind the best-in-class, but at least keep pace with what the best-in-class is in any given year.

15:43That was Vivek Aria, Senior Semiconductor Analyst at Bank of America Securities. More taco happening, but also more good news for NVIDIA. NVIDIA was up 4 % yesterday, which translates to an additional$150 billion in market value that was created in just one day. As of market close, the company is now worth$4.16 trillion, the most valuable company in the world, now by a$400 billion margin. Just incredible. Okay, after the break, the defense industry teams up with Big Tech. Stay with us.

16:32second job. That's where Found can help you out. Found is a business-making platform that makes it simple to track expenses and manage invoices. You can even stash money for specific goals and keep spending in check with customizable virtual cards. Found doesn't just bring your finances under one roof. It also takes repetitive tasks off your plate. You can even automatically spot tax write-offs. And the best part, there are no hidden fees, no maintenance costs, no minimum balance, and signing up is completely free. With Found, your financial world is streamlined and your time is freed up so you can put your energy into growing your business oh and by the way other small businesses are loving found too this found user said found is going to save me so much headache it makes everything so much easier expenses income profits taxes invoices even and found has 30 000 five-star reviews just like this you can open a found account for free at f-o-u-n-d dot com found is a financial technology company not a bank banking services are provided by the Piermont Bank, member FDIC.

17:27Don't put this one off. Join thousands of small business owners who have streamlined their finances with found. Adobe Acrobat Studio, so brand new. Show me all the things PDFs can do. Do your work with ease and speed. PDF spaces is all you need. Do hours of research in an instant with key insights from an AI assistant. Pick a template with a click. Now your Prezzo looks super slick. Close that deal, yeah, you won. Do that, doing that, did that, done. Now you can do that, do that. with Acrobat. Now you can do that. Do that with the all-new Acrobat. It's time to do your best work with the all-new Adobe Acrobat Studio.

18:07We're back with ProfG Markets. The Department of Defense announced it is awarding up to$200 million in contracts to several AI companies, including Anthropic, Google, OpenAI, and XAI. The goal of these awards is to help accelerate the adoption of AI capabilities to address critical national security challenges. And these are some of the largest contracts that the DoD has ever issued to software providers. But this isn't the first time that AI companies have partnered with the government. Last December, OpenAI announced it would be partnering with Anduril to advance America's automated aerial defense systems.

18:43And Meta opened up its Lama model to US national security agencies and defense contractors last fall. The bottom line, Big Tech and the Department of Defense are getting a lot closer. Now, I want to be clear. I am generally not against tech companies working with the DOD. I know a lot of people don't like this. They don't like the idea of Peter Hegseth joining forces with Mark Zuckerberg. They especially don't like him joining forces with Mecca Hitler. That is, of course, XAI's chatbot or the name it created for itself. I get it. But at the same time, you know, defense is an increasingly technological domain.

19:23We've talked about this with Scott. And so this idea of just cutting it off from big tech seems like a bad idea. Having said that, it is quite remarkable the extent to which big tech has reversed course on this issue, because people forget this. But once upon a time, the general rule in big tech was that you never partner up with defense. You never partner up with military. And it was especially important, at least to big tech, when it came to AI. That was the big concern. And it was so much of a concern that these companies even wrote it into their constitutions. Per Google's ethical guidelines, they said that applications they will not pursue include, quote, technologies that cause or are likely to cause overall harm and, quote, weapons or other technologies whose principal purpose or implementation is to cause or directly facilitate injury to people.

20:23Those rules were, by the way, scrapped this year. And you look at META's acceptable use policy. Prohibited uses included, quote, military, warfare, nuclear industries, or applications and espionage. Those rules, by the way, were also scrapped. So now they've scrapped those rules and Google and Meta are now free and clear to build AI for the Department of Defense. But it's not just big tech, it's the startups too. Just last month, Anthropic carved out a list of contractual exceptions that they felt were needed to adapt to, quote, the unique needs, missions, and legal authorities of governments.

21:01Meanwhile, OpenAI, although they never explicitly forbade military contracts their mission statement kind of implied as much the purpose was to quote advanced digital intelligence to benefit humanity as a whole unconstrained by a need to generate financial return well they're now doing 10 billion dollars in arr and they have multiple deals with the military and with defense contractors another great quote by the way from the open ai charter quote we commit to avoid enabling uses of ai or AGI that harm humanity or unduly concentrate power. Unless, of course, you get a call from Andrile or Palantir or now the Department of Defense.

21:41So look, this isn't to say tech companies shouldn't work with the military. Some people may have that view, and fair enough, it's not our view. However, this is a great reminder to never trust these mission statements or these values or these ethical principles that these big tech companies come up with because they never actually hold up. You know, we saw it with content moderation. We saw it with DEI. We saw it with OpenAI calling themselves a nonprofit and then a for-profit. And now we're seeing it again with defense. It's the same thing over and over. You state a mission, you update your charter, you make a big PR event about it.

22:25And then as soon as that mission gets in the way of making money, you cave. And that's what we're seeing here. So big tech loves talking a big game about principles, but let's just be real. They only have one principle and it is money. It's profit. And we've said it on this podcast. That's okay. That's not a problem. That's what capitalism is about. We're not necessarily against that. But at the very, very least, you could at least be honest about it. Okay, that's it for today. Thanks for listening to Prof G Markets from the Vox Media Podcast Network. I'm Ed Elson. I'll see you tomorrow.

23:24As the world's old.

23:54new Acrobat. It's time to do your best work with the all new Adobe Acrobat Studio.