News broke on Sunday of a “totally unacceptable” Iranian counteroffer to last week’s U.S. proposal. Despite the conflict’s whipsaw narrative, the U.S. economy continues to show resilience on both the equities and jobs front. The S&P 500 closed on Friday at a record 7,399 and the Nasdaq at 26,247. Both have retreated slightly but are now largely immune to the daily swings in diplomatic signals. The markets have been reassured, in part, by the stability of a “low hire, low fire” U.S. job narrative. Friday’s jobs report surprised at 115,000, doubling the Street’s consensus. The continued contrarian signals of the U.S. market and the energy/shipping shock (inflation again ticking up in this morning’s headline read) has been a key characteristic of this note since the outbreak of the war.
In his latest move to arrest the shipping bottleneck, President Trump launched “Project Freedom” last Monday to act as a humanitarian mission for those vessels still stranded in the Persian Gulf. The initiative resulted in a volley of sporadic Iranian attacks and U.S. countermeasures, which the President described as a “love tap.” The Administration’s characterization of the hostilities as “skirmishes” does not violate the fragile ceasefire, provides the President with a rhetorical legal argument to avoid the congressional timelines of the War Powers Act.
On the trade front, President Trump’s use of Section 122 to impose an immediate 10% global tariff to temporarily replace International Emergency Economic Powers Act (IEEPA) tariffs was struck down by the U.S. Court of International Trade (CIT) last week. Meanwhile, escalations with the EU over its slow ratification of the U.S.-EU Agreement on Reciprocal Trade (ART) were calmed after President Trump provided an extended timeline of July 4 before imposing a threatened 25% auto tariff. USTR continues its Section 301 investigations on a fast-track timeline—more urgent now given CIT’s 122 ruling—and USMCA negotiations are operating on parallel tracks. The Mexican side has formally begun its Joint Review but the relationship is showing signs again of friction over the tension between Mexican sovereignty and U.S. security. The Canadian side, on the other hand, remains in abeyance as preconditions and rhetorical barbs stall any forward progress.
Ultimately, this week will be defined by the convergence of trade and geopolitics at the Beijing Summit. Both issues and their underlying tensions will be at the center of the Trump/Xi negotiations, with the President’s state visit having the potential—however small—to unlock an Iranian peace deal and global shipping.
GEOPOLITICAL UPDATE
In a sign of China’s influence over the Iranian side, Foreign Minister Abbas Araghchi met last week in Beijing with Wang Yi at the CCP’s invitation. What was surely discussed was the U.S. one-page memorandum response to Iran’s previous 14-point proposal. Tehran’s nuclear program remains at the heart of the impasse, with a fractured leadership structure unable to reach a unified position. Supreme Leader Mojtaba Khamenei reportedly broke his public silence last Thursday, issuing a written statement read by state television that Iran would protect its “nuclear and missile capabilities” as national assets. But as Secretary of State Marco Rubio said referring to Khamenei, “The question between alive and in power are two different questions.”
News of Iran’s response to the U.S. memorandum came via Truth Social on Sunday with President Trump calling it “TOTALLY UNACCEPTABLE.” Iran’s Foreign Ministry spokesman, Esmail Baghaei, countered on Monday that the Iranian terms were “Generous” and “reasonable” and that the future of Iran’s nuclear program would only be negotiated when “the time is right.” Iranian state media further detailed the Iranian offering which included reparations, continued control of Hormuz, and the lifting of U.S. sanctions.
Speaking with reporters on Monday, President Trump made his most bearish assessment of the ceasefire to date: “I would say it’s one of the weakest, right now, it’s on life support.” With that backdrop, the Pentagon announced a Navy ballistic missile submarine had arrived at Gibraltar over the weekend.
And thus, the Islamic Revolutionary Guard Corps (IRGC)’s closure of the Strait of Hormuz will continue absent a diplomatic resolution, as will the U.S. naval blockade and resurgent U.S. military maneuvers—realities that cast doubt on Pakistan’s role as mediator. Instead, the war’s diplomatic track may need to be structurally reframed, a prospect the leaders of the world’s two superpowers will likely discuss at the end of the week.
Oil Shock
WTI settled at $95 on Friday, down approximately 7% on the week; Brent at $101, down approximately 6%. Both represented the largest weekly oil declines since the war began but were short-lived. Sunday’s news of the Iranian counteroffer jolted the oil market once more. Maersk’s CEO confirmed the shipping giant is passing its approximately $500 million monthly fuel surcharge “in full” to customers. The fuel pass-through is the physical market’s counter to optimistic trading, leading global airlines to cut 2 million seats from May schedules and bringing about the death knell of Spirit Airlines.
The failure of Spirit Airlines represents the first shutdown of a major U.S. airline in 25 years, eliminating 17,000 jobs. Rising jet fuel costs and supply shortages have led Air Canada and Alaska Air to delay guidance and United CEO Scott Kirby warned of an additional $11 billion in fuel costs if conditions persist. The consumer pass-through is material: summer domestic airfare is trending 10–15% higher year-on-year and international fares to Europe up approximately 20%.
According to Rystad Energy chief economist Claudio Galimberti, “In the next few weeks, you will start to see the jet fuel shortages” beginning in Southeast Asia, followed by Europe, then California. Saudi Aramco similarly warned that the world’s stocks of gasoline and jet fuel could reach “critically low levels” ahead of the summer months if the Strait remains closed.
The American heartland is another acutely affected industry with urea up a record 47% and farm diesel up 46%, leading 70% of American Farm Bureau Federation (AFBF) respondents to answer that they are unable to afford all of their fertilizer needs. Economists predict that the food price transmission into grocery prices may take another six to nine months, a lagging indicator that has not yet been fully felt by consumers. Perishable goods such as fruit, vegetables, meat, and seafood will lead the way in elevated prices given reliance on refrigeration and rapid distribution.
The oil shock affects one region above all: Asia. The United Nations Development Programme (UNDP) estimates $97–$299 billion in Asia-Pacific output losses as a result of elevated energy costs. The Asian Development Bank (ADB) forecasts regional growth slowing to 5.1% in both 2026 and 2027 as the International Energy Agency (IEA) predicts 120 billion cubic meters of cumulative liquefied natural gas (LNG) supply loss through 2030. Governments from New Delhi to Bangkok are closing schools, rationing fuel, and restarting coal plants. The International Monetary Fund (IMF) warns high fertilizer prices could push 45 million people globally into food insecurity. As the war enters its third month, sulfuric acid prices are 30% higher and tungsten has more than tripled since December 2025.
Overall, the IEA reports that the conflict removes approximately 14 million barrels/day from global supply and a cumulative loss of 120 billion cubic meters between 2026 and 2030. With Gulf producers exploring every alternative route possible, Iran’s strike last week on a Vitol-linked terminal in Fujairah was significant. The alternative UAE export route has been able to ship approximately 6.4 million barrels/day according to the IEA, with more likely given the UAE’s recent announcement that it would exit OPEC. Attacking Fujairah closes a significant workaround for the global oil market, leaving the UAE’s west coast pipeline and Saudi Arabia’s Red Sea routes as the remaining high-capacity lifelines.
Eurasia Group estimates that June “may be the turning point” for a “sharper price shock” with the global market facing a deficit of 10 million barrels per day and stocks of refined products likely to face critical levels in one month’s time. Goldman Sachs mapped the country-specific scarcity risks: South Africa, India, Thailand, and Taiwan face the highest immediate risks of petrochemical feedstock scarcity, including naphtha, LPG, and jet fuel. While Shell Q1 earnings rose 24%, CEO Wael Sawan estimates the stock draw at 900 million barrels will lead to shortages persisting well into 2027.
But there are signs emerging that the world’s biggest oil companies are returning to the playing field. ExxonMobil, Shell, and Repsol are among the producers that bid a record $163 million in March to secure leases in the National Petroleum Reserve of Alaska, estimated to hold 8.8 billion barrels of recoverable oil.
ConocoPhillips and Australia’s Santos also bid on leases in Alaska’s North Slope. The return of the majors to Alaska represents a byproduct success of the war for the Administration. As Kevin Gallagher, Santos chief executive, said: “Events in the Middle East do highlight the importance of supply diversity and Alaska’s location is a real strategic advantage — offering a route into key markets like Japan and Korea.”
Santos and Repsol’s $4.5 billion Pikka project, one of the largest finds in recent years, is expected to begin operating this month and produce up to 80,000 barrels/day. ConocoPhillips’ $9 billion Willow project is expected to come online in 2029 and produce 180,000 barrels/day. Wood Mackenzie forecasts production will rise in Alaska to almost 750,000 barrels/day by 2030. U.S. fuel exports have now surged to a record 8.2 million barrels per day, up more than 20% year-on-year, making the U.S. a net crude exporter for the first time since World War II. Though Chevron CFO Eimear Bonner recently downplayed increased production saying the company is instead focused on growing “free cash flow,” Diamondback Energy boosted its output to 520,000+ barrels/day with two to three new Permian rigs.
U.S. energy exports are indeed a boon for the industry and new discoveries are providing strategic diversification, but there are signs that long-term European demand erosion will produce a tail risk for those same producers. Moreover, a new study shows that oil price volatility alone can slow world global trade, with effects materializing over up to 19 months. The price may thus matter less than the weekly fluctuations when predicting long-term effects: “The worst may be ahead of us.”
The Administration has sought to address the consumer pricing pressure with various short- and long-term policy initiatives, including a suspension (and extension) of the Jones Act, a coordinated Strategic Petroleum Reserve (SPR) release, invocation of the Defense Production Act (DPA) for increased domestic production, a waiver of Russian oil sanctions, and a U.S.-backed commercial shipping insurance program. While some have conjectured that the President may also institute a U.S. oil export ban, the Administration has vehemently denied the prospect. Instead, President Trump told CBS yesterday that he is pushing for a temporary suspension of the 18-cent federal gas tax. The President called the suspension a “great idea” and committed to phasing the tax back in “when gas goes down.”
Congress was quick to respond. Immediately following Trump’s comments, Senator Josh Hawley (R-MO) released legislation that would suspend the gas tax for 90 days and allow the President to extend the pause for an additional 90 days. The bill would backfill the Highway Trust Fund (HTF) with money from the general fund. Punchbowl News is reporting that the House could vote on a gas-tax holiday as early as next week.
Shipping
Before the war, more than 120 ships passed through the Strait daily; only four crossed on Project Freedom’s launch day last week. The Maritime Freedom Construct coalition, a U.S. initiative for information sharing, diplomatic coordination, and sanctions enforcement around Hormuz transit, is now being assembled and German minesweepers have staged in the Mediterranean pending Bundestag approval. But the mine-clearing constraint remains binding: a timeline of up to six months from the formal end of hostilities, not the current ceasefire.
Having followed the war’s economic impacts extensively, Bloomberg’s John Authers’ concluded last week that the U.S. “blockade is working.” U.S. stocks are at records, Iran’s oil storage is nearing exhaustion, and thus, the economic pressure asymmetrically falls on Tehran rather than Washington. Robin Brooks of Brookings agrees, saying the blockade’s credibility “may shorten” the Hormuz closure. Tehran’s latest proposal augers against this optimistic view.
Congressional Response
President Trump notified Congress on May 1 that the Iran war had “terminated,” with the ceasefire resetting the 60-day clock of the War Powers Act. Despite kinetic activity throughout this past week, Secretary of War Pete Hegseth affirmed that the ceasefire “certainly holds” and Project Freedom is “separate and distinct” from the terminated war. The Administration’s posture with respect to the War Powers Act, however, is more fundamental. Secretary of State Marco Rubio separately stated last week that the law is “unconstitutional — 100 percent” and that the Administration has complied with its notification requirements solely to preserve congressional relations.
That façade now pierced, frustrations among Democrats and isolated Republicans have reached a boiling point. Given that legal challenges to the Administration’s position would take months or longer to adjudicate, Congress has effectively lost its immediate leverage over the President’s war strategy. To be sure, rhetorical pressure will continue. Rep. Tom Barrett (R-MI) introduced Authorization for Use of Military Force (AUMF) legislation last Thursday that would require the President to end U.S. military involvement in Iran by July 30. Democrats will also continue to force votes on war powers resolutions, hoping to peel off additional Republicans. These resolutions have no chance of gaining the necessary 2/3rds veto-proof supermajorities in each chamber to become law, notwithstanding the constitutional question.
Instead, Members will be left to voice their frustration in public and through congressional committee oversight. Both Secretary Hegseth and Joint Chiefs Chairman General Dan Caine are testifying before the House and Senate Defense Appropriations Subcommittees today, offering a window into the Administration’s latest estimates of the war’s cost. Acting Pentagon Comptroller Jay Hurst said two weeks ago that the Administration is still compiling a full assessment of the war’s costs, which at that time were estimated at around $25 billion. This is where congressional leverage ultimately rests—the power of the purse. Though the Administration has not yet sent a formal supplemental war funding request to Congress, it will be needed at some point in the coming months. Democrats’ price for approval will be steep, which may result in Republican Leadership turning to budget reconciliation once again (3.0) to enact the President’s funding request.
NATO and Eurozone Friction
Following German Chancellor Friedrich Merz’s public admonishment of the U.S. military campaign against Iran, Secretary of War Pete Hegseth ordered the withdrawal of approximately 5,000 troops from Germany. President Trump Truthed that “we are going to cut way down, and we’re cutting a lot further than 5,000,” adding he would “probably” consider Italy and Spain. Germany hosts Ramstein Air Base, Landstuhl Medical Center, and the headquarters of both U.S. European Command and U.S. Africa Command. The withdrawal scraps the Biden-era long-range weapons battalion deployment, putting Tomahawk missile deployments intended for NATO’s Russia deterrence at risk.
Conflicts abound throughout the Eurozone as a previous confrontation between Treasury Secretary Scott Bessent and UK Chancellor Rachel Reeves became public last week. According to the reporting, the Bessent-Reeves confrontation occurred at the April IMF Spring Meetings. Bessent reportedly berated Reeves over her characterization of the war as a “folly,” suggesting the U.S. was preventing Iran’s ability to deploy a nuclear weapon against London.
While Reeves pushed back against Bessent both privately and publicly, it is not lost on the U.S. side that the UK is under increasing economic and political pressure. King Charles’ recent state visit may have helped soften the rhetoric between the two countries—resulting in President Trump lifting tariffs on Scotch whisky—but economic damage is mounting for the UK. Markets are now pricing two to three Bank of England (BoE) rate hikes. The UK’s long-term borrowing costs surged to their highest level since 1998, with 30-year gilt yields reaching 5.8% in this morning’s trading. The pound fell another 0.7% against the dollar to $1.352 and was 0.3% lower against the euro at €1.175.
The UK’s economic woes are bleeding into its politics. Labour suffered decisive local election losses on Friday and Members of Parliament (MPs) are openly threatening to launch a leadership challenge against Prime Minister Keir Starmer. Starmer remained defiant at this morning’s cabinet meeting, saying “The Labour Party has a process for challenging a leader and that has not been triggered. The country expects us to get on with governing.”
Miatta Fahnbulleh became the first minister to quit Starmer’s government in the election aftermath and has demanded Starmer resign: “I urge the Prime Minister to do the right thing for the country and the Party and set a timetable for an orderly transition.” Nearly 80 Labour MPs have now called on Starmer to stand down, just shy of the 81 required to trigger a formal leadership contest. Others privately urging Starmer to allow for a leadership transition include Home Secretary Shabana Mahmood and Energy Secretary Ed Miliband, suggesting that Cabinet support for the PM is eroding.
Health Secretary Wes Streeting, a centrist, has been preparing for months to seek Starmer’s job. His supporters are urging a fast replacement process so as to block potential rivals like Greater Manchester Mayor Andy Burnham. A member of Labour’s “soft left,” Burnham requires more time to return to Parliament in order to become eligible for leadership, though a seat in the northwest of England is likely to soon open. Angela Rayner, another possible contender, has stopped short of saying she will challenge Starmer. Rayner has instead endorsed Burnham’s return to Parliament, leading some to conclude that she is hoping to be a partner on his ticket. Regardless the rivals, the reality for Starmer is clear. As one unnamed MP said, “The first thing that voters say to you on the doorstep is that they hate Keir Starmer.”
ECONOMIC OUTLOOK
A better-than-expected jobs report and a continuing AI-led/chip-stock rally lifted U.S. stocks to record highs last week. The S&P 500 closed Friday at 7,399 and the Nasdaq at 26,247, the second consecutive week of record closes, signaling that the market is largely immune to the war’s whipsaw.
April gained 115,000 jobs, with the unemployment rate holding steady at 4.3%. The print is the first payroll read covering the full war period and the most important labor market data point in ten weeks of conflict. Jobs were gained in healthcare, retail, and the transportation and warehousing sectors. According to the Administration, the U.S. added 12,600 factory construction jobs for the month, producing the first manufacturing job growth for a quarter since 2023. Prime-age labor force participation also remains strong, with prime-age female participation nearing its all-time high and prime-age male participation at its highest level since 2009. Job numbers in the federal government fell, another data point the Administration has enthusiastically embraced as it focuses on the private sector.
In short, job growth is steady, layoffs are flat, and the economy needs fewer new jobs than before (AI + immigration curbs). The Q1 gross domestic product (GDP) advance estimate came in at 2.0% annualized and business investment rose at a real rate of 17.2% with the AI buildout offsetting the deceleration of consumer spending. KKR reported its highest-ever capital deployment pace over the past twelve months, countering the investor uncertainty narrative. Q2, due in late July, will capture the full disruption period of the war.
But the number of companies responsible for the market’s continued surge are isolated. Just 42 stocks are materially contributing to the performance of the S&P 500 index, which some analysts point to as reason to worry about the “fragility” of the rally. Indeed, Greg Ip of The Wall Street Journal calculated that the AI economy grew at an annualized rate of 31% during Q1 compared to the non-AI economy which grew at only 0.1%. The AI number was dominated by investment in tech equipment (43%), software (23%), and datacenters (22%).
Reflecting on these numbers, Federal Reserve Chair Jay Powell said last week that the U.S. job market has shown “more signs of stability.” With Kevin Warsh officially succeeding Powell at the end of this week, investors will be looking to see whether the new Chair reorients recent policymaking towards jobs and away from inflation.
Warsh’s challenge was succinctly previewed by the University of Michigan survey of consumer sentiment release last week, showing a record fall in May. Executives across retail, restaurants, and packaged goods are increasingly worried about tightening budgets of U.S. consumers. Economists similarly are warning that war’s supply chain disruptions could lead to higher prices for a wider range of goods, particularly food. Speaking of the U.S. consumer, Kraft Heinz Chief Executive Officer Steve Cahillane said, “They’re literally running out of money at the end of the month. We’re seeing negative cash flows in the lower-income brackets where they’re dipping into savings.”
Consumers’ headwinds are building as lower-income household tax refund buffers are now exhausted, creating more exposure to higher retail gasoline prices. The middle-market softness that Automatic Data Processing (ADP) has documented (only 2,000 jobs added in the 50–499 employee segment) warrants further monitoring, as does the fertilizer cost surge working its way through the food supply chain. U.S. foreclosure filings hit a six-year high in Q1 as fast-rising homeownership costs compress household budgets at the lower end of the income distribution. As Chicago Federal Reserve Bank President Austan Goolsbee said last week, “It’s just been an inflationary shock. The longer that continues, the more nervous that makes me.”
Proof was seen in last week’s Personal Consumption Expenditures (PCE) deflator, 3.5% in March, the highest in almost three years. This morning’s headline added to the inflationary signal: consumer prices rose 0.6% on a seasonally adjusted basis in April, putting the annual rate at 3.8%, the highest since May 2023. Core inflation was also hotter than expected, with Core CPI accelerating to 0.4% month-over-month and 2.8% year-over-year. That’s a meaningful step up from March’s 0.2% and 2.6% core reading and the part of the report that will receive the most Fed attention.
Meanwhile, Eurozone inflation rose to 3.0% in April and traders are pricing three quarter-point ECB hikes this year. The Reserve Bank of Australia has already hiked for the third consecutive time to 4.35%, explicitly citing the Iran war’s energy price pass-through and warning of “second-round effects.” Thus, the synchronized central bank rate pause to date—the Bank of Japan (BoJ), the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE), and the Bank of Canada (BoC)—is fragile, at best. Pimco’s chief investment officer, Dan Ivascyn, warned that rate cuts at this time would be “counter-productive,” and that the Fed may instead need to raise borrowing costs. With Powell stating he will remain on the Board of Governors, the first Fed Chair since Marriner Eccles in 1948 to do so, Warsh’s early implementation of inflation targeting “regime change” will immediately be challenged.
Upcoming Datapoints
- Wednesday: Secretary Bessent’s visit to Japan and South Korea concludes; U.S. April PPI; EU Q1 GDP; France and Sweden CPI; NATO regional security meeting; IEA and OPEC market reports; UK King’s Speech
- Thursday: President Trump begins two-day Beijing visit; U.S. retail sales data for April; U.S. initial jobless claims; Rate decisions from Angola, Peru, and Uganda; BRICS foreign ministers in New Delhi
- Friday: Powell’s term as Federal Reserve Chair ends; UK Q1 GDP estimate; ECB economic bulletin; Russia and Hong Kong report GDP; Russia, Israel, Italy, and Poland CPI
CHINA
This week’s biggest moment may very well be President Trump’s visit to Beijing, beginning on Thursday. Recent leadup has included “candid and productive” talks between Secretary Bessent and Ambassador Greer with Chinese Vice Premier He Lifeng, as well as Secretary Rubio speaking with counterpart Wang Yi. Bessent also predicted that this week’s meeting will be one of four between President Trump and President Xi Jinping this year. Congress weighed in, as well, with Senator Steve Daines leading a bipartisan CODEL to China last week.
Summit Deliverables
Conjecture over the deliverables of the summit has ranged from “continued stable relations” to implementation of Greer’s much-promoted Joint Board of Trade. Further agenda items will likely include investments, political prisoners (e.g., Jimmy Lai), purchasing agreements around agriculture (soybeans), aircraft (Boeing), energy, and medical device sales. But the biggest deliverable could very well be a resolution to the war with Iran and renewed global shipping.
Administration officials have told various outlets that President Trump will urge President Xi to curb support for both Iran and Russia, including oil purchases and access to dual-use components and arms. Iranian Foreign Minister Abbas Araghchi’s recent visit to Beijing, following a trip to Moscow, demonstrates the close network between the three countries and the outsized role China exerts. The President has previously called on China to help escort ships through the Strait—this week’s summit will now include additional asks. Xi will no doubt be calculating the global leverage he could gain by facilitating a formal end to the war and helping to resume global shipping; a consideration that is all the more timely following President Trump’s rejection of Iran’s latest counteroffer, the continued U.S. naval blockade, and the Administration’s escalating and far-reaching sanctions regime.
Chinese involvement in the Iranian war effort and resulting U.S. sanctions bring added urgency to the topic. Wall Street Journal reporting last week exposed China’s continued role in Iran’s drone operations. The U.S. State Department on Friday imposed sanctions on three Chinese satellite companies for providing imagery and other services to Iran, including The Earth Eye, a satellite company accused of providing imagery to Tehran. The FT similarly reported that the IRGC had acquired a Chinese satellite built and launched by The Earth Eye, helping Iranian forces target U.S. military. Separately, Treasury sanctioned Yushita Shanghai International Trade for helping Iran import man-portable air-defensive systems and the FCC has blocked Chinese companies from selling drones and internet routers in the U.S. While the ban on drones and routers has implications for Chinese suppliers in the U.S., the Administration is also debating whether to ban Chinese cellular modules, a move that would impact smart electronic devices.
Rather than retaliate, the CCP is taking a more muted approach ahead of the summit. Over the weekend, the CCP ordered energy companies, including Hengli Petrochemical (Dalian) Refinery Co., to ignore Treasury’s secondary sanctions imposed on them for facilitating Iranian oil purchases. China is relying on a blocking measure first introduced in 2021 that was aimed at protecting its firms from foreign laws it deemed unjustified. Ji Wenhua, a law professor who has advised China’s Commerce Ministry, wrote in an opinion piece for the state-run Economic Daily that the CCP’s “central objective is to nullify their [U.S. sanctions] legal effect within Chinese territory, rather than simultaneously resorting to more aggressive retaliatory measures.”
This could very well trap a vast banking sector in the crossfire. Chinese refiners face asset freezes and transaction bans, though they can defy U.S. sanctions by conducting transactions in the yuan. Analyst Dominic Chiu observes that should the U.S. extend secondary sanctions to Chinese banks to address the workaround. This could easily lead to escalation as “Beijing would likely respond with more forceful countermeasures.” Under the CCP’s order, companies can also apply for exemption from the rules if they show that compliance would cause exceptional hardship or inconvenience (i.e., banking measures).
Despite the U.S. threat of sanctions, Iran is reportedly ramping up its rail trade with China to counter the U.S. naval blockade. Cargo trains from Xi’an to Tehran are observed to now run every three or four days, up from roughly once a week before the conflict. Xi’s influence over Tehran is thus dual-tracked: military/intelligence support and an economic lifeline.
AI Race
Beyond the Iran conflict, the race to dominate AI will take center stage at the summit. Last week, Treasury confirmed that AI will formally be on the agenda for the first time. The rare earth needs of the U.S. and Chinese reliance on advanced chips and chipmaking equipment provide some semblance of a mutually beneficial relationship framework. But the U.S. continues to deal with Chinese theft, including hardware and IP. Evidence emerged last week of China smuggling advanced Nvidia chips via third countries, with Alibaba among the end-customers. Office of Science and Technology Policy’s (OSTP) recent distillation theft memo formally accused China of industrial-scale AI model extraction.
Confronted with this reality, the Administration previewed to Axios a number of executive actions it might take before Trump arrives in Beijing, including AI and cybersecurity; deployment and testing of new AI models; and licensing or approval around limitations a model provider could place on government use of AI. Last week, the White House held meetings with tech and financial executives to better coordinate industry. Google, xAI, and Microsoft all signed pre-deployment testing deals with the Center for AI Standards and Innovation, part of the Department of Commerce.
U.S. officials are hopeful, however, that Trump and Xi will be able to reach an informal agreement on AI guardrails, particularly due to concerns raised by the capabilities of models such as Anthropic’s Mythos. An unnamed U.S. official said it would be “good” to have a communication channel and “open up a conversation.”
Leverage Points
As usual, each side will bring varying sources of leverage into the talks. On the U.S. side, China is on pace to import a record 800,000 tons of U.S. ethane per month, roughly 60% above the monthly average. As with much of the East, Chinese petrochemical producers have been forced to replace Hormuz-disrupted feedstocks. Structural dependence by the Chinese on U.S. ethane supply with no near-term substitution pathway is a significant advantage for the President. The President will also be able to dangle the nearly eight-year Section 301 tariffs as a bargaining chip, with a mandatory four-year review now triggered. USTR has opened continuance request windows for List 1 (May 7–July 5) and List 2 (June 26–August 22).
For its part, China has deliberately slowed the repatriation of illegal Chinese nationals in the U.S. and sought to unwind the Meta acquisition of Manus as pre-summit pressure signals. President Xi will also be able to flex a rebound in China’s exports during April, beating analysts’ expectations. The pace of export growth recovered to 14.1% last month, year on year in dollar terms, after falling to just 2.5% in March, according to data released by China’s General Administration of Customs. “The rebound in exports after last month’s dip underscores the strength of China’s high‑end manufacturing, especially in electronics and machinery,” said Hao Zhou, head of research and chief economist at brokerage Guotai Junan International Holdings. The trade figures were well ahead of median forecasts among analysts surveyed by Bloomberg and China’s trade surplus rose to $84.8 billion in April, up from $51.1 billion in March.
Additional Agenda Items
Additional agenda items for the summit could include Chinese investment, particularly electric vehicles, and the Taiwan question. President Trump has previously opined on Chinese foreign direct investment (FDI), particularly in car factories that employ American workers. But this is likely just rhetoric as the reality of Chinese FDI runs up against the President’s trade agenda, national security concerns, and domestic politics.
Regarding the latter, Congress has looked to codify the Commerce Department’s 2025 rule restricting the importation of Chinese cars and car parts. 58 House Republicans urged against allowing Chinese automotive and battery companies to manufacture in the U.S. Bipartisan legislation to prohibit the importation, manufacture, and sale of connected vehicles, software, and hardware linked to China was introduced on Monday by China Select Committee Chairman John Moolenaar (R-MI) and Congresswoman Debbie Dingell (D-MI). The reality, however, is that American cars already contain numerous Chinese parts. Chinese companies have ownership stakes in roughly 10,000 U.S. suppliers and outright ownership of over 60 U.S. supplier firms according to data compiled by AlixPartners.
Though no breakthrough is expected on Taiwan, President Lai Ching-te completed a trip to Africa after defying China’s orchestrated airspace blockade (Germany, Czech Republic, Mauritius, and Madagascar all denied overflight rights). Chinese officials have been urging the U.S. to change its policy on Taiwan in the leadup to the summit, asking that President Trump state publicly that the U.S. “opposes” Taiwanese independence. Taiwan’s Deputy Foreign Minister told Bloomberg: “What we are most afraid of is putting Taiwan on the menu of the talk between Xi Jinping and President Trump.” U.S. officials have pushed back, saying there are no plans to change current U.S. policy.
On the business front, CEOs from Apple, BlackRock, Blackstone, Boeing, Cargill, Citigroup, Cisco, Coherent, GE Aerospace, Goldman Sachs, Illumina, Mastercard, Meta, Micron, Tesla, Qualcomm, and Visa have been invited to attend a pre-summit dinner with President Trump, previewing the Administration’s sectoral priorities. Cisco’s CEO declined the invite due to company earnings. ExxonMobil and Nvidia were on a previously reported list but were not included in the White House’s final invites shared with reporters. The absence of Jensen Huang may be a signal to Beijing that Chinese AI labs are unlikely to secure newer Nvidia chips. Commerce Secretary Howard Lutnick told the Hill last month that while some H200s have been licensed for sale to China, none had yet been exported nor would the U.S make available the more advanced Blackwell. In short, U.S. export controls and limits on China’s ability to acquire American technology will continue—Nvidia’s absence from the WH invite list confirms the posture. Moreover, the smaller group size is a deliberate attempt to limit Xi’s reciprocal Washington CEO list in September and an early signal that an agreement on Chinese FDI is unlikely.
President’s Schedule
Thursday, May 14:
- 8:00AM – The President participates in Executive Time (Beijing)
- 10:00AM – The President participates in a Greeting with the President of the People’s Republic of China (Great Hall of the People)
- 10:15AM – The President participates in a Bilateral Meeting with the President of the People’s Republic of China (Great Hall of the People)
- 6:00PM – The President participates in a State Banquet with the President of the People’s Republic of China (Great Hall of the People)
Friday, May 15:
- 8:00AM – The President participates in Executive Time (Beijing)
- 11:30AM – The President participates in a Greeting and Friendship Photo with the President of the People’s Republic of China (Beijing)
- 11:40AM – The President participates in a Bilateral Tea with the President of the People’s Republic of China (Beijing)
- 12:15PM – The President participates in a Bilateral Lunch with the President of the People’s Republic of China (Beijing)
- The President departs Beijing, China, en route The White House (Beijing)
Russia Parallel
A Russian military general confirmed that Russia has also aided Iran in its ongoing war efforts: “There’s definitely some action there.” This directly connects the Araghchi trips and alliance between Tehran, Moscow, and Beijing. The Economist, adding to the narrative of Russian assistance, reported the Kremlin had offered to provide Iran with fiber-optic drones with which to attack American forces.
Meanwhile, President Trump announced on Friday that Russia and Ukraine had agreed to a three-day ceasefire and prisoner swap in a deal he described as “hopefully” the “beginning of the end of a very long, deadly and hard-fought war.” The ceasefire duration lasts through Monday, coinciding with “Victory Day” celebrations in Russia. Showing how the Iran War has limited the U.S. interest is adjudicating an end to the Russia/Ukraine war, Secretary of State Rubio conceded on Friday that talks had “stalled.” Rubio further stated that the Administration did not “want to waste our time and invest time and energy into an effort that’s not moving forward.”
TRADE UPDATE
The U.S. Court of International Trade (CIT) last week issued a 2-1 ruling against President Trump’s use of Section 122 to impose a 10% global tariff. The ruling is not a nationwide injunction but it does invite more lawsuits despite its likely appeal by the Administration.
Meanwhile, IEEPA refunds began arriving in importer bank accounts last week. Ford, GM, and Mercedes alone account for roughly $2.3 billion of the first tranche expected but of the 330,000 eligible importers, only 26,664 had signed up for newly operational Consolidated Administration and Processing of Entries (CAPE) system as of late April. The refund process systematically advantages large companies with in-house trade counsel over small businesses. This prompted Senate Finance Committee Ranking Member Ron Wyden (R-OR) to initiate an inquiry into the secondary market for IEEPA tariff refunds, which some small businesses have felt forced to avail themselves of in return for pennies on the dollar.
Elsewhere, USTR’s release of its “2026 Special 301 Report” previewed where current trading partners find themselves roughly one year after Liberation Day. The report specifically highlighted Vietnam as a Priority Foreign Country, prompting its government to immediately take action on IP violations. The report also moved Argentina and Mexico from the Priority Watch List to the Watch List and added the European Union (EU) to the Watch List over ongoing DST disputes. Separately, South Korea’s Industry Minister Kim committed that the first projects under its $350 billion ART investment fund would be announced by June. India’s final ART, however, continues to be delayed over effective tariff rate disputes.
USMCA
Prime Minister Mark Carney has continued his rhetorical blitz against the Trump global economic view, telling the Canadian Broadcasting Corporation (CBC) recently that U.S. tariff relief deals were “not worth the paper they were written on” and that a comprehensive deal could be done “in 10 days if the U.S. side had the bandwidth.” Quebec Premier Fréchette added that French language protection should be included as a further precondition following a meeting in Washington last week with Ambassador Greer. Acknowledging the complication these public statements have on formally starting Joint Review negotiations with the U.S., Quebec’s USMCA review envoy Louis Blais told Bloomberg Canada should “work harder to push back on the narrative in DC that Canada’s dragging its feet while rejecting unilateral concessions.”
As its government continues to rhetorically confront U.S. policy, the Canadian economy has struggled. Canada has shed 112,000 jobs so far this year, the weakest four-month stretch since the pandemic in 2021. Employment fell by 17,700 in April while more people looked for work, pushing the unemployment rate up to 6.9%, according to government data. Although employment on a year-over-year basis was up 67,000, it plunged steeply over the first four months of 2026, with the losses almost entirely concentrated in full-time work. The global trade reorder and the Iran war are having sizeable negative impacts on the northern side of the USMCA renegotiation, providing the U.S. with leverage to isolate the Carney government.
Meanwhile, the tension between the U.S. priority of combatting cartel crime and the domestic sovereignty imperative of President Claudia Sheinbaum continues to challenge talks on the southern side of the renegotiation. Mexican Governor Rocha Moya and Culiacán Mayor Gámez Mendívil took temporary leave following U.S. charges of cartel conspiracy, election rigging, and trafficking. As former Mexican Ambassador to the U.S. Arturo Sarukhán framed it: “If she [Sheinbaum] surrenders Rocha, then that touches everything and everyone — including her political mentor.” On the other hand, Inter-American Dialogue’s Lila Abed noted that failure to extradite Rocha would lead to further U.S. “indictments against other politicians.” This tension played out in two contradictory moves by the Mexicans. On one hand, Mexico authorities arrested Audías Flores Silva (“El Jardinero”), a senior Jalisco Nueva Generación Cartel (CJNG) figure with a $5 million U.S. bounty and a possible successor to the cartel’s recently killed leader.
On the other hand, a Mexican judge put a hold on the extradition of El Jardinero, thwarting U.S. counter-narcotic efforts.
At risk for Sheinbaum is her own domestic political standing. The Mexican president’s approval rating now stands at 51%, her term low. But the case for a more nuanced view of Mexican sovereignty is the prospect of continued economic growth. Mexico’s March exports hit $70.7 billion, a 27.7% year-on-year surge driven largely by AI-related equipment exports that carry near-zero effective tariff rates under the Administration’s exemption architecture. A successfully renegotiated USMCA will only strengthen this economic picture.
Donroe Doctrine
Validation of the Donroe Doctrine is being borne out in sovereign debt markets as Latin American spreads have not moved in the aftermath of the Hormuz closure. Brazilian bonds returned 7.3% in dollar terms in Q1; Colombia 4.2%; and Mexico 0.3%. By contrast, Thailand fell 7.2% and India lost 5.9%. The 15-point gap shows net commodity exporters borrowing in their own currencies earned more dollars from the crisis than they owed. In 1994, currency was Latin America’s vulnerability. In 2026, it has become its shield. Brazil’s share of China’s oil imports jumped from 10% in January to 18% in April as Hormuz disrupted Persian Gulf flows, per OilPrice.com data.
Overall, Latin America appears to be emerging from what Blackrock’s Larry Fink described as “wasted time” as the surging demand for AI could benefit Latin economies with abundant solar and hydrocarbon resources. Stock markets from Brazil and Chile to Mexico are all near record highs, tangible evidence of the Trump Administration’s strategy to insulate the Western Hemisphere from security threats through supply chain resilience and energy independence.
Argentina. The FT reported Milei’s approval has dropped from the mid-40s in February to the mid-30s, with confidence in his administration affected by domestic scandals and economic challenges. Much like the aforementioned countries, however, his government’s energy windfall is material: a record 550,881 barrel/day in Vaca Muerta output, a $2.5 billion trade surplus, and projected 3% economic growth. But much like Canada, the energy output is not generating the jobs or consumer-facing relief that approval ratings respond to.
Brazil. The Brazilian economy set a monthly export record in April, as aforementioned high oil prices bolstered the country’s revenue. Exports totaled $34.15 billion on the month, a 14.3% increase from a year prior and the highest such figure in data going back to 1997. Brazil’s trade surplus rose 37.5% in the same period, hitting $10.5 billion. As Latin America’s largest oil producer, Brazil has benefited from higher crude prices but President Luiz Inacio Lula da Silva has been forced to shield consumers from rising costs by cutting fuel taxes and providing subsidies. Whether President Lula strikes a trade agreement with the U.S. remains to be seen. Lula visited Washington for a bilateral meeting with President Trump last Thursday and signaled renewed interest in trade talks. Following the meetings, Trump posted: “The meeting went very well. Our Representatives are scheduled to get together to discuss certain key elements.” Lula suggested a quick timeline for talks, saying ministers should resolve tariff issues within 30 days. Topics during the Thursday meetings included trade, organized crime, critical minerals, and Chinese investment.
Cuba. Canada’s Sherritt International Corporation—Cuba’s top foreign investor—announced last Thursday that it is pulling out of the country over fears of tougher U.S. sanctions. Sherritt, which had a 32-year-old nickel and cobalt mining joint venture on the island, has provided the communist regime with an important source of hard currency via its cobalt and nickel production; its exit could very well be a final blow for the island’s economy. The Trump strategy—led by Secretary Rubio—is thus twofold: maximum economic pressure combined with military posturing. To that end, the U.S. military has conducted at least 25 flights near Cuba’s two largest cities since February 4, according to FlightRadar24 data reviewed by CNN. Most of the flights were performed by aircraft designed for surveillance and reconnaissance, as well as some high-altitude drones. As Rubio told reporters last week, the communist regime is “an unacceptable status quo and we’ll be addressing it, but not today.” Despite reiterating that Cuba “is a failed country,” Trump signaled diplomacy is back on the table this morning, posting that “Cuba is asking for help, and we are going to talk!!!”
Costa Rica. President Trump sent a Deputy Secretary-level delegation, led by Christopher Landau, to the inauguration of President-elect Fernández Delgado on May 8. Costa Rica was removed from the Special 301 Watch List the same week and signed the Panama sovereignty joint statement. The Donroe Doctrine’s Central American track consisting of Costa Rica, Guatemala, Ecuador, and Panama is the hemisphere’s most cohesive current regional cluster.
Venezuela. Last week, the Trump Administration authorized Venezuela to hire advisers for potential debt talks, a key step towards restructuring the country’s $60 billion in defaulted bonds. Among those optimistic is Blackrock’s Larry Fink who said on Monday that he was “quite bullish on the opportunity to invest in Venezuela” and believes the country can be brought “back into its glory.” Obstacles to the Administration’s Venezuela strategy, however, remain. Leopoldo López, a leading opposition leader, highlighted democratic elections as a remaining source of friction: “What’s urgent now — and I think the U.S. should make this priority — is to signal that there will be elections. That would give a lot of certainty.” Interim President Delcy Rodríguez, however, has declined to offer a timeline for democratic elections. Meanwhile, ExxonMobil and ConocoPhillips re-entry discussions remain stalled on arbitration claims and degraded infrastructure.
OUTLOOK/ANALYSIS
Data continues to point to a U.S. economy that is materially better positioned than most of its trading partners but U.S. equities may be masking many of the lagging economic indicators to come, particularly weak consumer spending and rising food costs. With Powell’s term as Fed Chair at an end, Kevin Warsh will inherit a committee with three hawkish dissents against the forward guidance language he has recently criticized.
Heading into the end of the week, we are watching whether Beijing’s influence over Iran will result in a structural reset of the diplomatic track that has officially stalled. If Xi can deliver Iranian compliance with U.S. nuclear demands, the May 14 summit will produce the most consequential outcome in the bilateral relationship’s recent history. Khamenei’s nuclear red line—whether directly from him or not—highlights the continued intransigence of Iranian hardliners. If the Beijing summit does not, however, act as a precursor to an Iranian peace agreement, the June oil shock tipping point is likely to be realized and the U.S. may very well resume military operations. The summit is thus a singularly high-stakes event, combining nearly every geopolitical and trade thread simultaneously: the Iran war, global AI race, supply chain chokepoints, dwindling energy supply, and the new trade order.
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