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

Ed takes a look at how the tariffs impacted the consumer price index for June, dives into why Nvidia and AMD can now resume chip sales to China, and breaks down the Department of Defense’s new contracts with several AI companies. Check out our latest Prof G Markets newsletter Order "The Algebra of Wealth" out now Subscribe to No Mercy / No Malice Follow Prof G Markets on Instagram Follow Ed on Instagram and X Follow Scott on Instagram Learn more about your ad choices. Visit podcastchoices.com/adchoices

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• 0:00Speaker 00

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• 0:30Ed Elson?

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• 1:00Ed Elson?

  Welcome to Prof G Markets. I'm Ed Elson. It is July 16th. Let's check in on yesterday's market vitals. The S and 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 companies 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. JP Morgan and Citigroup saw increases of 15 and 16% in trading revenues respectively. Meanwhile, a rally in chip stocks drove the Nasdaq to a record high. We'll talk more about that later.

• 1:44Ed Elson?

  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. Okay, let's examine this inflation data. We're up to 2.7% year-over-year in June. In May, it was 2.4%.

• 2:29Ed Elson?

  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 packing, 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. It could be that this is some natural moment in the economic cycle that is possible.

• 3:12Ed Elson?

  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? Well, 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.

• 3:57Ed Elson?

  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. In 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.

• 4:42Ed Elson?

  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 Servie, an economist at Wells Fargo.

• 5:14Speaker 04

  So 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. You had a lot of businesses who knew that tariffs were coming and so they built up

• 5:57Speaker 04

  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. So 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 with food at

• 6:39Speaker 04

  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. Where 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

• 7:24Speaker 04

  half of the year. But those are the elements where we're seeing most of the price pressure right now.

• 7:28Speaker 05

  Is this just the beginning for tariff driven inflation? What do you think we can expect in the coming months?

• 7:34Speaker 04

  This is kind of the first sign. We had some, we had some inklings of it over the past few reports, but this report in general felt like more of the first like broad based sign of consumer price inflation actually picking up on top of tariffs. So 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. But it is another bump in the road. You are going to see core inflation, which maybe in an alternative universe would have

• 8:17Speaker 04

  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.

• 8:34Ed Elson?

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

• 8:52Ed Elson?

  The 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."

• 9:37Ed Elson?

  They 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. 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, or if there is one,

• 10:20Ed Elson?

  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, and that is you get chaos, you get conflict, confusion, and there's no real purpose, no real motivation, and no real outcome

• 11:05Ed Elson?

  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. That 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 Arya,

• 11:50Ed Elson?

  a senior semiconductor analyst at Bank of America.

• 11:53Speaker 06

  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 US and China, that that's very important, because, you know, as you know, US is the largest designer of chips, and China is the largest buyer of chips, right? So having a fruitful dialogue between the two countries is extremely important. And number two, as it relates specifically to AI.

• 12:31Speaker 06

  I think it does help Nvidia and AMD remain engaged with Chinese software developers who are extremely innovative. You know, 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 US overall to maintain its leadership over the AI technology stack

• 13:16Speaker 06

  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.

• 13:29Speaker 05

  So assuming Nvidia obtains a license to resume selling into China, what kind of incremental sales are you expecting from Nvidia?

• 13:38Speaker 06

  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. Because at this point, it's about the Chinese customers going and asking the US 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

• 14:20Speaker 06

  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. So 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, you know, the product that Nvidia is selling to China, the H20 product, is already a handful of generations older and de-featured 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?

• 15:03Speaker 06

  I think that's going to be the debate and whether Nvidia can keep on pushing the envelope to have the Department of Commerce, yes, be, you know, a few steps behind the best-in-class, but at least keep pace with what the best-in-class is in any given year.

• 15:18Ed Elson?

  That was Vivek Arya, 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.

• 15:51Ed Elson?

  Okay, after the break, the defense industry teams up with big tech. Stay with us.

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• 17:04Ed Elson?

  We're back with Prof G 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. And Meta opened up its Llama model to US national security agencies and defense contractors last fall.

• 17:47Ed Elson?

  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 Pete Hegseth joining forces with Mark Zuckerberg, they especially don't like him joining forces with Mecha 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. We've talked about this with Scott, and so this idea of just cutting it off from big tech seems like a bad idea.

• 18:28Ed Elson?

  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

• 19:12Ed Elson?

  or other technologies whose principal purpose or implementation is to cause or directly facilitate injury to people." Those 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

• 19:57Ed Elson?

  governments." Meanwhile, OpenAI, although they never explicitly forbade military contracts, their mission statement kind of implied as much. The purpose was to, quote, "advance digital intelligence to benefit humanity as a whole, unconstrained by a need to generate financial return." Well, they're now doing $10 billion in ARR and they have multiple deals with the military and with defense contractors. Another great quote, by the way, from the OpenAI 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 Anduril or Ballantir or now the Department of Defense.

• 20:38Ed Elson?

  So 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, and then

• 21:22Ed Elson?

  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 Profitec Markets from the Vox Media Podcast Network. I'm Ed Elson. I'll see you tomorrow.

• 22:03Ed Elson?

  Lifetime.

• 22:11Ed Elson?

  You have me in kind reunion.

• 22:22Ed Elson?

  As the water.