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Markets debate the Fed’s next moves, Google’s former CEO adds to alarm on China’s use of AI, and US commercial property prices fall. — Liza [View in browser]( [Bloomberg]( Markets debate the Fed’s next moves, Google’s former CEO adds to alarm on China’s use of AI, and US commercial property prices fall. — [Liza Tetley]( Rate debate The Federal Reserve rate debate continues among market players, with [Pictet Wealth Management betting against the assumption that the central bank will cut interest rates this year](.  Andres Sanchez Balcazar, the European wealth manager’s head of global bonds, believes market pricing for policy makers to reverse course and start cutting rates in September is “extreme.” Pictet, which has around $680 billion of assets, is positioning itself by shorting rates futures in a wager they will fall in the months ahead if the Fed is unable to lower borrowing costs due to sticky inflation. AI alarm [China’s embrace of artificial intelligence in warfare has set alarm bells off across the US](. Former Google CEO Eric Schmidt added his voice to the chorus during his testimony at a House hearing on Wednesday evening focused on accelerating the uptake of AI within the US’s own military defense.  Schmidt warned that China invests far more in AI for defense than the US, on top of the “civil-military fusion” that has Chinese commercial companies working closely with the military. Kathleen Hicks, a deputy defense secretary, said she could see “the PRC trying to advance and exploit” AI technologies. Property falls [US commercial real estate prices fell in the first quarter for the first time in more than a decade,]( risking more banking stress given lenders owned over 60% of the $3.6 trillion in outstanding commercial real estate loans in the fourth quarter of 2022. The rise in employees working from home has driven some retailers and restaurants out of business and forced owners of office buildings to reduce rents or to sell all together. While the decline was less than 1%, Moody’s chief economist expects prices to drop about 10% overall, and potentially more if the US enters a recession. Stocks gain Contracts on the S&P 500 and Nasdaq are seeing muted gains this morning, both up around 0.2% at 5:50 a.m. in New York as risk appetite resurfaces on optimism about an eventual breakthrough for US debt-ceiling talks. Treasury yields are climbing, more decisively among longer-dated notes.  Meanwhile, a measure of the dollar is strengthening. Oil is declining, along with gold prices, while iron ore continues its ascent. Coming up… On the data front, we’ve got US jobless claims numbers at 8:30 a.m. along with the Philadelphia Fed Business Outlook for May.  Then at 10:00 a.m., we’ll get US April Leading Index and Existing Home Sales. We will also hear from a few Fed speakers: Jefferson at 9:05 a.m., Barr will testify before Senate Banking Committee at 9:30 a.m. and Logan will speak at 10:00 a.m. Meanwhile, President Biden is attending the G-7 leaders summit in Japan, and Treasury Secretary Janet Yellen will speak on the debt limit and developments in the banking system at the Bank Policy Institute today. The US will sell $35 billion 4-week and $35 billion 8-week bills at 11:30 a.m., and $15 billion 10-year TIPS and $45 billion 156-day CMBs at 1:00 p.m. Earnings include Walmart, Alibaba, Applied Materials, Bath & Body Works, and Ross Stores. There’s also a Bitcoin 2023 conference in Miami. What we’ve been reading Here’s what caught our eye over the past 24 hours: - [Cathay Pacific is giving out free plane tickets to Hong Kong]( - Montana becomes the[first US state to ban TikTok]( - Japan’s biggest brokerage,[Nomura, slashes profit target]( - [Deutsche Bank agrees to pay $75 million](to settle Epstein lawsuit - [UK announces chip partnership with Japan]( as fears grow over Taiwan - UK’s [Rishi Sunak gives details on immigration and China en route to G7]( - New York plans [new rules to stop the proliferation of trash and rats](bbg://news/stories/RUUJPITP3SHS) And finally, here’s what Joe’s interested in this morning Not necessarily as a journalist, but as a consumer of news, I really like political prediction markets like [PredictIt](. I like seeing where the odds stand on things like, [Which party will win the 2023 US Presidential Election](? I also tend to think these markets are misunderstood. People get hung up on the word "prediction" and so they look at these markets with the lens of whether the market "predicted" it or not. Was the market right or wrong? There could be some use in this, but a better way to think about them is that at any given snapshot in time, they put a price on conventional wisdom. So for example, prior to the 2022 midterms, the GOP was strongly expected by the markets to win both Houses of Congress. Ok, so the market was wrong. But the market was only wrong because conventional wisdom was wrong at the time. What was useful going into the election was the quantification of conventional wisdom. When a market is priced at 54% that's very different than 90%, and so the market gives you a feel for how strongly people feel about the odds of a binary outcome. It's very similar to markets on Fed Funds, which are prediction markets for what the FOMC is going to do at any given meeting. The point isn't about whether the market is right or wrong. Markets got the Fed badly wrong through much of 2022, as the hikes came in way faster than most people appreciated. But that doesn't mean these markets weren't useful. Instead they were useful for individuals to gauge how the market was generally pricing in the Fed Funds trajectory. Rightness or wrongness is a red herring. It's useful information to consume. The other thing I like about the political prediction markets is that they're pretty good at cutting through the noise on/after election night. Once the data starts coming in, the bettors tend to be pretty savvy about what it means. Often way more savvy than the pundits on TV. And so you have a situation where the market is pricing in one thing quite strongly (EG in the last election, the Democrat winning the Arizona governorship) while the talking heads keep calling it at tossup. All that aside, the future of political prediction markets in the US is uncertain. It's not totally dead yet, [but the CFTC has been attempting to shut down PredictIt](, and it may be gone by the next election. Maybe if it goes away, something crypto-y will spring up in its place and end up being the same thing, but suffice to say the future of these kinds of binary event contracts sites is ambiguous at best. Last week at the ISDA Annual General Meeting, [Tracy Alloway]( and I got the chance to do a [live episode of the Odd Lots podcast](, interviewing CFTC Chief Rostin Behnam about various topics. Much of the convo was crypto related, but we did talk a little bit about prediction markets and his concerns with them. Behnam brought up at least one concern that I hadn't heard before. Which is that because the CFTC is compelled to look into allegations of market manipulation, the existence of political prediction markets could backdoor the Commission into being de facto election police. Here's his comment: I believe in markets, I believe in efficient markets and price discovery obviously. And the importance of the, the intersection between efficient well-run markets and how they can price risk for capital allocators or decision makers. I would say, And this isn't thought of enough. It doesn't surprise me, but just walk you through a hypothetical, and I'm gonna take a quick step back to the crypto conversation. We don't have -- and this should be clear to everyone; we've discussed this -- I don't have legal authority to police cash crypto markets. We do have this very limited authority within the CFTC to police cash markets if there's fraud or manipulation. And  the policy idea behind this authority that Congress provided to us is that if you're gonna have potentially fraud or manipulation in an underlying contract or an underlying cash market that could impact CFTC regulated markets, the CFTC should be able to police those markets, right? We wouldn't want manipulated cash markets to impact the markets we regulate. So now let's pivot back to this conversation. Around election contracts, in theory, and just taking into the context what we see in the news, what we listen in the news and how, news and its impact on elections, and how we behave has changed and evolved over the past decade. Imagine a situation where we have alleged fraud or alleged manipulation of an election and someone coming to the CFTC and say, "You know, you have a contract listed on an election in, you know, X district  in Y state, and we believe there was fraud, because of hardware, software, news, you name it. "Right? "You need to police that fraud." So without being too indirect, what I'm trying to say is the CFTC could end up being an election cop, and I don't think that's what Congress meant or intended for us to do. Anyway, it's not clear how much of a threat or problem this is yet. Most of these are small dollar markets. But I thought it was an interesting answer, at least from the perspective of the CFTC Chief about why the obligation to regulate these markets would make them uncomfortable. Find the whole episode up on [Apple](, [Spotify]( or elsewhere. Follow Bloomberg's Joe Weisenthal on Twitter @TheStalwart. Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else. [Learn more](. Want to sponsor this newsletter? [Get in touch here](. You received this message because you are subscribed to Bloomberg's Five Things to Start Your Day: Americas Edition newsletter. If a friend forwarded you this message, [sign up here]( to get it in your inbox. 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