US Manufacturing PMI

US factories continued to report strong expansion in October, sustaining the sector’s best growth spell since early 2022. The upturn is also generating jobs at a pace not seen for five-and-a- half years, during the surge in demand seen during the pandemic.

Although new work increased at the slowest rate since March, growth was still solid and supported by generally stronger market demand and a stabilization of international sales (new export business rose fractionally for the first time since June 2025 although tariffs limited gains). There remained some reports of clients seeking to secure orders and lock in prices given widespread inflationary pressures.

On the price front, input cost inflation surged higher in September, reaching its greatest level since May’s near four-year high. Manufacturers widely reported that energy, fuel and transportation expenses had risen since September, and were key in driving up wider vendor prices. Tariffs also added to upward cost pressure, and metals like aluminum and steel were again reported to have risen in price.

Faced with another atypical increase in input costs, many manufacturers saw little choice but to increase their own charges in October. Output price inflation overall picked up and was the highest since September 2022.

The short supply of inputs was another source of inflationary pressure. Vendors were widely reported to be struggling to keep up with demand, especially for any products related to AI data center build outs, whilst simultaneously dealing with tariffs and the disruption caused to supply chains by the conflict in the Middle East. Subsequently, average lead times for the delivery of inputs deteriorated to the greatest degree since August 2022 and at a historically elevated pace.

Backlogs of work overall increased for an eighth successive month, with the latest net increase the steepest since April’s near four-year peak.

Such steep growth in factory gate prices will inevitably feed through to consumers in the coming months, keeping inflation well above the Fed’s target and adding to pressure on policymakers to raise interest rates further.”

• ISM manufacturing production hits a five-year high

ISM manufacturing production versus official industrial output growth

Source: Macrobond, ING

• Solid upturn in global manufacturing continues, but input price inflation accelerates amid shortages

The start of the final quarter of 2026 saw a further solid expansion of the global manufacturing sector. Rates of growth in output and new orders remained above their respective long-run averages in October, despite easing slightly from September highs. The less positive news was on the price and supply fronts, as input cost inflation accelerated amid reports of material shortages and vendor delivery delays. (…)

October data provided further evidence of rising backlogs of work at factories, as the volume of work-in-hand (but not yet completed) increased for the ninth month in a row.

Manufacturers reported that growth in outstanding business reflected a combination of improved sales, supply chain delays and capacity constraints. (…)

Input costs rose at the quickest pace since June, amid reports that supply chain delays and subsequent material shortages were driving prices higher. Average vendor lead times lengthened for the twenty ninth consecutive month, with the rate of increase one of the steepest registered during that sequence.

BTW: On November 2, the GDPNow model estimate for real GDP growth in the fourth quarter of 2026 is 3.7 percent, up from 3.2 percent on October 29.

Apple’s Growth Machine Is Slowing. High Prices Might Not Save It. CEO John Ternus warns margins may weaken in future quarters

The company saved the bad news for its earnings call, an hour after it posted its results for the September quarter, projecting that for the current quarter its high-margin services business will continue to slow and that its widely watched gross profit margin will continue to fall. (…)

The impact of high memory costs are weighing even more heavily on the company, Ternus and Apple Chief Financial Officer Kevan Parekh said on the company’s earnings call. Apple has stockpiled cheaper components purchased earlier, but those inventories are dwindling. (…)

The company raised prices across the board last quarter to help offset higher costs. Without compelling new features, a big question is whether consumers will slow the frequency of iPhone upgrades. (…)

Apple said its revenue grew 12% in the September quarter, slightly ahead of Wall Street’s expectations. Its widely tracked gross profit margin, at 47.9%, also came in just ahead of analyst estimates.

Apple will need to find new growth avenues because a reliable engine during the Cook era—the services business—is slowing. Courts and regulators worldwide have limited Apple’s ability to charge developers big fees to distribute apps through its App Store, the biggest component of the company’s services segment.

One of its most lucrative App Store fee generators has been the ChatGPT app from OpenAI. Around the time Apple accused OpenAI of trade-secret theft this past summer, OpenAI began redirecting potential subscribers to pay via its website instead of the App Store, skirting Apple’s tollbooth.

Bloomberg:

Though Apple predicted revenue growth of 7% to 10% during the holiday season — beating the 6.1% estimated by Wall Street — the company warned that gross margins would be thinner than projected. It’s also suffering from supply constraints that will make it harder to capitalize on a wave of new products. (…)

Sales growth in the quarter decelerated from a 16% clip in the previous three months, and the numbers from Apple’s iPad, China and wearables businesses were disappointing. But the iPhone, the company’s biggest moneymaker, remained strong.

Apple itself had projected fourth-quarter revenue growth of 9% to 11%.

Gross margin — the percentage of sales remaining after deducting production costs — will be 45% to 46% in the December quarter. Analysts projected 47%, and the benchmark was above 50% in the June quarter. Higher memory costs and expenses related to the new Siri AI digital assistant weighed on the figure, Apple said.

The FT:

Apple launched its new chatbot-style “Siri AI” voice assistant powered by Google’s models in September. But it noted the extra cloud computing costs to run the tool could also eat into its margins.

Global smartphone shipments declined 20 per cent in the third quarter, according to data from Counterpoint Research, reflecting higher prices caused by the component crunch.

This has had a more severe impact on affordable smartphone makers. Apple, which delayed iPhone price increases, managed to grow its market share from 18 per cent to 22 per cent in the third quarter despite the broader market shrinking, the research found.

Recap:

• Slowing growth, from +16% to 12% and forecast at 7-10% (vs 9-11% previously guided)
• Rising costs with FIFO inventory accounting’s growing impact
• Rising cloud computing costs
• Declining margins
• Component shortages

For Apple, a dominant $5T company. Imagine smaller companies …

CAPITAL IS CAPITAL

Pimco CEO Warns AI Financing Is on Path to Become ‘Too Much’

Artificial intelligence-related financing could grow to about $10 trillion over the next five years, eventually reaching excessive levels, said Emmanuel Roman, chief executive officer of Pacific Investment Management Co.

Roman estimated that about $2 trillion of financing needs could be created annually over the next five years to fund capital spending by the AI industry, compared with a US bond market of about $12 trillion. (…)

[Blackstone President Jon] Gray struck a more bullish tone, saying “some of this skepticism today is probably healthy,” while adding that the broader AI trend points to more investment and substantially greater demand for capital.

“What is happening is very powerful, and I think underestimating the productivity gains that are coming and the change in consumer and businesses, that’s a mistake,” Gray said.

• State Street CEO Says It’s ‘Hard to See’ AI as a Bubble Yet

“It’s not like these data centers are being built on spec. I mean, there’s real orders behind them, and in most cases, there’s real companies behind them,” O’Hanley told Bloomberg Television’s David Ingles and Yvonne Man in an interview on Tuesday. “So right now, it’s hard to see that’s a bubble.”

“The question will be whether does AI become more efficient, such that all the capacity that’s being built we don’t need now,” he said on the sidelines of the Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit.

The global AI race has fueled a borrowing binge that has flooded markets with more than $650 billion of debt in less than two years, according to data compiled by Bloomberg.

AI CORNER

Updated S-1:

• Anthropic said in an updated filing Monday that its revenue hit $17 billion in the 3 months ended Sept. 30, up from $11.6 billion in the prior quarter. That’s 46.5% QoQ to an annualized rate of $68B.
• The revenue increase was partially offset by $600 million in price reductions introduced from new model versions and contractual discounts.
• The company’s operating expenses jumped to $17.5 billion in Q3.
• Anthropic entered into purchase commitments and lease agreements with an aggregate committed spend of approximately $895.4B, with nearly $70 billion due over the next 12 months and $447.5B (50%) expected to be incurred before the end of 2030 and the rest between 2031 and 2045.
• At the end of the third quarter, it had $146.6 billion in cash and readily accessible investments.

Nvidia orders data centre clients to reduce China exposure

In recent months, the world’s largest chipmaker has told cloud computing clients that they must now sell at least 51 per cent of their services to non-Chinese companies, according to five people with knowledge of the matter. There had been no previous restrictions.

The instructions have been communicated verbally and carried out by Nvidia’s sales force and regional teams rather than spelt out in documents, the people said.

The move means Chinese tech companies now face a new threat to their AI ambitions as Washington moves to further restrict their access to advanced US chips through overseas cloud computing deals.

Many Chinese groups have previously relied on such leases for advanced AI tasks, including model training.

These additional compliance rules apply to Nvidia’s clients globally and not just data centres in Asia, two of the people said. They only affect future contracts and not existing leasing agreements, however.

Nvidia said: “Datacenters and clouds built on American chips are the foundation that American model and application makers need to compete worldwide. Longstanding US policy encourages every cloud to build on American infrastructure and to win business everywhere they can. America’s longstanding policy has always supported the build-out of American infrastructure worldwide, bringing prosperity, influence, and jobs home.” 

The US is seeking to clamp down on both intermediaries that have helped create a thriving black market for Nvidia’s chips in China, as well as Chinese companies’ access to advanced chips overseas through leasing deals outside the country.

Cloud providers are struggling to comply with the new requirements because it is “difficult to find enough non-Chinese clients outside the US”, said one Singapore-based group. “If strictly implemented, it will definitely hurt business.”

Nvidia’s crackdowns have also created a mounting shortage of advanced computing power for Chinese tech companies. A rack of Nvidia’s B300 chips, which sells for about $600,000 internationally, last month fetched Rmb18.5mn ($2.8mn) in China due to their scarcity, according to a person with direct knowledge of the deal.

The B300, which is not allowed to be sold in China due to US export controls, is one of Nvidia’s most advanced products and is used by leading American AI players such as Anthropic and OpenAI. Nvidia has already more than halved the number of Asian customers authorised to buy its AI chips after this year creating a “white list” of companies that have passed tougher compliance checks aimed at preventing the products from reaching China.

That meant fewer advanced Nvidia chips entered China via smuggling and forced more Chinese tech groups to pursue leasing deals with overseas cloud providers. (…)

Nvidia’s move has also led to data centres outside the US scrambling for clients that are not Chinese. They could be forced to shrink the scale of their operations if they cannot do so. (…)

US export controls since 2022 have restricted the physical sale of advanced chips to China, but the rules largely don’t reach computing power rented over the cloud. That gap became a main artery for Chinese AI companies reportedly obtaining advanced Nvidia compute through data centers in Japan, Australia, and Southeast Asia.

The 51% threshold is Nvidia’s unilateral fix: rather than banning Chinese customers outright, it caps how dominant they can be on any single provider’s books.

The rule is best understood as Nvidia buying regulatory credibility: demonstrating self-enforcement on China access at minimal revenue cost.

Demand for Nvidia chips is currently supply-constrained, not demand-constrained: it sells every GPU it can make, and its forward guidance already assumes zero China data center revenue.

The rule doesn’t reduce the global pool of compute demand, it reallocates it. Chinese workloads displaced from Singapore, Tokyo, or Malaysia must migrate to Chinese domestic suppliers. This will benefit Chinese companies such as Huawei, Alibaba Cloud and SMIC (Semiconductor Manufacturing International Co.). It may also help firm up prices in China.

Western cloud providers with heavy China exposure now have to scramble for replacement demand, potentially putting downward pressure on prices although demand still significantly exceeds supply.

Gulf Allies Prepare for New Round of Strikes on Iran—and the Blowback Risks growing as diplomatic efforts remain stalled and Iran threatens unrestrained retaliation

America’s Gulf allies are steeling themselves for a heavy U.S. bombardment of Iran that they expect to trigger a vicious cycle of retaliation against their own economic and civilian infrastructure as early as this week.

The Trump administration and Arab mediators are making a number of efforts to reach a negotiated end to the conflict. But the lack of progress paired with U.S. and Iranian threats of especially ferocious fighting if the conflict resurges are heightening concerns across the region. (…)

The top U.S. commander in the Middle East briefed Trump on Thursday on military options for Iran, in a rare in-person visit to the White House as the U.S. weighs resuming major combat operations, the Journal reported.

Adm. Brad Cooper rarely briefs Trump in person, so the meeting could signal that the U.S. is moving closer to significant military operations. (…)

But Monday night,

“Trump mouthed “No,” when a reporter shouted a question about whether he would resume military strikes on Iran after the elections on Tuesday that will decide control of Congress.”

After his remarks on Monday, Trump wrote on social media that “Oil Prices are DROPPING LIKE A ROCK, down almost $10 a Barrel, A RECORD, because people feel that there will not be a War with Iran.”

Speaking shortly after Trump, Vice President JD Vance separately told reporters “we’ve had a number of good conversations with the Iranians” and that “the president and I both feel pretty good about the prospects of potentially coming to a negotiated settlement.”

“Of course, the Iranians are always a little unpredictable,” Vance continued. “But we’ve certainly made some progress, we’ll see if we can make some more.” (…)

“Given the sensitivity of the current situation, consultations and deliberations have become highly intensive,” Iran Foreign Minister Abbas Araghchi told IRNA during a visit to Turkmenistan.

“We have presented our terms and plan, and everything depends on Washington’s political rationality,” he said. “If they intend deception and military operations, they will face a response harsher and heavier than before.” (Bloomberg)

• America Is Making a ‘Freaking Fortune’ in an Energy Crisis

“And while oil prices are temporarily high … the United States oil and gas business is making hundreds of billions of dollars…. Our country is making hundreds of billions of dollars ‘cause of what’s happened in the Middle East … trillions of dollars,” he told a rally crowd in Georgia on Saturday. “My people said, ‘Please don’t mention that sir, because people are paying a little higher’ … I said, ‘I don’t give a damn, I’m gonna say it: We’re making a freaking fortune.’”

The data:

• The US oil industry earned over $130B in profit so far during the Iran war
• American households have spent $1,100 on fuel alone since the war began. That’s an extra $147 billion all together, according to Brown University’s Climate Solutions Lab.

Also likely going down the wrong pipe:

• Trump Delivers a Closing Midterm Message. Mostly About Landscaping. On the eve of the election, the president held forth in great detail on columns, drain pipes and granite at the newly refilled Reflecting Pool.

And this from David Kotok:

The “genius” self-image of POTUS 47, now 80, is waning a bit just as we enter the polls. Consider this: when asked about Defense Secretary Hegseth firing Lieutenant General Sylvia over an alleged classified information leak, Trump responded, “She’s got problems. She’s gonna have big problems. She did. We’re very much looking for leakers and ah, she’s going to have big problems. Long-term problems.”

Dear Readers: Lt. General Brett Sylvia, director for strategy, plans, and policy on the Joint Staff that advises the president on military issues, is a man.

The US commander-in-chief apparently had no briefing on the identity of the officer at the center of the alleged classified information leak. A slip like that from Biden in 2024 would have dominated a news cycle and Trump’s social media.

EDGE AND ODDS

Yesterday I showed this bullish seasonal chart from Mike Zaccardi, pointing out that November is the best month of the year from an average return standpoint and second-equal on % positive (historical 69% probability the market ends November up).

Today’s FT adds the election component:

S&P 500’s perfect midterm record faces a test in 2026 Wall Street’s blue-chip index has risen in the six months following every midterm Congressional election since 1950

An investor who bought US stocks at the last close of trading before any Congressional midterm election in more than 75 years would have made money over the next six or 12 months: the last time it declined was in 1946.

This is not simply a seasonal anomaly; over the same six- and 12-month windows in other years since 1950, the index fell roughly a third of the time.

Analysts say the pattern is partly a result of pre-election uncertainty that weighs on markets ahead of the vote, and is lifted once it has passed. But with equity markets sitting on double-digit gains this year — despite the recent tech sell-off on Wall Street — and a long list of investor worries, some fund managers say the streak could end. (…)

Strong stock market performance after midterms tends to follow a weak run-up to the election. In midterm years since 1942, the S&P 500 has fallen an average of 18 per cent from peak to trough within the year, according to FT analysis. The 2026 run-up has been anything but weak. The S&P 500’s deepest fall in 2026 was 9 per cent, just half the midterm average. (…)

There is another striking difference between this year and previous midterms: valuations. US stocks have never been this expensive heading into a midterm election. The S&P 500’s much-quoted cyclically adjusted price-to-earnings ratio stands at 40.7, well above the previous midterm high of 33.8 in October 1998, according to FT analysis of Robert Shiller’s data.

The ratio has averaged about 20 since 1942. In the eight earlier midterm years when it was above that level, six-month gains averaged little more than half those in the other 13.

Ed Yardeni:

Could Midterms Give Wall Street A Cold Shower?

We suspect that stock investors have yet to fully discount the possibility of a Democratic sweep of Congress. (…

In any event, Wall Street traditionally welcomes political gridlock because it reduces the likelihood that Congress will pass extremist legislation. But this time could be different for two reasons.

First, deepening partisanship could turn gridlock into damaging political paralysis at a time when the Bond Vigilantes are already uneasy about Washington’s unsustainable fiscal trajectory. A Democratic sweep could complicate negotiations over government spending and the debt ceiling. Prolonged shutdowns and fiscal standoffs could push Treasury yields higher, weighing on equity valuations.

Second, gridlock’s traditional ability to constrain policymaking may not hold this time. President Donald Trump has relied heavily on executive authority, with some of his most market-disruptive policies, including tariffs and military action against Iran, pursued largely without congressional approval.

A Democratic-controlled Congress may therefore do little to restrain him. Moreover, with the midterms behind him, Trump may feel even less constrained politically and more willing to pursue controversial policies through executive action. Hence, a blue wave could deliver a cold shower for stocks, though we would view a significant selloff as a buying opportunity given the remarkable strength of the economy and corporate earnings.

One encouraging development ahead of the elections was today’s reports that the US and Iran are working on a peaceful diplomatic solution to their war. Iranian President Masoud Pezeshkian said he has granted his government greater authority to pursue peace talks, while President Trump and Vice President Vance also signaled progress. Hopes for a deal sent the price of Brent crude oil down 7.6% to $104.77 per barrel.

However, we have been here before with apparent diplomatic breakthroughs. We still see a high risk of military re-escalation. The bid-ask spread remains wide, with Tehran demanding sanctions relief, the release of frozen assets, and an end to the US naval blockade of Iranian ports, while Washington insists on nuclear concessions. (…)

There you go: on the one hand, on the other hands …

Good election day to my American friends, although someone will surely call them rigged somewhere.

An AI Halloween Market Scare

(…) Google’s advertising revenue during the latest quarter undershot investor expectations, raising worries that AI may be cannibalizing its search engine. Search ads are a key source of Google revenue, which it has used to fund its AI build-out. If more people use AI large-language models for search, that could reduce Google’s income and make it harder and costlier to fund its AI ambitions.

There are also lingering concerns that Google may struggle to monetize its own large-language model Gemini and AI search tools to the degree it has traditional search. But on the bright side, revenue from Google’s cloud unit doubled from a year earlier from increased demand for its AI tools and custom chips, which could pose a competitive threat to Nvidia and its high-cost chips.

Intel had an even worse day than Google, with the chip-maker’s stock price plunging 29% on Friday. AI was indirectly to blame. Surging demand from hyperscalers like Google and OpenAI has driven up prices for memory chips and, consequently, devices like PCs and smartphones. This is hurting the market for PCs, which run on Intel’s legacy chips.

Amazon’s stock on Friday also took a header after the company reported higher than expected capital spending on AI and negative cash flow. This amplified market concerns that the AI build-out is proving more expensive than anticipated.(…)

At some point hyperscalers may have to pull back, which could hurt the entire AI ecosystem. That might hit chip makers like Nvidia and Micron Technology that are currently churning out huge profits.

This in large part explains the routs in other AI-related stocks, which dragged the Nasdaq down 3% on Friday. A correction was probably inevitable given the waves of capital that have been pouring into any company claiming to have an AI angle. (…)

Interestingly, the “AI correction” came after AI players reported weaker than expected growth in their respective legacy businesses: search for Google, retail sales for Amazon and end-user hardware for Intel.

Their respective AI businesses kept booming along, requiring investments that investors worried might not be sufficiently financed by legacy cashflows.

• The New Bottleneck in America’s AI Build-Out: A Shortage of Cheap Money

Lenders and investors are getting choosier about where to place their bets and are demanding tougher terms, signaling a new phase in the AI build-out. Among their concerns: the prospect of delays in big projects as a grassroots political backlash to data centers gains traction, and the threat that AI-related profits from hyperscalers and startups such as Anthropic and OpenAI won’t materialize as fast as promised.

Plus, a flood of stock and bond offerings is compounding concerns that investors are getting overexposed to AI.

The new terms of trade are visible in every corner of markets. Bonds issued even by big tech companies such as SpaceX and Meta are trading at steep discounts. AI cloud companies such as CoreWeave, Nebius and Nscale that borrow big to build and sell capacity have effectively been shut out of the bond market in recent weeks, people familiar with the matter said.

Taken together, it all amounts to a buyer’s market for Wall Street. Even powerful players such as Broadcom are having to sweeten the terms offered to banks to secure loans. (…)

The stock market is starting to reflect investors’ nervousness that the AI payoff might not arrive—at least in the near term. (…)

There is still money available for creditworthy companies. SpaceX this week announced it raised the biggest-ever financing for AI chips, a $40 billion package that will allow it to purchase the latest lineup of Nvidia chips.

Its record only lasted a few hours, when chip-design giant Broadcom sealed a $63 billion deal to lease chips to Anthropic. (…)

Meta, Amazon, Alphabet and Microsoft carry top credit ratings and have significant room to pile debt on their balance sheets. But after many of them flooded the high-grade debt market with new bond sales this year—and signaled they plan to keep doing so for the foreseeable future—the investment firms, insurance companies and pension funds that lend to them are feeling increasingly tapped out, and concerned about their concentration in one sector. (…)

Add the odds of a Democrat sweep Tuesday and a AI-hot economy likely to push the FOMC to hike rates again in December and maybe after and there is enough uncertainty to make investors reevaluate their positions.

And the US/Israel war with Iran and its impact on supply chains, commodities and inflation.

And tariff/immigration  policies pushing corporate costs up.

And the US government deficit needed financing.

In fact, one might say that the US government has set the stage for the current reckoning that it ain’t good to be small if you must

• switch suppliers and reorganize your supply chain,
• absorb tariff and energy costs,
• hire skilled people,
• build AI capabilities,
• secure limited inputs and
• find affordable financing.

Is OpenAI big enough?

• OpenAI Raises Less Than Half of $30 Billion Target in Latest Round

OpenAI has raised less than half of the $30 billion it had initially targeted for its latest funding round, with market jitters over the AI trade dampening investor appetite for one of the industry’s biggest names.

After receiving tepid interest from some large investors, OpenAI has so far secured roughly $11 billion in commitments for the new financing, according to people familiar with the matter. The deal values the company at $1.25 trillion—less than the $1.4 trillion valuation that it had earlier hoped to achieve. (…)

The maker of ChatGPT and Codex is now hoping to raise up to $20 billion, one of the people said. (…)

AI Adoption Rises to 24.6%

From Goldman Sachs:

AI adoption by firms rose by 0.8pp to 24.6% among US establishments (with adoption expected to rise to 28.6% in the next 6 months) according to the Census Bureau’s Business Trends and Outlook Survey (BTOS).

Adoption is approaching 50% in the information, professional, and finance sectors. At a detailed subsector level, computing, securities, and publishing firms continue to lead adoption.

Over half of establishments with over 250 employees expect to be using AI in the next six months.

Other business surveys note that firms in Europe and Asia reported the highest rates of positive return from their AI initiatives.

Amid the debate on AI adoption, ROI and productivity, one can see the very rapid positive trends from these surveys:

• A McKinsey August survey said that 40% of large organizations have adopted AI agents and are scaling their deployment throughout the organization. 80% of respondents said AI has improved their individual productivity.
• A KPMG September survey found that 62% of organizations are now building, deploying or developing AI agents, up from 53% last quarter. General workforce adoption of AI tools rose to 44% from 23% last quarter.
• A Dun & Bradstreet October survey revealed that 28% of surveyed businesses report broad or strong returns from AI efforts. Data readiness is strongly associated with AI ROI. Only 8% reported that their enterprise data is ‘fully ready” to support AI at scale, 44% as “partially ready” and 33% as “mostly ready”. 65% plan to increase AI spending over the next 12 months.

No mentions of costs or budgets. Agentic AI seems to be taking off as businesses get their data AI-ready. “65% plan to increase AI spending over the next 12 months.”

The last chart shows how tough it is to be small in this rapidly expanding AI world. Small company = small AI staff, small budgets = small investments = small productivity gains = smaller market share.

Back to GS:

AI’s labor market impact has become increasingly visible in recent months. We continue to observe employment drags in specific industries where AI-use cases have been established—such as marketing, graphic design, customer service, and some tech occupations—and gains in construction jobs exposed to data centers (up 315k since 2022 relative to broader construction employment trends).

Recently, the three-month averages in nonmanufacturing payrolls and unemployment data show a statistically significant relationship with AI adoption at the subsector level, with higher adoption associated with weaker job growth and higher unemployment.

Corporate layoffs attributed to AI affected 4.0k employees in September, bringing the total since May 2023 to 207k.

We continue to observe large impacts on labor productivity in the limited areas where generative AI has been deployed but only modest signs of economy-wide impacts.

Academic studies imply a 23% average uplift to productivity, while company anecdotes imply slightly larger efficiency gains of around 32%.

Industries with higher AI adoption rates are now showing a slight acceleration in productivity growth over the past year in official US data.

EARNINGS WATCH

We learned a lot last week:

• Anthropic is now making good money from AI. It’s operating income reached $1B in Q2, close to $4B annualized.

Obviously not to be straight lined but, as SemiAnalysis wrote: “to date, they have burned $9.7b, they are growing at a rapid pace, and are profitable on an operating income basis as of the June quarter! This is likely the most efficient scaling of a business in the history of capitalism.”

• We also learned that hyperscaler cloud revenues not only keep accelerating (+54% YoY) but that their revenue backlog is up 140% to $1.75 Trillion!

 

(Goldman Sachs)

• We also learned that the data center business is quite profitable. Alphabet told us that its Google Cloud operating margin was 36.2% in Q3 (AMZN AWS’s was 38.7%), close to its Google Services margin of 40.7%. Its cloud revenues grew +103% YoY and its revenue backlog (now at $561bn) jumped 256% YoY. Management said that about 55% of this backlog (i.e. $310B) will convert into revenue in the next 24 months. Cloud revenues were $30.7B in Q3. It added that “additional availability of compute is standing as a gating factor to even faster growth”. FYI, Google Search revenues were $63B in Q3.
• Investors also told us that, in a world where financing capabilities are getting more challenging, they currently care more about free cashflow than AI growth.

 

(Goldman Sachs)

• Most interestingly, however, was that Alphabet, Amazon, Microsoft and Intel suffered from slowing, even declining, non-AI businesses:
• AMZN North America segment sales increased 6% after +16% in Q2 and +12% in Q1 (adjusting for the Prime Day shift, Q1+Q2 was +14.4% YoY and Q2+Q3 was +11.1%). On a world-wide basis, AMZN’s Net Product Sales slowed from +12.6% in Q1+Q2 to +7.5% in Q2+Q3. Meanwhile, AWS grew 39%, fastest pace in nearly five years.
• GOOG Search revenue growth slowed from +19% in Q1 and +17% in Q2 to +12% in Q3. Its cloud revenues grew +103%.
• MSFT Windows OEM and Devices division revenues cratered 22% in Q3 after +5% in Q2. Azure grew 48%.
• INTC Client Computing and Physical AI Group revenues dropped 5% after +13% in Q2. Intel’s data center revenues jumped 78%.

In effect, hyperscalers are now experiencing a K-shaped growth with their non-AI businesses, their cash cow divisions, slowing rather meaningfully, reflective of what’s happening in the non-AI economy.

• With some 180 S&P 500 companies reporting last week, we also learned that non-AI related revenues, margins and profits are starting to feel the effects of slowing non-AI demand and cost push inflation.

Goldman tells us that “the pressure from rising input cost prices has been reflected both in management commentary and in analyst margin estimate revisions.”

The latest PMI survey said that corporate costs are also surging due to “material shortages, low stock levels, overloaded suppliers, labour shortages, rising back orders and shipping or import delays”. That’s a lot to deal with all at once.

 

Non-AI profit growth is slowing even with surging war-related commodity producer profits (Energy +143% and Materials +40%).

In contrast with the last few quarters, the outlook for hyperscaler capex spending has remained fairly stable this reporting season. Analysts continue to expect roughly $800 billion in capex in 2026. Estimates for 2027 spending now stand at $1.2 trillion, only slightly above the estimate prior to the hyperscaler earnings reports.

The lack of revisions is consistent with our expectation that hyperscaler capex spending will increase substantially in 2027 but that we are moving past the peaks of both capex growth and upside surprises to consensus estimates.

Anthropic may not secure investment-grade rating after IPO, Blackstone tells investors Private capital giant says AI group is expected to receive ‘high’ junk rating in shift from previous guidance

Blackstone is acting as an anchor investor on the deal, known as “Project North Star”, and is working with banks that stumped up financing on selling the debt on to other investors. (…)

While Blackstone had told its investment partners in recent months that it was expecting an investment-grade rating for Anthropic before year-end, it has recently signalled that a rating in the double-B range or above is more likely given the guidance it has received from major credit agencies, the people said.

Such a designation would limit the pool of capital that Anthropic could tap because many insurance and pension funds are restricted from taking large positions in junk-rated borrowers. As a result, the company might need to continue to rely on its suppliers with high credit ratings to support its debt-raising efforts. (…)

The Smartest People in AI Believe This Is the World’s Most Important Chart AI is starting to build better AI. This self-improvement is speeding up research and development—and freaking everyone out.

(…) It’s a phenomenon known as “recursive self-improvement,” or RSI, which roughly translates to AI building smarter AI. Anthropic refers to it as “closing the loop,” a cycle in which each improvement makes the machines better and faster at improving themselves.

AI companies say they are now seeing the early signs of recursive self-improvement, which is speeding up their research—and freaking everyone out. As this technology accelerates its own evolution, the risk is that we struggle to keep pace and keep it under control.

Our best data about this profound shift comes from Anthropic, which recently published a chart showing how much of its AI research and development is being done by AI. (…)

US military says it helped Gulf states export 1.5 billion barrels of oil

US military forces have helped Gulf countries export more than 1.5 billion barrels of oil since June, despite Iran’s efforts to control the critical waterway, according to US Central Command. (…)

It added that more than 95 percent of ships navigating the channel had sailed through safely in recent months despite Iranian threats, “clearly demonstrating that the United States and regional partners control the international waterway”. (…)

At least 16.5 million barrels of oil per day left the region in September, equal to the pre-war average, excluding Iran, according to market intelligence firm Kpler.

Analysts have attributed the rebound to a combination of offshore ship-to-ship transfers, US military escorts, and increased use of oil pipelines. (…)

• Why do prices keep rising?

(…) The climbing prices reflect anxiety about the possibility of renewed hostilities in the US war on Iran, dwindling oil stocks, and the increased costs of transporting supplies out of the region, according to market analysts. (…)

Freight costs have reached as much as $40 per barrel in recent weeks, about 10 times the usual rate, according to data from the London Stock Exchange Group, the surge driven by elevated insurance premiums in addition to logistical challenges.

October has been the deadliest month for attacks on commercial vessels since the start of the war, with 32 incidents logged by the United Kingdom Maritime Trade Operations (UKMTO) as of Friday. (…)

Pavel Molchanov, an investment strategist at Raymond James & Associates, expressed scepticism that supply has returned to the pre-conflict trend.

“The IEA’s most recent production data – for September – shows OPEC Gulf production at 15.8 million bpd, which equates to 75 percent of the pre-war baseline,” Molchanov told Al Jazeera, referring to the International Energy Agency’s latest energy outlook. (…) “but it’s still a considerable distance from 100 percent.” (…)

Observed inventories fell by 10 million barrels in September, taking the global stockpile to 509 million barrels below its pre-war level, according to the IEA.

“The market has moved to a chronic squeeze, driven by concrete supply risks: Hormuz transit, shipping and depleted inventories,” Figuerola-Ferretti said. (…)

• Goldman Hikes Oil-Price Forecasts on ‘Substantial’ Supply Risks

Goldman Sachs Group Inc. raised oil-price forecasts for the year-end and 2027 on elevated risks to supplies, joining other banks in hiking their outlooks after months of war in the Middle East.

Brent is now seen at $105 a barrel in December, up from a previous estimate of $90, and will average $88 next year, 10% more than seen before, analysts including Daan Struyven and Yulia Zhestkova Grigsby said in a note, which also increased forecasts for US oil marker West Texas Intermediate.

“Substantial downside supply risks are likely to sustain a large, near-term risk premium,” the analysts wrote. The markets are assigning “increasing weight to escalation after the Nov. 3 US midterms and subsequent potential weakness in Mideast supply,” they added in the Nov. 1 report. (…)

In recent weeks, Morgan Stanley raised its forecast for Dated Brent — a key physical price — to $105 a barrel for the fourth quarter, while ANZ Group Holdings Ltd. hiked its year-end outlook for Brent futures to the same figure.

EDGE and ODDS

From Callum Thomas:

• seasonality is about to flip maximally positive (though see the next chart for a caveat on this).

Source: @MikeZaccardi

• the monthly seasonality stats are revealing for a couple of reasons. First, November is the best month of the year from an average return standpoint and second-equal on % positive (historical 69% probability the market ends November up). Second, notice the best vs worst Novembers in history: +11% vs -11% (and then also contemplate that 31% of Novembers were negative). There is a seasonal edge for November (and December), but anything can happen to throw that off, and statistically there is almost a third chance that the market closes down. Be open to upside, but don’t rely on this as your only guide.

Source: Topdown Charts Pro

John Authers:

Meanwhile, the key dynamic in the post-ChatGPT era has been to bet on tech-led growth, which means buying tech stocks relative to bonds. The Nasdaq’s advance over Treasuries, proxied in the chart by the most popular exchange-traded funds tracking the sectors, has been remarkably consistent. September’s bond selloff took this trade beyond its long-term trend a month ago. After a few weeks of brutal correction, that trend remains intact:

Goldman Sachs: Previewing the Midterm Elections

(…) prediction markets imply high odds Democrats will win the House majority with a wider margin of control (around 236 seats) than either party has had in several years.

The Senate majority is more uncertain. (…) However, the Senate outcome is less important if Democrats have won the House; Senate passage generally requires bipartisan support, and President Trump could still veto any legislation Congress sends him.

Fiscal deadlines would be the main focus for legislative action under a Democratic majority. Spending authority will need to be extended and the debt limit will need to be raised, which could force compromise. The war in Iran, tariff rollback, the reversal of spending cuts, and the expansion of health benefits are likely to be at the top of the Democratic agenda around these deadlines. We don’t expect Congress to address these deadlines before year’s end, though Republicans might try.

We do not expect major fiscal policy changes over the next two years (…).

Democrats have indicated they would seek to reverse some of President Trump’s tariffs, but we expect this to have a limited effect since the reversals would likely be focused on a few countries (e.g., Canada) or products. We expect President Trump to announce new tariff increases after the election that would more than offset those reductions, likely resulting in a rise in the US effective tariff rate of a little under 2pp.

Authers:

Democrats’ chances of a Blue Wave are 70% — which is still less than the 80% shot Flavio Bolsonaro appeared to have against Lula in Brazil a week ago, but it still makes sense to call this a base case because they have a number of routes to their target.

For those keeping score on election night, the Democrats need to win a net four Senate seats, and Polymarket bettors think they’ll get six.

In order of confidence, they are North Carolina (98%), Ohio (74%), Alaska (74%), Texas (71%), Maine (68%), and Kansas (52%). Dems look more likely to win Iowa (42%) or even Nebraska (where an independent is on 27%), than to lose their most vulnerable state, Michigan (a 29% shot for the Republicans). You can entertain yourself by checking the latest odds on Polymarket’s website here. (…)

How much does all this matter to markets? The president is in place for another two years, and there is no chance of putting together a majority that could override his veto. Trump’s big tax cut for his second term has already happened, and he would veto any attempt to push through a hike.

A big Democratic win, coupled with victory for the billionaire tax proposal in California, would suggest the party might just win in 2028 with a candidate committed to raising taxes. That would be market-negative (to put it mildly); but Democrats would still need to choose a candidate and win the election (both difficult), so in the near-term this should do little more than affect the vibe. (…)

Congress cannot shift the market calculus significantly until the 2028 presidential election. A blue wave this week would change little in the short term, even if it shifted the odds and therefore the market prices for the longer term. (…)

If the GOP somehow held the House, it would be a massive vote of confidence in Trumpism and empower a radical end to his time in office. This hasn’t been priced in at all.

Barclays suggests that another tax cut would then be likely — and that would likely intensify both the rush to buy growth stocks and the upward pressure on inflation and interest rates. It would also be bullish for the dollar — the DXY dollar index has rallied after Trump victories over the last decade.

The likelihood is that a strong night for Democrats causes a mild freak-out over events that cannot happen for another two years. The slim Lula-level possibility of a last Trump hurrah would have much more impact.

AI impact:

Goldman thinks that

While data centers have emerged as a theme in some campaigns this year, we expect the focus to fade somewhat after the election. The issue ranks low among voter priorities, and state governors are likely to shift attention once election season is over. Congress might limit data center tax incentives, but a national moratorium looks unlikely in any election outcome. Instead, we expect the congressional focus to shift to AI regulation, where a compromise that codifies basic federal oversight and self-testing is possible but restrictive regulation looks unlikely.

But SemiAnalysis warns (my emphasis):

The 2027 datacenter boom is already being built and next week’s midterms won’t stop it now. (…) The election will change the rules around them, but much of the 2027 pipeline already has a substantial head start.

The fight is over 2028. Our model has 62.2 GW of US net additions that year, most of which hasn’t started construction. Most of it sits in states electing a governor on Nov. 3. (…)

That leaves a 2028 pipeline still working through approvals, power projects and construction schedules as the rules change. (…) What is changing is the reach of the restrictions given the growing anti-datacenter backlash.

Three things have worsened since.

• Texas, the largest US market, froze Texas Commission on Environmental Quality (TCEQ) permits on Sept. 21 on top of the interconnection-queue audit begun Aug. 3, bringing onsite power into the hold.
• Oregon expanded its earlier state-land freeze to air and water-discharge permits on Oct. 9, through July 1, 2027.
• And midterm candidates have campaigned on more restrictive positions: nine of the 20 nominees want a pause on new construction and the other 11 want conditions, and the split is about even by party. Both parties want developers to accept stricter conditions. The main difference is whether a developer can meet the new terms and keep building, or has to wait for the state to reopen approvals.

The biggest risk to our buildout forecast right now is a prolonged permitting freeze at the TCEQ. Texas alone adds close to 30% of US GW in 2028. A few months of lost time in that market can move the national number. (…) The question now is how long the pause lasts.

Gov. Greg Abbott (R), who is running for re-election in Texas, could reopen permitting once the Electric Reliability Council of Texas (ERCOT), the state’s grid operator, finishes its audit and the Texas Water Development Board completes its water-use review. ERCOT is targeting Dec. 10 to file its report, which does not by itself reopen permitting. A restart around then would leave developers dealing with a relatively short interruption, which some projects can absorb within their schedules. The audit still has to lead to a decision to resume issuance, and each permit still needs approval.

By contrast, Gina Hinojosa (D), his challenger, presents a more bearish approach: She would impose a moratorium until legislation is passed that gives communities a voice and protects household utility bills, as well as ends the tax incentives for datacenters. (…)

This is the risk posed by the pro-moratorium candidates: a project cannot carry out work if it still requires an approval which the state has ceased to issue. If the candidate proposing a datacenter pause won in every state where one is running, those states would together contain roughly 30 GW of planned capacity scheduled for 2028. How much actually slips depends on the permits each project still needs and how long the pause lasts.

We are less concerned with the candidates who support conditions only. Most of their demands change the price and terms of development. A developer can fund the grid upgrade, change the cooling design or negotiate the community agreement and then move forward. That can be expensive and time-consuming, but it gives projects a route to approval.

According to race ratings and available polling as of Oct. 30, from multiple sources (Cook Political Report, Multistate, and The New York Times), the conditions-only candidate is favored in Texas, Oklahoma, Pennsylvania, and Iowa, and Georgia is a toss-up.

(…) hyperscalers can afford to pay the higher costs of new rules and can more easily bring or pay for their own power.

However, that doesn’t necessarily mean they will be able to deliver capacity on time. These projects still require their own permits and equipment. And having the money to pay for power transmission doesn’t make it available immediately. (…)