CONSUMER WATCH

Consumer spending continued to look solid in September. Bank of America total aggregated credit and debit card spending per household rose 6.2% year-over-year (YoY), while spending excluding gasoline increased 5.1% YoY. Notably, both are the third strongest growth rates in the past four years.

Seasonally-adjusted total card spending rose 0.2% month-over-month (MoM), while spending excluding gasoline was little changed. Overall, spending growth remains well above the 2025 average rate

Note how Retail ex-gas spending has flattened since June, in nominal dollars so probably down in real terms.

This next chart shows how necessities are taking a larger share of spending in all income categories:

Should we be concerned about the easing in household spending and after-tax wage growth for those with the top 5% of incomes? For now, probably not, as in our view this spending growth is likely being driven by wealth effects rather than wage gains.

Absent a sharp correction in equity markets, there is little reason to expect them to retrench their spending. However, developments here are worth watching as this cohort comprises a significant proportion of overall consumer spending. They also tend to make outsized contributions to several discretionary spending categories

Now that summer is over, the next big gauge of consumer momentum is how people spend during the run-up to, and over, the holiday season. It is early days, but September spending on holiday items ran well ahead of 2025. Given the backdrop of firmer after-tax wage growth and breadth across retail and services categories, this is perhaps not surprising. However, some of this spending strength could be due to rising prices as opposed to more purchases.

FYI, my proxy for retail inflation is up 3.7% YoY in August, roughly unchanged since June but up from less than 2.0% in 2025 and Q1’26 (1.8%).

Inflation fears on the rise as one-year outlook in Fed survey hits highest level since May 2023

The central bank’s Survey of Consumer Expectations indicated that the median view for inflation over the next 12 months rose to 3.9%, up 0.3 percentage point from August and the highest level since May 2023, when the figure was at 4.1%.

The three-year expectation edged up 0.1 percentage point to 3.3%, while the five-year view was unchanged at 3%.

One closely watched bond market indicator known as a breakeven shows the five-year outlook around its highest level of the year at 2.35%.

Similarly, the survey found that household spending growth is expected to hit 5.5%, also up 0.3 percentage point month over month and the highest since May 2023. (…)

HOUSING WATCH

• Mortgage rates are up 25% from their recent low:

• Demand is plummeting:

• Sellers outnumber buyers by 60%. Something has to give.

• Home Sellers Grapple with Reality: Listing Prices Drop in Florida, California, Texas, and Suddenly even in New York

(…) So listing prices show what sellers are struggling with. Those listing prices have been sinking in Florida, Texas, and California for the past few years. Transaction prices have also fallen or plunged in many markets in these states. But listing prices are now suddenly sinking in New York, where transaction prices had held up. (…)

 

 

Lofty US Yields Lure Strong Investor Appetite at 10-Year Auction

Long-term bond yields pared their rise on Wednesday after the US Treasury Department’s $39 billion sale of 10-year notes was awarded at 5.3%, well below the prevailing yield seen before the auction — an indication of solid demand.

“This is showing that finally the deeper-pocketed guys find these levels appealing,” said Monty Gandhi, rates strategist at SMBC. “Around 5%, we heard some of these larger players mention that they were unwinding their shorts, and my guess would be slowly they are getting back in.” (…)

The bid-to-cover jumped to 2.77%, the most since 2016. Non-dealer investors took down a record 97.5% of the auction. (…)

OIL WATCH

Oil Retreats as Trump Rules Out Attacks on Iran Before Midterms

Three Saudis killed in Houthi attack on Riyadh airport

Syria weighs military aid for Saudi Arabia amid Yemen war, sources say

U.S. Forces Complete Withdrawal From Iraq

• Tanker rates just hit a new all time high: shipping now adds over $40 to the price of a barrel (Zerohedge)

• Refiners have to pass on shipping costs, so diesel crack spreads quickly shot up back over $100, as market laughs at the emergency release of 100MM barrels. Meanwhile, most still can’t get physical oil and Dated brent is almost back to all time highs (ZH)

US Election Monitor: October 8 Update

From Goldman Sachs:

Senate

Where things stand: Prediction markets imply a 65% chance that Democrats win a Senate majority, which requires a net gain of 4 seats. Polling averages show Democrats ahead in 7 Republican-held seats as well as all of their own close races (Exhibit 3), but most sit within the margin of error.

What has changed: Prediction markets moved further toward Democrats over the past week, lifted by polls showing them leading in Kansas and leading by a wider margin in New Hampshire, with continued albeit narrow leads in other key Senate races. The Republican Senate spending advantage grew to more than $200 million, but the gap in ads aired through September appears much narrower. Republicans boosted spending by $8 million and $5 million to defend seats in Kansas and South Carolina, signaling those races are tighter than expected. The mail ballot requests lean more Democratic in Ohio, Maine, and North Carolina than in 2024, though so far these likely account for only about 25% of total mail ballots (based on the 2022 midterm election).

House

Oracle, Broadcom and SpaceX Seek Blockbuster Debt Deals to Pay for AI Chips Apollo, Blackstone and Goldman Sachs among lenders in talks to finance megadeals worth tens of billions of dollars apiece

Big players in artificial intelligence are lining up a series of blockbuster financing deals to pay for computing hardware, part of a rush for capital as data-center build-outs race forward.

In recent weeks, Broadcom has been working to arrange more than $50 billion in financing for OpenAI’s custom artificial intelligence chip, which the firms are developing together, according to people familiar with the discussions.

Apollo and Blackstone are among the lenders Broadcom has talked to about participating in the deal, people close to the situation said. Talks are early and the size of the deal could change.

Separately, Oracle is in talks with Apollo and Goldman Sachs to arrange money for a big purchase of chips, people familiar with the matter said. And SpaceX has talked to lenders in recent days about a $40 billion chip financing for Nvidia NVDA chips, according to a person familiar with the discussions. The Financial Times earlier reported on the SpaceX talks.

The wave of deals reflects the mounting cost of building AI infrastructure. Cloud providers such as Amazon Web Services and Oracle have traditionally financed computing hardware through their own cash flows. For their AI build-outs, the companies issued hundreds of billions of dollars of bonds, pushing the public debt market to its limits. Now, some buyers are turning to Wall Street investment firms to help fund purchases totaling tens of billions of dollars per deal.

There is also a new group of chip buyers, including OpenAI and Anthropic, who don’t have the financial firepower to purchase their own hardware. Leading AI labs historically rented the bulk of their computing capacity from cloud providers, but they now want to own more of their own infrastructure to help lower costs and reduce their reliance on other firms. (…)

The well-known bottlenecks to AI growth are power, equipment, memory/chip capacity and specialized labor.

Add capital.

I highlighted parts of the WSJ article that characterize the AI infrastructure issues:

• The “race forward”: model companies are in a race for leadership/supremacy. The best models will win big, but this is a never ending race.
• The race necessarily brings “mounting costs”, aggravated by significant geopolitical issues.
• Owning their “own infrastructure to help lower costs” necessitates huge amount of capital …
• … right when governments across the world also need financing, “pushing the public debt market to its limits”.
• Hence the “rush for [unconventional] capital” which, in the current context, should read the “rush for affordable capital”.

So far, AI racers have been willing to pay the rising costs to participate. For some of them (e.g. Anthropic, OpenAI) this is an existential race.

They are also willing to pay the increasing cost of capital but, much like for the physical issues, capital is not infinite, particularly when its cost keeps rising. Lenders will eventually balk when they start questioning the safety of their capital given the ever rising borrowers’ liabilities.

The chart plots various market yields all indexed to 100 on January 2026. Financing costs are up 20-25% even for the better credits (treasuries are up 26%!). They are up 36% for the worst.

If capital gets scarce at the top of the chain, the whole chain slows down.

Demand for capital is booming along with AI-related capital spending. Hyperscaler capex is expected to reach $750-$800 billion this year and $1.2 trillion next. Total US corporate bond issuance over the past 12 months through August was a record $3.0 trillion, including $1.4 trillion and $1.6 trillion issued by nonfinancial and financial corporations, respectively. At the same time, US Treasury borrowing totaled $2.1 trillion over the past 12 months through September, including $1.3 trillion in notes and bonds. National savings faces demographic headwinds as retiring Baby Boomers stop saving and draw down their net worth. (Ed Yardeni)

Maybe we should read something from these facts:

• Blackstone stock is down 40% in the last year, 23% in the last 6 weeks. Its forward PE dropped from 32 to 18.
• Apollo stock is down 24% in the last year, 18% in the last 6 weeks. Its forward PE dropped from 20 to 12.
• KKR stock is down 40% in the last year, 23% in the last 6 weeks. Its forward PE dropped from 20 to 12.
• Goldman Sachs stock is down 16% in the last 6 weeks. Its forward PE dropped from 17 to 14 (and from 27 one year ago).

In effect, everybody’s cost of capital is rising fast.

Well, not everybody’s:

• Nvidia-Backed IPO’s Cratering Demand Sends Warning on AI Funding

The sudden plunge in demand for an Nvidia-backed data center company’s initial public offering is revealing fresh cracks in the AI funding boom.

The planned $5.5 billion listing by Australia’s Firmus Grid Ltd. has become shrouded in uncertainty after the deal failed to attract adequate support for the A$11 marketed share price, according to people familiar with the matter.

Some investors turned cautious just days after the company said it received indications of interest well above the offer size, putting it on track for a $30 billion valuation, the people said. While Firmus closed order books on Thursday, it has so far given no clear indication of the price or the deal structure, an unusual communication gap that’s fueling speculation the price may be cut or the IPO scrapped altogether.

The deal underscores growing concern over how much capital AI infrastructure companies are demanding from public markets at a time when borrowing costs are rising. Much of Firmus’ valuation is based on the company successfully building a pipeline of data centers across Asia serving customers such as Meta Platforms Inc. and OpenAI. Currently it operates two data centers. The IPO proceeds were needed to help fund construction of the broader network.

“Investors still believe in AI,” said Maxence Visseau, Dubai-based chief investment officer at Arkevium Capital, a multi-strategy investment firm. “What they won’t do is pay any price for companies that spend huge amounts on data centers, depend on a few big customers, and promise profits years from now.” (…)

UniSuper, one of Australia’s biggest pension funds, was among institutional investors not taking part in the IPO.

“We think that Firmus indeed has a compelling story. It just doesn’t have a compelling valuation,” Chief Investment Officer John Pearce said in an investor update published Thursday. “So much has to go right to justify the valuation.” The fund was also concerned that Firmus would have to continue to raise debt and equity to fund its expansion plans, he said.

“Investors are increasingly on edge,” said Phil Wool, head of portfolio management at Rayliant Global Advisors. “Firmus was going to be one of the biggest Australian IPOs ever, so from that perspective, it registers as a historical fail.” (…)

Firmus was valued at $10.5 billion in early August after a fundraising round which included Jane Street and Blackstone Inc., meaning it was looking to nearly triple its valuation in two months. The Australian company, which had revenue of $51 million in the 2026 financial year, plans to build data centers it calls AI factories using hardware from backer Nvidia. It has a pipeline of 912 megawatts, of which only 46MW has been built, according to investor documents seen by Bloomberg. (…)

Some AI cloud companies are turning to risky debt to raise capital. At the same time as JPMorgan Chase & Co. was joint lead manager on the Firmus listing — along with Bank of America Corp., Morgan Stanley and Morgans Financial Ltd. — it was also pitching a yield of about 11% on a $5 billion leveraged-loan sale on behalf of Volta Infrastructure Holdings Ltd. to finance a data center complex in Norway. (…)

But with KKR & Co. estimating $8 trillion is needed to complete the global AI buildout, pressure will only intensify for companies to raise capital. (…)

BTW, Bloomberg’s Chris Bryant’s column today: The AI Giants Are Facing a Severe Case of Financial Indigestion

Today’s FT:

China races to build data centres in bid for AI supremacy Beijing is rolling out computing infrastructure at breakneck speed in Inner Mongolia

(…) While China is struggling to secure enough advanced chips to satisfy soaring AI demand, it has been able to mobilise the land, electricity and construction capacity needed to build the data centres that house them.

China already has 24 gigawatts of operational data centre computing capacity, more than the rest of Asia combined but less than half the 56GW in the US, according to SemiAnalysis, the chip-focused research firm. A further 50GW is under construction or has been announced. (…)

Inner Mongolia had 117GW of installed wind capacity by June this year, the largest fleet in China and nearly four times the entire capacity of the UK. It also has roughly 130GW of fossil-fuel power capacity, mostly made up of coal power.

David Fishman, energy analyst at consultancy The Lantau Group, said Inner Mongolia likely had the “largest electricity local oversupply” of any administrative region in the world. “There is an immense amount of electricity that operates at very low capacity,” he said. “Data centres help soak up this excess power.” (…)

But China’s advantage extends beyond access to power. Developers in Ulanqab are also building data centres more cheaply and quickly than is typical in the US.

Contractors from across the country have won orders for the projects, with construction costs in the region about 20 per cent lower than in larger cities, according to Goldman Sachs.

Thousands of workers have been brought in and housed in temporary accommodation beside the sites, many of which are scheduled to be completed within 12 to 18 months. US counterparts typically take between 18 and 24 months.

China has pioneered the use of prefabricated modules — uniform, shipping-container-like units housing computing racks that can be assembled rapidly. SemiAnalysis calls the approach “Lego data centres” with the design also adopted by US hyperscalers. (…)

Beijing is also using incentives to steer the enormous build-out towards its goal of reducing China’s reliance on foreign technology. Data centres that use domestic processors rather than Nvidia’s AI processors receive better tax benefits and discounts on electricity and water bills, according to people familiar with the policies. (…)

Lee said demand for computing power was accelerating as Chinese technology companies expanded their use of AI, particularly AI agents, contributing to rising prices for rented chip capacity.

“There is no risk of overbuilding,” he said. “Token consumption is going through the roof.”

Instead, the extraordinary speed with which China can build and power data centres is exposing the problem at the heart of its AI infrastructure push: securing enough advanced processors. (…)