The US Labor Market

September Hiring Trudged Along but Labor Market Still on Steady Track

US economy adds just 29,000 jobs in September as hiring slows sharply

The WSJ headline (top) sounds much better than the FT’s.

The WSJ:

The 29,000 number will seem low to anyone who remembers the job gains that routinely topped 200,000 in the years before the pandemic—much less the massive job gains that came when the economy reopened from Covid-19.

Jobs numbers for both July and August were revised down. Employers shed 10,000 jobs in July, down from a previous estimate of a gain of 21,000. August’s job gain was revised to 133,000, from 162,000. Combined, revisions trimmed 60,000 jobs from the previously estimated tally for July and August.

But the economy doesn’t need to generate as many jobs as it used to just to keep the labor market steady. The population is aging, and an immigration clampdown has reduced growth in the supply of workers.

In a positive sign, what is called the labor-force participation rate—the share of people working or looking for work—inched up slightly. “That all speaks to continued strength in the labor market,” said Kathy Bostjancic, chief economist at Nationwide. (…)

The most important development was that the report provided no signs that the labor market is tightening in ways that would add to price pressures. (…)

“There are clear signs of a positive spillover” from data-center spending into the job market, said Ruchir Sharma, U.S. economist at Nomura.

The FT:

The US economy added just 29,000 jobs in September as hiring slowed sharply from the previous month, raising doubts over the resilience of the labour market and the outlook for interest rate rises.

Friday’s figure from the Bureau of Labor Statistics marked an abrupt reversal from the downwardly revised 133,000 jobs added in August and was well short of the 88,000 job gains anticipated in a Bloomberg poll of economists.

Hiring decelerated across multiple sectors, with healthcare, a big driver of job gains in previous months, slowing sharply. Employment in the financial sector continued to contract.

Payrolls for July and August were revised lower by a combined 60,000 positions. The July figure fell to a loss of 10,000 jobs. The unemployment rate climbed to 4.2 per cent in September from 4.1 per cent in August.

Amid high monthly volatility, quarterly data provide clearer trends: growth in labor income keeps slowing, from 4.0-5.0% annualized in 2025 to 3.5-4.0% in 2026, with increased hours offsetting slower job growth and wage gains now rising at a 2.5% annualized rate, well below inflation, core or not.

Labor income YoY growth (black below) has been stable around 4.0% in 2026 but accelerating inflation is eroding purchasing power, offset by a big drop in the savings rate, lately sustaining nominal spending growth to 6.0%.

Boomers spending their savings plus the strong wealth effect add to the AI boom, keeping the US economy humming amid all the turmoil.

Vulnerabilities are developing however:

• it’s easier and faster for employers to cut hours than jobs if demand slows;
• the wealth effect is also carving its own K shape: investors with tech stocks are doing OK but those without are now suffering;
• at 2.5% annualized, wage growth is well below inflation, requiring that the 2 warnings above don’t materialize.

Saudi East-West Oil Pipeline Is Said to Be Flowing as Normal After accounting for supplies to refineries on Saudi Arabia’s west coast, Aramco had about 4.5 million barrels a day of flows available for exports as of last week

• Strike For Strike: Yemen’s Houthis Claim Attack On Saudi Aramco Facility In Retaliation To Sanaa Air Raids

Yemen’s Iran-aligned Houthi movement has claimed responsibility for a missile and drone attack on Saudi Arabia’s energy infrastructure, saying it targeted an Aramco facility in Riyadh in retaliation for Saudi-backed military operations in Yemen.

Houthi military spokesman Yahya Saree said the group launched long-range ballistic missiles and drones at the Saudi facility and described the operation as precise. He claimed the attack caused fires at the targeted site and warned that the Houthis would respond to any further escalation by Saudi forces. (…)

The Houthis said their latest attack was a direct response to Saudi military operations in Yemen, including airstrikes against Houthi-controlled areas. Saudi-backed forces supporting Yemen’s internationally recognised government have intensified military operations across several fronts, including areas around Taiz and Lahij.

Yemeni government forces reported 97 military operations targeting Houthi reinforcements around the Tor al-Baha front and Taiz axis. They claimed that the operations targeted about 260 Houthi fighters and destroyed or disabled 44 military vehicles. The figures could not be independently verified.

Meanwhile, Saudi-backed forces have continued airstrikes against Houthi strongholds in Sanaa, Saada and surrounding provinces. Health officials in Sanaa have reported dozens of casualties from recent attacks, while Houthi projectiles have contributed to heightened military tensions along Saudi Arabia’s southern border.

The latest escalation follows the collapse of a fragile truce established in 2022. Fighting has since intensified across multiple fronts, including Taiz, Lahij and Marib, with regional reports suggesting that Saudi Arabia and Yemeni government forces could be preparing a larger offensive to reverse recent Houthi gains. (…)

• Iran says Strait of Hormuz will not reopen until conditions are met

The Strait of ​Hormuz will not reopen until seven Iranian conditions set out in a June interim agreement with the US ‌are met, state media reported Iran’s parliament speaker Mohammad Baqer Qalibaf as saying on Sunday. (…)

“The position of the Islamic Republic of Iran is completely clear and firm, and ​the Strait of Hormuz will not be opened until our seven conditions, based on the Islamabad ⁠Memorandum of Understanding, are met,” Qalibaf, who is Iran’s top negotiator, was quoted as saying.

He said Washington “must understand that the period of ​dragging out the (diplomatic) process and dictating one-sided demands is over”.

“The Americans’ propositions are more or less in line with their previous positions, specifically on the nuclear issue. We told them our focus in this stage is the issue of the ​Strait of Hormuz and the return to security in this waterway requires clear steps from the US,” spokesperson Esmaeil Baghaei said.

He ​also denied Tehran had offered UN nuclear watchdog inspections of its nuclear facilities in exchange for US sanctions relief, saying Iran had not entered into ‌nuclear ⁠discussions with Washington.

The document being circulated outlines a seven-day period of trust-building aimed at returning the two sides to an enhanced version of the memorandum of understanding agreed in June, including concrete steps on Iran’s nuclear programme, an official briefed on the talks said last week.

The disagreement centres on the sequencing of the steps rather than the components of the plan, the official added. (…)

Bond Vigilantes Gone Wild (Ed Yardeni)

The Bond Vigilantes have gone wild worldwide, pushing government bond yields higher in developed and emerging markets alike.

A month ago, we asked whether rising yields reflected stronger growth, higher inflation, or looming fiscal crises. We still think the answer is mostly growth. The exception is where government finances are weakest. There, bond investors are charging a fiscal-risk premium. France may be on the verge of a full-blown debt crisis. (…)

Six of the 22 bond markets on our list have seen 10-year yields climb 100bps or more this year. France leads at 131bps, with the US second at 112bps. Italy, Indonesia, Japan, and South Korea round out the group. (…)

The Bond Market’s Tokyo Story

The Japanese budget deficit, central bank policy and currency are all playing an immediate role in the intensifying global bond selloff, leading to knockdown effects on American consumers who end up saddled with higher borrowing costs. (…)

In recent months, Takaichi’s government has made record spending requests, with a mind to boosting Japan’s slow (and slowing) economic growth. The concern is where all of that is going to come from. (…)

That means a few more shovels full will be added to Japan’s $9 trillion public debt pile, which at roughly twice the size of its economy makes it the most indebted advanced nation on earth.

To make matters more complicated, in an August interview with the Yomiuri newspaper, Takaichi said the government intends to cap the issuance of new government bonds at 40 trillion yen next year, or about $255 billion.

Unsurprisingly, the mix of increased spending, cuts to revenues and limiting debt financing has raised more eyebrows on the bond market than a silverback gorilla bathing in a hot spring reserved for Japanese macaques.

For Japan, this cloudy outlook has accelerated the rapid bond market sell-off that’s impacting economies around the world.

The bond market has effectively told governments in recent weeks: “If you want us to loan you money for a decade or 30 years while you’re spending more and more, you’re gonna need to pay us a higher premium for taking on the risk.” (…)

Adding to those pressures are circumstances out of Japan’s control. Central banks, including the Bank of Japan, have been pressed to hike interest rates because the U.S.-Iran war has raised the cost of energy and especially of diesel. (…)

Governor Kazuo Ueda told a press conference in Tokyo that the bank’s focus flipped from trying to raise the country’s persistently low inflation to its 2% target to trying to stabilize inflation against the upward pressures caused by the war, the massive global spending on AI and a weakened yen.

According to a summary of the BoJ’s meeting, most policymakers believe they should follow last month’s rate hike with more.

The American Angle

All of this activity in Japan, the world’s fourth largest economy and one of its most heavily financialized, impacts the U.S. bond market and, ultimately, American consumers.

The most straightforward impact is simple, upward pressure. The decades-high government yields in Japan, the U.K. and Europe are all driving each other higher, as investors try to lock in better returns, and U.S. bonds are no exception. (…)

The 10-year U.S. Treasury yield, a key benchmark for borrowing costs, rose to 5.34% on Thursday, the most since 2002. In the third quarter, it rose nearly 90 basis points, or the most in any quarter in over 25 years. (Japan’s 10-year government bond yield has risen by double digit basis points for five straight quarters).

The U.S. bond yield, of course, is also being driven up by inflationary pressure and increasing investor concerns about its own government spending and debt, which is nevertheless considerably smaller than Japan’s when measured as a percentage of GDP. The enormous volume of private sector spending on artificial intelligence is also exerting upward pressure on yields.

“As more and more of the AI CapEx is financed in debt markets, we are seeing there’s some competition now for government borrowing,” said George Cole, the head of European rates strategy at Goldman Sachs Research, on a podcast last month.

But there’s another reason for Japan’s outsized impact on the U.S. Treasury market: Japan is the largest foreign holder of U.S. debt. As of July, the country had roughly $1.1 trillion U.S. Treasuries, equal to 12% of all foreign held U.S. debt, as of July, according to Treasury Department data.

This was in large part a function of the country’s relatively low interest rates, which for decades depressed bond yields and incentivized investors to seek out better returns abroad.

The normalization of interest rates and rise of bond yields at home means Japanese investors have less reason to place their money abroad.

A TD Bank analysis earlier this year found these shifts mean Japan’s insurers and pension funds, which have been “a key source of stable, long-duration demand for U.S. Treasuries,” will likely keep their money at home, reducing Treasury demand and thus driving up borrowing costs for the U.S. government.

Another factor that weighs on Japanese investors is the yen, which has flirted with four-decade lows this year.

A weak yen makes life more expensive at home for the Japanese, forcing Tokyo to consider selling off its dollar assets including Treasurys, which would threaten the U.S. with even higher borrowing costs. It also makes it harder for U.S. companies to compete in Japan’s important retail market because imports are suddenly much more expensive.

This is why U.S. Treasury Secretary Scott Bessent has aggressively moved to boost the Japanese currency. “I am the house now, and you can bet against me if you want,” he declared last month, after U.S. and Japanese officials confirmed a joint intervention to support the yen worth of tens of billions of dollars.

Along with the BoJ’s latest rate hike, the intervention helped the yen add 3.3% against the dollar in the third quarter, making it the top performing currency in the G10 for the period, according to Deutsche Bank.

Other policy factors were likely under consideration.

“A weak yen tends to put pressure on other Asian currencies, and it could make it harder for China to continue to allow a slow appreciation of its currency,” wrote Brad W. Setser, a senior fellow at the Council on Foreign Relations, in August. (…)

On the other hand, Bessent and the BoJ have to be careful about balancing the currency’s strength with rate hikes in Japan. The suddenly surging yen has caused headaches for investors who use the so-called carry trade, a term for borrowing cheap Japanese currency to invest it in assets with higher yields. If the yen keeps rising and the BoJ proceeds with planned rate hikes, borrowing in yen will suddenly become more expensive.

Many market observers fear that could force investors to sell U.S. stocks and Treasuries to close out the trade. Some say it’s already happening.

“A more likely explanation for the global bond market rout [than inflation] is that the yen-carry trade is unwinding as the Bank of Japan raises its policy rate, forcing carry traders to sell government bonds they bought worldwide with proceeds from cheap yen loans,” wrote Yardeni Research President Ed Yardeni last week. “This trade allowed many governments to run budget deficits without putting upward pressure on their bond yields. Now, the chickens have come home to roost.”

In the immediate term, the rising bond yields in Japan, the U.S. and elsewhere are dictating the terms for borrowing costs across economies, which includes mortgages, auto loans and student debt. Borrowing becomes expensive for consumers and companies, not just governments.

Japan may be a long way away, but surging 30-year U.S. home loan rates have blown up the playbook for would-be borrowers, topping 7% while home prices remain at record highs. The rising sun is just over the horizon line.

Callum Thomas illustrates the impact higher rates are having:

• Equal-Weighted Weighed-Down: however, the equal-weighted S&P500 closed September down -5% m/m, and has seen an almost -7% drawdown off the mid-Aug peak. Breadth has also plunged to the worst levels since the 2025 tariff-tantrum. And there is a very clear reason for this…

Source: MarketCharts.com

• It’s a Rates Thing: rate-sensitive sectors have been clobbered —declining an average -10% thanks to the Fed pivot to rate hikes + global sovereign bond bust.

Source:  Can Anthropic Outearn Its Obligations?

• Rates Wreckage: here’s another angle on it, small caps have also come under significant pressure from rising bond yields particularly as a lot of small cap companies have poorer profitability, lower rated credits, and more floating rate debt. But the other usual suspects have also come under pressure as the hangover from the Iran war ripples across macro and markets.

Source:  The 5% Treasury Yield: It’s Here and How It’ll Affect Stocks

Source:  @SamRo via @TheShortBear

Bad, bad breath:

The McClellan Summation Index (red line, broadly whether the typical stock is doing relatively better or worse than the index).

Fear is winning over greed:

Opportunities?

• Real 10Y rates are near their 25-year peak:

• But, but, look at the pre-2000 years. Real yields were much higher:

• The term premium (extra yield investors demand to hold a longer-term bond instead of continually rolling over short-term bonds for the same period)

• The term premium vs core inflation:

It seems like a “In Warsh We Trust” decision.

US Lead in AI Over China Narrows After DeepSeek Gains, BI Says

American AI companies’ performance lead over China narrowed sharply in past months to a record low after labs such as DeepSeek gained ground, threatening US tech supremacy, according to Bloomberg Intelligence.

Top Chinese models lag their US rivals by just 3% on benchmark scores after the September release of DeepSeek’s V4.1 Flash, BI senior analyst Robert Lea wrote in a report Monday. That’s down from about 9% in May and 15% earlier in the year. That improving performance spells further market share gains for Chinese contenders, he said.

China’s ascent is a result of deepening AI expertise and its researchers’ ability to optimize their models for domestic hardware. The gains raise questions about the usefulness of US export restrictions on technology such as Nvidia Corp. chips, intended to curtail Chinese AI advances and prevent the likes of Huawei Technologies Co. from making progress with their own alternatives.

The Asian country’s progress “casts further doubt on the long-term sustainability of US technological supremacy in AI,” Lea said. (…)

DeepSeek’s V4.1 Flash ranked sixth globally last month on LiveBench, making it the highest-ranked Chinese model since the startup broke ground with its reasoning model R1 in 2025. LiveBench scores AI models based on their responses to and analysis of questions, puzzles or tasks, a process akin to gauging human IQ.

DeepSeek last recorded a LiveBench score of 81.1, below Anthropic’s best score of 83.4. That means the DeepSeek model delivers “comparable performance” to leading AI systems from Anthropic and OpenAI, Lea said. Still, while the score gap has narrowed to just 3%, just three of the top 15 models as assessed by LiveBench were Chinese. (…)

The Chinese AI industry could remain unprofitable until 2030, Lea said. A focus on low-margin token supply and a brutal price war may make it impossible for any firm to gain a competitive edge in a domestic market flooded with more than 1,100 large language models.

ByteDance Ltd.’s Doubao is the frontrunner in AI app monetization, while the chatbots of rivals DeepSeek and Tencent Holdings Ltd. remain free, Lea said.

“Putting China’s AI sector on a sustainable profit footing will require a cooling of competitive pressures, an industry shakeout, and a more rational approach to pricing,” he said.

US Manufacturing PMIs

• S&P Global:

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) surged higher in September, posting 55.9, up from 53.9 in August. Recording well above the critical 50.0 no-change mark, the latest reading was the strongest since May 2022. Growth has now been registered every month since August 2025.

All five PMI components supported the uplift in the headline index. Most notably, output and new orders registered faster rates of growth. Panelists commented on a broad-based uplift in demand, with government and tech-related industries mentioned as sources of higher sales, with latest data indicating the best rise in sales since April 2026 and the second-strongest since May 2022. Firms responded by increasing their production sharply to extend the current run of output growth to 16 months.

Once again, it was the domestic market that underpinned demand growth as new export orders fell for the fifteenth successive month. Panelists reported that tariffs and elevated shipping costs had dampened international sales.

Strong growth in overall sales and production encouraged companies to take on additional staff in September. The net increase in jobs was the highest in over five years as firms scrambled to expand capacity and deal with the influx of new work and existing workloads.

However, there were several reports of difficulties in securing suitable labor, and this was a factor that led to another rise in work outstanding. Overall, backlogs of unfinished orders rose for a seventh successive month and to the greatest degree since April.

Manufacturers also reported that input delivery delays had contributed to backlog growth. Indeed, latest data showed typical vendor lead times lengthening to the greatest degree since August 2022. There were reports of widespread stock shortages at suppliers, with a swathe of products reportedly hard to source, especially steel and electronics-related items. Shipping challenges across global maritime routes, plus customs delays (especially at the Canadian border) added to supply-side pressure.

The short supply of inputs, tariffs and the war in Iran all served to push up manufacturing input costs at a faster rate than in August. Alongside metals and electronics, firms widely reported increased energy and fuel prices. In response, manufacturers raised their own charges steeply albeit to the weakest degree since February.

Despite rising inflationary pressures, and ongoing supply-side challenges, manufacturers are confident the recent upswings in production and new orders can be sustained. Indeed, confidence in the outlook remained positive (albeit a little below its historical trend), with firms linking their optimism to positive order book pipelines, and expectations for market, product and commercial expansion. Some firms also hope for greater stability in the business environment and a drop in energy prices.

Reflective of positive production and sales forecasts, companies sought to build inventories of inputs and finished goods. Purchasing activity rose markedly, expanding at an above-trend pace that was the fastest since June. Despite supply-side delays, and a strong uplift in production needs, the rise in purchasing activity helped to drive stocks of purchases higher for the sixth successive month.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“Order book backlogs are rising and suppliers are increasingly busy, pointing to stretched capacity as companies struggle to meet demand across both consumer-facing and business sectors. This is most notable in the investment and production of machinery and equipment, linked in many cases to rising AI-related spend.”

• ISM:

“The Manufacturing PMI^® registered 54.5 percent in September, 0.1 percentage point below the August figure of 54.6 percent. The overall economy continued in expansion for the 23rd month in a row. (A Manufacturing PMI^® above 47.5 percent, over a period of time, generally indicates an expansion of the overall economy.)

The New Orders Index expanded for the ninth consecutive month after four straight readings in contraction, registering 55.3 percent, up 1.6 percentage points compared to August’s figure of 53.7 percent. (…)

The Prices Index remained in expansion (or ‘increasing’ territory), registering 77.9 percent, a notable increase of 6.8 percentage points compared to August’s reading of 71.1 percent.

The Backlog of Orders Index registered 56.4 percent, up 4.6 percentage points compared to the 51.8 percent recorded in August.

The Employment Index reading of 52.7 percent is up 1.5 percentage points from August’s figure of 51.2 percent,” says Spence. (…)

“The New Export Orders Index lost 2.3 percentage points in September for a reading of 50.9 percent versus 53.2 percent in August. (…)

“In September, three of four demand indicators (the New Orders, Backlog of Orders and New Export Orders indexes) remained in expansion, and the Customers’ Inventories Index remained in ‘too low’ territory, contracting at a faster rate. A ‘too low’ status for the Customers’ Inventories Index is usually considered positive for future production.

“Regarding output, the Production Index expanded for the 11th month in a row, with the positive-to-negative comment ratio dropping again in September (1.6 positive comments for every negative one, compared to a 2.2-to-1 ratio in August and 3.3-to-1 in July). The Employment Index remained in expansion and gained 1.5 percentage points. The positive-to-negative comments ratio on Employment was 1.5-to-1 in September.

“Finally, inputs (defined as supplier deliveries, inventories, prices and imports) were mixed, with the Supplier Deliveries Index decreasing 0.3 percentage point, the Inventories Index declining another 2 percentage points and returning to contraction, and the Prices Index increasing 6.8 percentage points, returning to its level at the start of the Iran War. The Imports Index lost 1.5 percentage points, to 51 percent versus 52.5 percent in August. (…)

Some comments:

• “Orders have doubled yet again, and delivery times have also doubled, in the semiconductor, electronics and government sectors, with remaining sectors flat to down. Coupled with supply chain lead times and pricing pressures, the factory backlog has nearly doubled. Canada tariffs have impacted cross-border costs and left our supply chain team scrambling — those supply chains took years to develop and nurture — hurting the very lead times government buyers are concerned about.” [Machinery]
• “Order levels remain strong and elevated; we have orders through year-end at above forecast levels. Our biggest challenge continues to be a severe shortage of workers, limiting our production output to meet demand. The second challenge is general availability of steel; the market is getting worse, and more production delays are expected as we gap out of needed material.” [Fabricated Metal Products]
• “Raw metals continue to be challenging, especially with the uncertain nature of tariffs being on and off again. New tariffs against Canada have drastically increased costs for capital expenses as well as assemblies.” [Electrical Equipment, Appliances & Components]
• “Higher interest rates slow down the growth of new construction projects; we also have to face up to the higher cost of components from overseas due to tariffs and freight rates. Due to booming demand of AI and data centers, domestic steel capacity has been stretched and pushed. Higher steel costs each month increase our raw-material and finished-goods costs.” [Machinery]
  

• “Every month, we are faced with new headwinds created by this administration. This month, it is the trade war with Canada, which every day is getting worse — causing prices to go up and uncertainty that creates massive disruption. Buying continues to get pushed out indefinitely as customers don’t want to spend on capital expenditures until there is more certainty of costs and demand. The only thing that is predictable is the chaos that is created by these trade policies.” [Transportation Equipment]

Ed Yardeni:

(…) The upswing is being fueled by the AI capex boom, reshoring, and stronger incentives for domestic investment, including immediate expensing under the OBBBA.

Meanwhile, input cost pressures remained elevated in September. The ISM prices-paid index rose to 77.9, near its highest level since 2022, while regional Fed price surveys also remained high (chart).

Respondent comments in the ISM survey noted that demand remains strong in semiconductors, electronics, machinery, and AI/data-center-related markets, but that strength is increasingly running up against worker shortages, stretched steel capacity, longer lead times, and rising input costs.

• AI Data Center Construction Goes Nuts

The amount spent on the construction of data centers spiked by another 7.5% in August from July, and by 73% year-over-year to a seasonally adjusted annual rate of $85 billion, according to construction data from the Census Bureau today. Since the beginning of 2021, the annual rate of construction spending on data centers has spiked by 823%.

These amounts only reflect the construction costs of the buildings, the improvements around the buildings, and the equipment integrated into the buildings, such as HVAC systems. But that’s the cheap part of a data center.

Not included here is the expensive part: equipping the completed data center buildings with servers and racks, with electronic and optical equipment to connect the servers to the internet, and with the electrical equipment that supplies the servers with prodigious amounts of power, including in many cases onsite diesel or gas-turbine power generators.

 

 

Canada Manufacturing PMI: Modest growth sustained in September but spike incost inflation

Canada’s manufacturing economy showed a degree of resilience in the face of several headwinds during September. Output rose and firms showed a willingness to backfill vacancies with skilled workers to support recent long-term contract wins.

However, tariffs and elevated global energy prices due to the war in Iran continued to have a damaging impact on the sector.

Input cost inflation accelerated to its highest level since July 2022, whilst supplier delivery times lengthened to a degree not seen in over four years. (…)

China: Manufacturing output expands at fastest pace in five months

The headline seasonally adjusted RatingDog China General Manufacturing Purchasing Managers’ Index™ (PMI) remained above the 50.0 no-change mark for the tenth consecutive month in September, indicating an improvement in the health of the manufacturing sector. At 52.1, up from 51.5 in August, the latest reading was the highest in five months and was positively influenced by all five sub-indices apart from the stocks of purchases component, which fell slightly.

An improvement in client demand, driven partly by interest among some companies in accumulating safety stock, had reportedly supported the latest expansion in overall new orders among Chinese manufacturers. This was accompanied by growth in new work from abroad amid reports of robust market conditions overseas. Notably, total new work rose at the fastest rate in five months, while the upturn in new export orders was the best seen since February, with both respective indices signalling solid growth overall.

Stronger inflows of new work led to a faster rise in Chinese manufacturing production in September. This marked the tenth consecutive month in which output had increased, with the rate of growth similar to that seen for new orders and solid. Among the three monitored sub-sectors, consumer goods makers recorded the strongest increases in new orders and output.

Outstanding workloads continued to accumulate at a steady pace among Chinese goods producers despite the expansion in production capacity. Subsequently, firms hired additional staff – both permanent and temporary – to cope with rising workloads. Though only slight, this marked the third time in four months that firms had raised their workforce numbers.

To meet rising production requirements, Chinese manufacturers continued to purchase additional inputs at the end of the third quarter. Anecdotal evidence also suggested that some companies were interested in accumulating additional inventory as part of safety stock building efforts. That said, supplier delays were again observed in September, which partly limited the pace at which input inventory stocks rose. Stocks of purchases nevertheless expanded for the tenth consecutive month, marking the longest run of growth since 2006–07.

Turning to prices, average cost burdens continued to rise among manufacturers during September. The rate of input price inflation was the strongest seen in four months and solid. According to firms, higher raw material prices, particularly for metals and oil, were the main drivers of inflation. As a result, Chinese manufacturers lifted their selling prices slightly in September, following a marginal reduction in August. Export charges likewise rose slightly.

Overall, sentiment in the Chinese manufacturing sector remained positive at the end of the third quarter of the year. Firms were generally optimistic that output would rise in the next 12 months amid expectations for better global macroeconomic conditions and the implementation of business development plans. Although still below the long-run average, the degree of confidence improved from August.

Euro area manufacturing expansion gathers pace in September

September has seen a further encouraging improvement in manufacturing growth across the eurozone, with the rising tide lifting all ships as the upturn has also broadened out to cover all surveyed member states.

Measured across the euro area, production is rising at a rate not seen for four and a half years as firms boost capacity to meet rising demand. Order book growth is also now sufficiently strong to encourage factories to take on additional staff, ending the continual loss of factory jobs that had been reported over the prior three years.

The upturn is being driven by rising demand for investment goods such as machinery and equipment, with output of these capital goods growing in September at a rate not seen since the post-COVID rebound five years ago. This reflects higher demand for AI and defence-related equipment in particular.

Demand for consumer goods continues to fall, however, with the increased cost of living acting as a drag on household spending. It’s therefore worrying to see both input costs and selling prices rising at increased rates again in September, which will fuel speculation about additional rate hikes from the ECB.

Japan: PMI slips to six-month low in September

The latest PMI survey data suggest that growth momentum softened across Japan’s manufacturing industry in September. Firms signalled slower increases in output and new orders, as some companies mentioned that clients were adjusting inventories as an earlier period of stock accumulation began to unwind.

Nevertheless, the survey was consistent with solid growth overall, and rounded off the best quarterly performance since Q1 2014.

Employment remained a particular bright spot, rising at the second-fastest rate since April 2018, as firms remained highly confident that production levels would continue to rise in the year ahead. This was often linked to upbeat forecasts for demand related to semiconductors and AI technology, new product launches and robust international demand.

Nevertheless, there were a number of potential headwinds that could temper performance including further supply chain disruption, component shortages and sharply rising costs.

While companies suggest that the worst of recent price rises may have passed, expenses continued to rise sharply overall at the end of the third quarter. As a result, manufacturers raised their selling prices at one of the sharpest rates recorded since late 2022.

ASEAN manufacturing growth remains solid but loses momentum in September

ASEAN manufacturing had a strong third quarter, regaining momentum after a relatively soft second quarter. Although the region continued to perform well in September, growth shifted down a gear.

Renewed tensions in the Middle East and the resulting rebound in oil prices have prompted manufacturers to temper their expectations for the year ahead.

Nonetheless, the sector’s continued strength helped revive hiring, while purchasing activity rose further. Part of this increase, however, reflected efforts by some firms to get ahead of potential raw material shortages and subsequent price hikes. Although the road ahead remains difficult to assess, given heightened geopolitical uncertainty, ASEAN manufacturers are more than holding their ground for now.

 

U.S.: Inflation too broad-based

Several observers certainly breathed a sigh of relief when the U.S. inflation data were released yesterday, as methodological revisions resulted in figures that were much lower than expected, both for the headline PCE and the core PCE.

Changes in how prices for computer software and accessories, portfolio-management fees, and legal services are compiled indeed lowered annual core inflation by no less than 36 basis points—significantly more than economists had anticipated—leaving this measure three tenths of a percentage point below consensus expectations (3.0% vs. 3.3%).

The revision also helped narrow the gap that had recently widened between core inflation as calculated by the PCE and the CPI, bringing it down from 0.9% in July to 0.6% in August.

Although welcome, this revision has not fundamentally altered our view of the inflation outlook in the United States. With domestic demand still being fueled by the AI investment boom, we believe it will be difficult to bring inflation back to target without multiple rate hikes by the Fed. Labour market tightness is another factor to consider, as any acceleration in wage growth would threaten to intensify price pressures in the services sector.

But more fundamentally, it is the highly widespread nature of current inflation that leads us to believe further rate hikes are likely. As shown in today’s Hot Chart, the proportion of PCE components with an annual growth rate exceeding 3%—an indicator frequently cited by Fed Chairman Kevin Warsh—remains well above its long-term average (51.3% versus 35.3%). The same is true for components rising at a rate above the central bank’s 2% target (64.8% vs. 50.3%).

These two measures suggest that price pressures are currently not limited to the components most directly affected by the crisis in the Middle East. In an economy that continues to grow at a rate above its potential, demand-driven inflation is also a factor and will be more difficult to curb, especially after five years of inflation above the 2% target.

Rising Yields Are Wreaking Havoc on Stocks Outside the AI Trade

After the 10-year Treasury yield rose as high as 5.34% for the first time since 2002, stock traders are fiercely debating when the selloff in bonds will start to trigger pain for a resilient US stock market.

Under the surface, however, the spike in rates is already wreaking havoc.

While the S&P 500 Index is less than 2% from a record, everything from interest-rate sensitive small-cap stocks to banks and utility companies are getting battered. And many of the most speculative corners of the market — like unprofitable technology companies and those with the weakest balance sheets — trail the equity benchmark since the Federal Reserve hiked interest rates last month for the first time in three years to cool inflation.

“Most parts of the market are at least 5% off their highs, let alone segments of the market that are down 15-plus percent,” Dan Suzuki, global investment strategist at iCapital, told Bloomberg TV. “A lot of that has to do with the higher interest rates and the tightening of financial conditions that comes along with that.”

It’s a unique moment for the US stock market, which is being held aloft at the index level by the artificial-intelligence trade while at the same time staring down the type of circumstances — from mounting geopolitical risks to rising interest rates and US midterm election uncertainty — that historically have led to turbulent markets. (…)

E.G.:

• The S&P 500 Equal-Weight Index is down 6.0% from its Aug. 14 peak.
• The median stock is down -17%.
• 204 companies, or over 40% of the index, are more than -20% below.
• The Russell 2000 Index is down 8.5%.
• The KBW Nasdaq Bank Index is down 12%.
• The S&P 500 Utilities Sector is down 17% since February.
• Citadel says that MSFT, NVDA, AAPL and META alone added about 300 points to the S&P in Q3, more than 200% of the index’s total gain. The other 499-ish stocks together subtracted about 150 points (Zerohedge)

Canada, EU plan to link next-gen payment systems, easing transactions

Canada and the European Union plan to link next-generation payment systems to enable faster cross-border transactions, according to a draft joint statement prepared for a summit between Ottawa and Brussels later this month.

This will help remove obstacles to business and investment between the two jurisdictions, according to the statement, an early version of a summit communiqué that was viewed by The Globe and Mail. It adds that the new partnership will be called an “Alliance for the Future.”

The draft statement doesn’t detail what next-generation payment systems include, but this term has been used by others to refer to a major upgrade of a country’s core payment infrastructure, usually built around real-time payments. The core infrastructure is a central set of systems that clear and settle payments between financial institutions.

Canada and the EU are working to modernize the electronic systems that their businesses and people use to move money from place to place.

Both have identified the United States’s sway over the current generation of payment systems as a risk, given that Washington has grown increasingly unpredictable and protectionist under President Donald Trump.

Earlier this month, Prime Minister Mark Carney identified a country’s control over payment systems as a feature of modern sovereignty. In an address to the European Parliament on Sept. 17, he said Canada and Europe should “secure our strategic autonomy” through co-operation in strategic capabilities including “critical minerals, defence industrial capacity, AI and compute, energy security, space, and payments.”

Mr. Carney is welcoming EU officials in Montreal at the end of October to begin to define a new relationship with Brussels – one that European Commission President Ursula von der Leyen has said could make Canada an “associate member” of the 27-country bloc. (…)

The U.S.’s power over international payments was demonstrated in 2025 when Mr. Trump imposed sanctions on Winnipeg-born International Criminal Court judge Kimberly Prost over her work on a case involving American troops in Afghanistan. The U.S. sanctions left Ms. Prost unable to use most credit cards or multinational services such as Amazon or airlines. (…)

The draft statement shows that Canada and the EU plan to announce that they’ve completed a Digital Trade Agreement “to allow for faster, lower-cost secure digital trade and transactions” and that they plan deeper co-operation on critical minerals.

It says Ottawa and Brussels plan to announce that Canada and the European Investment Bank have “completed negotiations of an agreement that will facilitate European Investment in critical Canadian resources, in particular, critical minerals.” (…)

• Ottawa designates West Coast pipeline a project of national interest

Ottawa designated a proposed pipeline to the West Coast from Alberta a project of national interest on Thursday (…).

It marked the first official designation of a project of national interest under the Building Canada Act, which provides an accelerated pathway through regulatory approvals with the support of the federal government. (…)

Pacific Link is a key part of Mr. Carney’s suite of policy changes that aim to reset federal relations with Alberta and diversify Canadian exports away from the United States. It would carry one million barrels of oil a day to the coast, allowing Alberta oil to access more international markets and garner higher prices. (…)

  Respectfully Yours!

Q: You said that Iran cannot have nuclear weapons. Why not? North Korea can have nuclear weapons.

Trump: Ahh because you had a different president. Kim Jong un. He’s a friend of mine. He likes Trump. I like him. As long as I’m around, he’s going to be fine. You know why? He respects me. (@Acyn via ZH)