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On AI Global Mess, AI Tokenomics & Better Breadth
Many emerging market economies aspire to become regional AI hubs, importing the technologies needed for their infrastructure from the US or China. The US had seemed the better option given concerns about Chinese data privacy and misinformation. Now uncertainty over whether the US will slow AI deployment changes that calculus. William says that could give China “a far deeper hold on the digital plumbing of the 21st century.” … Also: Melissa explains why falling AI token prices aren’t the negative for AI providers one might assume and why we’re bullish on “tokenomics.” … And: Joe explains how the midterm elections broadened the S&P 500’s breadth.
Fed Likely To Hike By 50bps In December
I. The Fed Has More Work To Do On October 26, we warned that the Fed could surprise markets with a 25bps rate hike at its October meeting. If the Fed chose to pass on doing so because the midterm elections were too close, we predicted a 50bps hike in December. Two days later, the FOMC voted 10-2 to hold the federal funds rate (FFR) at 3.75%-4.00%, with the two dissenters favoring a 25bps hike. Yet, in his October 28 presser, Fed Chair Kevin Warsh's assessment of the economy sounded decidedly hawkish. Economic growth was robust and broadening, the labor market was in good shape, inflation remained above the Fed's 2% target, and financial conditions were hardly tight. So why did the Fed stand pat? Warsh argued that financial conditions had tightened, inflation expectations remained anchored, and stronger productivity growth was allowing the economy to expand without overheating. With an information-rich period ahead, the Fed saw little reason to rush. We called that decision puzzling, comparing it to someone standing in a room with a fire alarm blaring and smoke pouring under the door, yet insisting on more evidence before calling the fire department. Now Fed Governor Christopher Waller is sounding the same alarm. Speaking in London on Tuesday, Waller said he would support a 25bps rate hike in December even if inflation improved in October. However, if October's core CPI increased by around 0.3% m/m or more, as it had in the previous two months, he argued that a larger move would be warranted. Specifically, he said that "a 50 basis point hike in the policy rate should be considered at the December meeting." Waller warned that moving by only 25bps under those circumstances would jeopardize the Fed's inflation-fighting credibility. Economic data released since Waller's remarks suggest that a 50bps hike in December is becoming increasingly likely. We believe such a move is warranted, as it would bring the FFR back to our estimated neutral range of 4.25%-4.50%. Consider the following: (1) CPI Inflation. October's headline CPI rose by 0.4% m/m, while core CPI increased 0.3% m/m for the third consecutive month (chart). Inflationary pressures remain broad-based, with particularly strong increases in energy, food, and transportation services. Importantly, the core CPI reading meets Waller's condition for necessitating a 50bps rate hike in December. Three forces are contributing to renewed goods inflation: the AI investment boom, higher energy prices stemming from the Iran war, and tariffs. In October, prices rose sharply in tariff-sensitive categories such as furniture & bedding and appliances (chart). However, overall durable goods prices were essentially unchanged, largely reflecting a 1.2% decline in used car and truck prices. Inflationary pressures were also widespread among nondurable goods, with prices rising 0.5% m/m in October (chart). Recreational reading materials, housekeeping supplies, footwear, and energy saw particularly sharp increases. Apparel prices were essentially unchanged, while prices for computer and software accessories fell. Another concerning aspect in the inflation data is the persistence of services inflation, reflecting resilient consumer demand, housing cost pressures, and the pass-through of higher energy prices. Services prices rose 0.4% m/m in October, including a 0.4% increase in services excluding shelter (chart). Postage and delivery, hospital services, transportation services, and motor vehicle insurance rose sharply. Owners' equivalent rent also rose 0.3%. (2) Small Business Sentiment. Echoing the CPI report's fire alarm, October's NFIB survey showed that the net share of small business owners planning to raise selling prices jumped to 37%, the highest since July 2022, while 24% planned to raise worker compensation, the highest since December 2025 (chart). (3) Consumer spending. Spending remains remarkably robust. Redbook same-store retail sales rose 10.1% y/y in the week of November 6, well above the 2025 full-year average of 5.8% (chart). (4) Labor market. One of the key reasons consumer spending remains remarkably strong is the continued strength of the labor market. The latest ADP data support this assessment. Private employers added an average of 19,750 jobs per week during the four weeks ending October 24 (chart). That translates into roughly 86,000 jobs per month, a healthy pace of job creation that is sufficient to keep the unemployment rate near its current low level of 4.1%.
Asia’s AI Rollercoaster Ride
South Korea and Taiwan had been counting on AI-related export demand to sweep them to prosperity. But another sweep, of Democrats in the US Congress, has sparked doubt and deep stock market declines. What’s next for the Asian AI trade? William shares his thoughts. … Toby opines on what newly depressed valuations in the Korean and Taiwan stock markets mean for investors, noting that analysts’ earnings sights remain aloft. … Also: Japan’s stock market stumbled by association with its Asian neighbors, but perhaps unduly: Its investment case doesn’t rest on AI. … And: China claims to have passed an important milestone in AI development.
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