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Europe’s Future
Five Central and Eastern European countries are enjoying an economic renaissance—expanding exports, growing GDP at rapid clips, and attracting foreign investment. William argues that investors seeking the next great European growth story need look no further than the de facto bloc of Poland, Romania, the Czech Republic, Hungary, and Slovakia. … Europe has been gaining relevance in the global economy by investing in strategically indispensable sectors: defense and aerospace, energy infrastructure, semiconductors, critical minerals, batteries, AI innovation, and digital infrastructure. But retooling Europe is expensive. Can Europe pay for its new relevance without reviving its old fiscal crises? France is the first test.
On South Korea’s Chip Bet & Claude’s AI Bubble Meter
No economy has bet more chips (literally) on AI than South Korea. William explains why its stock market represents the purest AI trade and what’s at stake for the BOK’s upcoming monetary policy decision. … Also: Introducing YRI’s AI Bubble Meter. Melissa discusses the tool that Claude built to gauge whether investors’ heady expectations for AI are inflating a stock market bubble. The meter reads high on the bubble preconditions dial but low on the triggers dial. The takeaway: The meter says there’s a bubble, but it’s not about to burst.
What Will Warsh Do?
I. The Fed: To Hike or Not To Hike? The Federal Reserve announces its next interest-rate decision on Wednesday, October 28. According to CME FedWatch, the federal funds futures market assigns an 84% probability to a pause. The market expects a 25bps hike in December and roughly 50bps of tightening over the next six months (chart). The two-year Treasury yield remains roughly 90bps above the federal funds rate, consistent with expectations for further tightening (chart). Why are markets pricing in such a low probability of an October hike despite September's hot CPI and PPI reports? The explanation may lie more in Fed commentary than in the economic data: (1) Fed officials favor patience. New York Fed President John Williams and Vice Chair Philip Jefferson, who alongside Chair Kevin Warsh form the influential troika, have signaled little urgency to hike in October. Governor Christopher Waller suggested that hikes need not occur at consecutive meetings, while Vice Chair for Supervision Michelle Bowman also favors patience. Together, their forward guidance has steered the markets toward pricing in an October pause. Even Warsh's refusal to provide guidance at the IMF-World Bank Annual Meetings in Bangkok on October 16 was interpreted as supportive of a pause. (2) Warsh's three problems. The markets remain heavily influenced by the very forward guidance that Warsh wants to abandon. This creates three challenges: First, other Fed officials have continued to provide guidance despite Warsh’s preference to move away from it. Second, that guidance influences bond yields, making it harder for Warsh to get a clean signal from the bond market. Third, that risks boxing him into policy decisions that he may oppose, as he could be reluctant to surprise the markets. (3) The solution. We suspect Warsh would prefer an October hike. Following the FOMC's September 16 decision to raise the federal funds rate by 25bps, Warsh said he would be “hard pressed to describe broad financial conditions as restrictive,” characterizing the hike as removing a dose of accommodation. Raising rates in October, even if the markets aren't fully pricing in such a move, could help Warsh address his three problems. It would signal that forward guidance from other Fed officials, even influential members of the traditional troika, may no longer carry the weight it once did. That could encourage investors to place less weight on Fed commentary, giving Warsh a clearer signal from the bond market about the appropriate path of monetary policy. In turn, it would reduce the risk of getting boxed in by market expectations shaped by forward guidance that Warsh does not necessarily agree with. (4) Our call. We estimate the neutral federal funds rate at 4.25%–4.50% and believe the Fed should return to that range, reversing last year's three 25bps insurance cuts. Those cuts were intended to protect against labor-market weakness (that we considered overblown) and were made at a time when the Fed was too complacent about inflation. We believe that Warsh should try to persuade his colleagues to hike next week. Then again, he might not do so because the midterm elections are too close. II. US Economy The latest US economic data suggest that monetary policy remains accommodative, exerting little restraint on economic activity or inflation: (1) Consumer spending. Redbook same-store sales rose 9.7% y/y during the week of October 16. The four-week average climbed 9.1%, its fastest pace since early July and well above the 2025 average of 5.8% (chart). (2) Labor market. The latest weekly ADP data show private-sector employment rising by an average of 18,500 jobs per week over the four weeks through October 3, implying roughly 74,000 jobs per month (chart). This suggests that the labor market remains in good shape, supporting continued brisk consumer spending. (3) Import prices. September's data on import prices point to persistent inflation pressures. The import price index surged 8.1% y/y, the fastest pace since July 2022 (chart). The index excluding petroleum imports rose 6.0%. Import prices from the newly industrialized Asian countries surged 12.5% y/y in September, mostly reflecting booming AI-related demand for semiconductors from South Korea and Taiwan (chart). That suggests the AI buildout will remain inflationary for now, before AI brings the fruits of disinflationary productivity growth. (4) GDP. The Atlanta Fed's GDPNow model estimates Q3 real GDP growth at 3.5% (saar). Real final sales to private domestic purchasers, a key gauge of underlying demand, is projected to rise 4.7%, a pace last matched in Q1-2023. Real consumer spending is expected to grow 3.8%, matching Q2's strongest reading since Q4-2024, while business investment is projected to rise more than 11%.
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WELLS FARGO: STOCK PRICE (WFC)
GERMANY CENTRAL GOVERNMENT BUDGET BALANCE
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