What the Democrats can seek to achieve (ING)

Key sectors of corporate America will be nervous that Democratic control of important oversight committees could bring greater scrutiny. More congressional hearings involving AI and technology business leaders would be a likely outcome, while a strong performance at the ballot box may embolden local Democratic leaders to try to stall unpopular data centre construction in their constituencies. Fossil fuel producers may face similar challenges.

Democrats will likely feel even more confident about pushing back against President Trump’s policies on Iran, support of Israel and any escalation of tariffs. They may apply more pressure on the president to sound tougher towards Russia and to provide support to Ukraine, but the final call will remain with the president.

Investigations into President Trump, his family and members of his administration may also be stepped up as Democrats exercise their greater powers. Inquiries into finances and business dealings could result in subpoenas for documents and testimony. Moreover, impeachment proceedings begin in the House, raising the possibility of a third attempt to impeach the president.

To be convicted and removed from office, 67 of the 100 senators would need to vote in favour, which is unlikely. The Democrats could still use the process to constrain the president, but doing so risks further toxifying the political situation in the US. Rather than pursuing such action against the president himself, Democrats could instead launch investigations into members of his cabinet.

With Democrats now in control of the Senate, they can block or, at the very least, stall judicial and executive nominees. This includes heads of government agencies, ambassadors and cabinet members, potentially making it difficult for the president to replace any senior officials he chooses to fire.

What will the president do?

A key question is whether a constrained President Trump, entering the final phase of his tenure, becomes more willing to accept political or market disruption in pursuit of his objectives.

If there is little sense of any compromise, the ensuing gridlock in Congress would leave the president to focus on areas where he can exercise executive power: 1) foreign policy and diplomacy, including trade policy, 2) national security and defence, 3) law enforcement and regulatory policy, 4) personnel appointments (subject to Senate approval), and 5) administration and management policy.

This suggests Iran, Russia/Ukraine and tariffs/trade policy are likely to be the focus for the president. Tariff policy could increasingly be used to incentivise foreign partners to align with US foreign policy objectives, for example by pressuring NATO members to increase defence spending.

More fundamentally, heavy defeats in the House and Senate will be interpreted as a referendum on President Trump’s policies and potentially prompt figures within the Republican Party to take the view that it is time to open the debate on its future direction.

With Trump’s influence set to fade, leading lights within the party, most notably JD Vance and Marco Rubio, may attempt to shore up support for their own campaigns as they look to the 2028 presidential election. Similarly, a large Democratic victory will intensify speculation over whether the party’s 2028 candidate should come from its more moderate wing or whether the progressive left has enough momentum to put forward a candidate of its own.

The market reaction

The initial bond market reaction has been a fall in yields across the curve. In the coming days, that could reverse as the prospect of policy stasis leaves the market weighing a still-elevated fiscal deficit against some easing of inflation concerns.

We will probably see front-end yields drift lower, while the back end retains an upside bias. If we do see more tariffs, the back end could find a small silver lining in the additional tax revenues. But any benefit is likely to be marginal, given the risk that tariffs also push inflation higher. Overall, we retain a bias towards the 10-year yield heading towards 5.25%.

The dollar is softer on the outcome, though it has recovered from its lows seen in early Asia when a sharp fall in Nasdaq futures was warning of a larger re-pricing of the tech story. Nasdaq futures have since retraced the majority of those losses. Limiting a larger dollar correction on this news is probably a still-resilient US economy and at least one more rate hike from the Federal Reserve.

The dollar could see a little more weakness into 2027, however, if an emboldened Democratic Party takes greater issue with Republican policy, including deregulation and the AI build-out. And the potential for a prolonged government shutdown in mid-2027 adds to the case for a weaker dollar next summer.

What it means for Europe and China

With the outcome of the vote limiting President Trump’s options at home, he is likely to focus more heavily on foreign and trade policy. The result could be greater volatility and uncertainty for the global economy.

This will clearly affect Europe. A forced deal between Russia and Ukraine, to the disadvantage of Ukraine and Europe, could undermine economic sentiment in Europe. A new escalation in the Middle East would push up energy prices and harm the European economy. Europe’s latest shift towards more protectionist trade policies could bring new global trade tensions.

At the same time, with only two years left in office, the TACO (Trump Always Chickens Out) phenomenon could increasingly shape Europe’s thinking. The risk of an unwarranted economic accident rises as Trump’s policies towards Europe become more aggressive and Europe’s own stance hardens, in the hope that Trump will ultimately back down or simply run out of time.

If Republicans lay the blame for the poor result at the president’s door, the sense that Trump’s time is coming to an end could grow stronger. If so, some European countries may be tempted to test the president’s patience and slow the pace of defence spending increases, particularly given their own fiscal constraints. Alternatively, and less likely, a stifled but less angry Trump administration could try to bring the wars in Iran and Ukraine to an end.

Constrained by Congress and the Supreme Court on trade, it could ultimately, intentionally or otherwise, end up indirectly supporting the European economy.

China’s main response will be to wait and see, as it will react to actual policy changes rather than the shifts within Congress. The main potential trigger points would be Taiwan arms sales, tariffs and other trade/investment restrictions.

Personal ties between the two leaders appear good, but with President Trump’s policy focus being channelled towards foreign and trade policy, China could end up in the crosshairs again. The trade truce is set to expire in January, and it seems like both sides are not interested in going back to the mutually destructive peak tariff scenario we had in 2025, but it cannot be ruled out.

As with Europe, if Trump appears weakened by the outcome of the midterms, China could sense that it is time to start looking beyond 2028, triggering a revaluation of its long-term US strategy.

U.S. Job Openings Rose in September

Available positions rose to 7.5 million in September from a upwardly revised 7.2 million in August. The number and rate of layoffs and discharges also were little changed at 1.6 million and 1%, respectively.

Here’s the most interesting part:

Voluntary quits spiked by 321,000 MoM in September, up 12.5% YoY.

• People generally quit for better conditions, generally salary. Job switchers’ wages rose 4.7% in September from +3.7% in May. The gap with total wage growth has widened considerably lately.

• More quits leave more job openings to be filled, potentially at higher wages in low unemployment conditions.

AI CORNER

Data Center Construction: How Are Fifth District Businesses Involved?

The Fifth District is home to more than 20 percent of the nation’s data centers, and development continues to accelerate, reflecting the industry’s expanding physical presence across the region. (…)

Among survey respondents, businesses directly involved in data center construction reported average input cost growth of 9.7 percent over the last year, compared with roughly 6.7 percent for indirectly involved firms and uninvolved businesses.

Growth in prices charged to customers followed a similar but slightly lower pattern across involvement levels: Directly involved firms reported an average growth of 6.4 percent, followed by indirectly involved firms at 5 percent, and not involved firms at 4.5 percent.

Annual wage growth showed a similar pattern. Businesses directly and indirectly involved in data center construction experienced wages rise by 4.2 percent and 4 percent, respectively, over the last year, while uninvolved businesses experienced a smaller increase of 3.4 percent.

These results suggest that survey respondents closer to data center construction faced greater increases in cost, prices, and wages, though price increases did not fully keep up with the pace of rising input costs.

Among firms directly involved in data center construction, the share expecting to increase employment exceeded the share expecting to decrease employment by 14 percentage points. The corresponding gap is 11 percentage points for indirectly involved firms and 5 percentage points for firms not involved. Overall, firms involved in data center construction in any capacity are more likely, on net, to expect employment growth over the next six months.

A Cleveland Fed mid-September survey found a higher share of firms involved in data center construction (47% vs 31%. Different questions:

• 81% of respondents said their firms had used AI for business processes or tasks in the past six months, compared to 74% who said the same in March 2026. Over the next six months, 81% said they plan to use AI for business processes or tasks, compared to 79% who said the same in March.
• Most firms that reported using AI in the past six months said their use of AI did not change their staffing levels. 11% said their AI use had increased their staffing levels in the past six months, compared to 2% who said AI had decreased their staffing levels. These responses were similar to those collected in March 2026.
• Firms most often said AI helped them improve efficiency and productivity (82%), and a smaller majority said AI helped them enhance decision making (66%). Across all benefits of AI use, firms were more likely to say AI would help them achieve the benefit in the future than to say AI was currently helping them achieve the benefit.

CAPITAL IS CAPITAL

The AI Boom May Be Sowing Seeds of Another Financial Crisis

Bill Dudley is a Bloomberg Opinion columnist and a former president of the Federal Reserve Bank of New York.

(…) The risk of another GFC seems low. First, concerns about an AI bust are prevalent. (…)

Second, the financing of the AI investment boom seems more robust. (…) most of the funding for the AI boom has a longer tenure that is better matched to the assets being financed. (…)

That said, there are characteristics of the AI boom that are concerning. In particular, it is not easy to assess counterparty exposures and how those exposures might change if the outlook for investment returns or the financing environment were to worsen. And financing terms are often complex and opaque.

Much of the financing activity is being executed through leasing structures, which stay off the balance sheet until the data center infrastructure is completed.

Also, the financing, at times, has “wrong way” risk. For example, if Nividia guarantees of future chip values were triggered, it would be happening at the same time its margins would be crashing because of lower chip prices.

So what can be done?

First, securities regulators should be given an explicit financial stability mandate. (…) it is important that there is a regulatory body that takes responsibility and works to identify the emerging risks.

Second, banking and securities regulators should take steps to increase transparency. Who owes what to whom and under what conditions and contingencies? (…)

Third, there should be a review of accounting practices to ensure that they fairly represent the exposure and risks. (…) Rules that required a fuller disclosure of actual and contingent liabilities would help investors make more informed decisions, which would constrain undue risk-taking. (…)

• Apollo Says It Will Play Defense in Lending for AI Buildout

(…) “We know that society will use dramatically more computing power in the future,” that demand for chips will remain strong, “and that AI capabilities are improving at an extraordinary rate,” Apollo President Jim Zelter said on a call with analysts Tuesday following its third-quarter results. “What we don’t know is how pricing and economics will evolve.”

Zelter said the firm’s defensive posture will mean focusing more on secured lending and senior debt, and setting strict limits on its exposure to specific borrowers. Chief Executive Officer Marc Rowan said the firm is seeing high valuations across markets and elevated risk, driving the decision to play defense.

“FOMO is not an investment strategy,” Rowan said on the call, referring to the fear of missing out. “We are prudent and we are cautious, especially in credit.”

The firm’s subsidiary Athene disclosed in an Oct. 30 filing that it has invested $12.9 billion in digital infrastructure as of Sept. 30. The firm broke down its exposure to each borrower and the asset class tied to the sector, while emphasizing that most of the investments were secure and investment grade. The overall exposure doesn’t include any unfunded debt that Apollo has already committed.

For Athene, its largest AI-related investments include $3.1 billion of exposure to SpaceX, $2.4 billion to Oracle Corp., $2.3 billion to Meta Platforms Inc. and $1.1 billion to Anthropic PBC and Broadcom Inc. The exposures don’t capture the full picture, as the Broadcom debt portion represents just one of several installments that Apollo has committed to the chip firm for its leasing agreement with Anthropic. (…)

Apollo co-led a $40 billion financing for SpaceX last week to fund its purchase of AI chips, and earlier this year it led a $35 billion deal for Broadcom and Anthropic.

Athene also said it caps investment-grade exposure to any single issuer at 1% to 1.5% of gross invested assets, aggregating investments across different structures.

Zelter said Apollo is prioritizing investments that are more senior in the capital structure and taking a more defensive posture in the loans the firm’s making.

“The logical conclusion is to take risk off, position defensively and prepare for the opportunity to play offense,” Zelter said.

FYI:

Oracle completed a roughly $20 billion stock-and-bond sale for AI data centers, pricing $9.9 billion of new stock at $116 a share, an 11% discount to Friday’s close, alongside $10 billion of bonds with yields reaching 8.65%, to fund data-center construction.

The raise landed as the industry’s cash math drew fresh scrutiny: quarterly filings from Microsoft, Alphabet, Meta and Amazon show combined operating cash flow of $175.5 billion against $201.9 billion of capital spending, more than double the year-ago total, leaving aggregate free cash flow of negative $26.4 billion for the September quarter, the first negative combined reading on record, according to the Kobeissi Letter.

The aggregate masks wide differences: Microsoft generated $18.6 billion of free cash flow, while Amazon’s was negative $34.8 billion on $77.3 billion of capital spending, and all four hold large cash reserves.

OpenAI, meanwhile, has secured about $11 billion toward a $30 billion funding target at a $1.25 trillion valuation, the Wall Street Journal reported; the round remains open. (Rock & Turner)

China Services Gauge Unexpectedly Dips for First Time Since July

The RatingDog China services purchasing managers’ index slipped to 50.8 in October, the lowest in three months, according to a statement published Wednesday. (…)

Days earlier, the official PMI survey showed the services industry slid slightly in October to the 50 mark that separates expansion from contraction. The private and official surveys cover different sample sizes, locations and business types, with the RatingDog report focusing on small and medium-sized firms. (…)

More from the releases:

New business received by Chinese service providers expanded further, extending the current growth sequence that began in January 2023, with the pace of increase solid and little changed from September, helped by successful business development efforts and new client wins. New export business rose for the sixth consecutive month, further extending the longest growth streak seen since 2024 amid improving overseas demand conditions, though the rate of growth eased from September and was marginal overall.

China’s manufacturing output expanded at a rate that was sharp and the fastest in six months, underpinned by another solid increase in new work inflows. According to panellists, October’s demand growth was driven by the launch of new products and improvements in production capabilities, while firms’ own business development efforts also bore fruit.

Exporters also reported higher sales volumes at the start of the fourth quarter, albeit with the rate of growth slowing from September’s high.

In line with the trend for output, the rate of buying activity growth accelerated from September and was the strongest in eight months.

On prices, average charges fell in October after rising in September. According to survey respondents, intense competition and a slower increase in input costs enabled firms to lower selling prices to support sales.

This was likewise the case for exports as average export charges declined for the first time in nearly a year. Where operating expenses did increase, however, this was attributed to higher raw material, such as for metals, and fuel costs.

Eurozone growth eases to four-month low

The seasonally adjusted S&P Global Eurozone Composite PMI® Output Index fell for the first time since May. Posting 51.7, the headline index remained in growth territory, extending the current period of economic expansion in the eurozone to four months. That said, by falling from September’s 53.1, it signalled a softer increase that was also the weakest over this period.

Sector data signalled a broad-based growth slowdown as both manufacturing and services output levels rose at softer rates. (…)

Weighing on business activity was a marked softening of sales growth. The volume of new business received by private sector firms in the eurozone rose only marginally during October as a slight decline in demand for services was only narrowly offset by an expansion to factory order books. Export conditions were still supportive, as indicated by a third successive rise in new business from abroad, although the upturn here also lost pace.

Eurozone companies were able to keep on top of workloads in October as outstanding business volumes were broadly unchanged. This was achieved despite workforce numbers ticking down from September. Although job cuts were only marginal, the rate of decline signalled was the most pronounced since May. The service sector drove this reduction as factory headcounts rose slightly.

Cost pressures intensified across the eurozone economy during October. The rate of input price inflation accelerated again, bringing it up to a five-month high. Output charges were raised sharply, although the pace of increase did soften from September.

Lastly, eurozone firms’ year-ahead expectations weakened at the start of the fourth quarter. This marked the third successive month that business sentiment has softened. Overall, the level of business confidence remained historically weak, coming in below its long-run average.

Costs seem to be rising faster than output prices.

Oracle cancels $7bn Tencent AI deal under Trump pressure Intervention comes amid growing tension for US AI infrastructure groups doing business with Chinese tech giants

Oracle has scrapped a multibillion-dollar chip leasing contract with Tencent after bowing to pressure from the Trump administration, in a sign of rising tensions for US cloud providers serving Chinese AI companies.

The Californian group led by billionaire Trump backer Larry Ellison signed a five-year lease with the leading Chinese tech giant to provide access to as many as 100,000 advanced AI chips across a host of data centres in south-east Asia. The contract, worth an estimated $7bn and first reported by the FT in September, was Tencent’s largest overseas leasing deal.

It would have given the group access to chips unavailable for use in China due to curbs from Washington and Beijing.

US officials approached Oracle to raise concerns about the Tencent deal, according to two people familiar with the matter. Tencent also received visits from top officials in Guangdong, where the group is based, who asked the tech giant to support domestic Chinese chips, according to one of the people.

The deal has since been cancelled, the people added. (…)

While Tencent is catching up with multibillion leasing deals, ByteDance and Alibaba remain the biggest clients of data centres in south-east Asia.

Oracle is a major supplier to ByteDance in Asia with multiple data centres in Malaysia. The company also hosted US customer data for the Chinese group’s social media platform TikTok before being part of a consortium that late last year acquired the reel-based app’s US operations. (…)

Tit-for-Tat:

China’s Message to Its Rivals: You Need What We Make It’s not just rare earths. China is making it harder for other countries to shed their dependence on its solar, drone and drugmaking technology.

(…) In the past month, Beijing has moved to control the exports of dozens of technologies, including drones, artificial intelligence models and agents, and certain processes used to develop advanced medicines and to make solar panels.

The overall push could make it much harder for companies in the United States and elsewhere to set up solar energy equipment factories that would compete against Chinese manufacturers. And it could soon make it more difficult for anyone outside China to gain access to the latest and most powerful Chinese A.I. models. (…)

For Xi Jinping, the Chinese leader, the controls are the realization of a plan he laid out years ago, when the pandemic exposed China’s dependence on foreign countries for advanced medical equipment like ventilators and life-support systems, as well as for raw materials and specialized parts.

He declared that China would develop “trump card” technologies in industries such as high-speed trains, renewable energy and telecommunications. That would make China not only more self-sufficient, but deter countries from trying to cut China off.

Beijing needs leverage to ensure that China can still get what it needs from other countries — namely their customers and advanced technologies like jet engines and high-end chips, said Kirsten Asdal, a founder of Asdal Advisory, a consultancy that focuses on Chinese political research. (…)

In a recent front-page editorial commemorating the 90th anniversary of the Long March, People’s Daily, the party’s mouthpiece, called for the country to “focus on the ‘chokehold’ key core technologies” and “stiffen the Chinese backbone” of self-reliance.

In a clear reference to the United States, the editorial praised China for weathering tariffs and trade wars and urged readers to prepare for a “great struggle.” (…)

China has said that the recent flurry of export controls and proposed rules are needed to protect Chinese business interests. The country has spent decades and billions of dollars developing its dominance of the manufacturing of solar equipment, for instance, and it argues that it must restrict the export of core equipment to prevent competitors from trying to replicate China’s supply chain domestically.

China has also said that more controls are needed to guard against threats to national security.

“China is beginning to more systematically consider which technologies and equipment can be exported, to whom they should be sold and what their ultimate applications will be,” said Sun Chenghao, a foreign relations expert at Tsinghua University in Beijing.

He said, for instance, that the risks that A.I. could be used for cyberattacks or that machines that bore tunnels and that dredge mud could be used by militaries against China are legitimate reasons for Beijing to vet where these technologies go.

The proposed controls may also be a part of tit-for-tat actions that China and the United States have traded in recent months, despite a broader trade truce. The Trump administration added BGI, a major Chinese genomics company to a trade blacklist aimed at barring products made with forced labor in China. Earlier, the Treasury Department proposed regulations prohibiting U.S. companies and investors from taking investment stakes in Chinese biotechnology firms.

President Trump and Mr. Xi are expected to meet in China later this month and next month in Miami.

American restrictions and sanctions on China helped teach Beijing that great powers need economic weapons as much as they need aircraft carriers and long-range missiles, some analysts have said. Washington first cut two of China’s largest technology companies, Huawei and ZTE, off from American chips and software, then restricted exports of advanced chips to China broadly, curbs that continue to hurt China’s A.I. ambitions.

During its trade war with the second Trump administration, Beijing choked off exports to the United States of rare earths, the minerals needed to make fighter jets, cars and everyday technologies. That pressured Washington into a truce.

Some Chinese analysts worry that Beijing’s rare earths strategy has been too successful. The United States and many of its allies and partners are now scrambling to develop alternative sources.

Part of last month’s flood of Chinese controls was aimed at establishing new points of leverage.

“China is concerned that it might lose its ‘rare earths card,’” said Zhao Minghao, an international relations scholar at Fudan University in Shanghai. “So, what other cards does China still hold? How can China effectively counter U.S. sanctions or tariff measures? I believe Beijing is prioritizing this highly at the present.” (…)

The new controls could also alarm other trading partners like Europe, which is already uneasy about a flood of cheap Chinese exports. (…)

“China is indiscriminately expanding the scope of their export controls to include basic equipment that aren’t even strategic,” he added. “They are demonstrating that in any political conflict, they can counter with industrial leverage.”

“That kind of business by threat is not going to be something that is sustainable,” Mr. Kennedy said. (…)

Indeed. But how will it end?

• Japan ‘months’ from running out of critical rare earth as China squeezes supply Tokyo asks US to help convince Beijing to ease chokehold on yttrium and avert manufacturing shutdown

(…) Washington has urged China in recent months to increase the flow of rare earths, including yttrium — a heat-resistant metal crucial to manufacturing vehicles, jet engines and semiconductors — to the US and its allies. US defence supply chains rely on components made in Japan that contain yttrium.

Unless Beijing changes tack or western allies find substitutes or additional stockpiles, shortages could emerge as early as the end of this year, Japanese government officials and trading house executives said.

“We’re in a serious situation to keep supplying downstream industries,” said a Japanese government official. “Stockpiles are decreasing and rare earth saving efforts have a limit.” (…)

Yttrium shortages have become the biggest pain point for Japanese materials groups. The metal is used to coat engines and plasma-etching chambers for chip manufacturing.

Yttrium oxide prices outside China have skyrocketed to $1,150 per kilogramme, a 179-fold increase versus two years ago, compared with $9 per kilogramme in China, according to price assessments by Argus. (…)

US officials have told Beijing that the US will not export jet engines needed for the Comac C919 — China’s first domestically made airliner — as production has been constrained by the lack of yttrium, which is critical to making turbines.

China also agreed to buy 200 Boeing jets when Trump visited Beijing in May. But the deal has not been completed, partly due to complications related to critical minerals.

Erin Browne, the top US Treasury official for international affairs, told the FT that rare earths were essential to the production of Boeing aircraft and jet engines. “In order to produce aircraft, you need rare earths,” said Browne. “They’re all sort of under the same umbrella, which is that in order to . . . export engines, you also need rare earths.” (…)

“It is rightful panic in Japan,” said Gracelin Baskaran, head of the critical minerals security programme at the Center for Strategic and International Studies in Washington. “They are probably going to have to suffer for the time being.”

A high stakes poker game in which chips are not in the center of the table but integral parts of anyone’s hand. Like dirt.

Trump’s American slapdown for the ages In multiple midterm races the president’s heavy-handed input boomeranged

The FT’s Edward Luce:

Tuesday night looks like the beginning of the end of Donald Trump. His response to what amounts to America’s stinging personal midterm rebuke is likely to be volatile. Yet it is hard to see how he could claw his way back from such a strong Democratic wave having urged voters to act as though his name were on the ballot.

Against advice, Trump turned the elections into a referendum on him. He thus owns the historic scale of the Republican defeat.  

There were plenty of other losers on Tuesday night. Elon Musk, who pumped more than $200mn of his own money into the Texas Senate race, learnt that even historically large donations can’t buy you love or results against so strong a public swing. His candidate, Ken Paxton, lost to Democratic nominee James Talarico, who was not even born the last time a Democrat won a Texas Senate seat.

It was also a disastrous night for the once-powerful American Israel Public Affairs Committee, which spent a lot of money trying to defeat Abdul El-Sayed in Michigan. El-Sayed is set to become the first Muslim senator in US history having also got the votes of a majority of Michigan’s Jewish vote, according to exit polls.

It was also a terrible night for Vivek Ramaswamy, the bombastic Trump understudy, who was defeated in Ohio’s gubernatorial race. He might now bow out from politics having spent a large chunk of his personal fortune on what was seen only a few months ago as a safe bet.

Likewise, the late Lindsey Graham would be turning in his proverbial grave to watch his recently appointed sister, Darline Graham, lose his long-held South Carolina seat to a Democrat — the first time the party has won a Senate race there in almost 30 years.

Many other landmarks will be passed in America’s 2026 midterms in what early numbers suggest was a historically high turnout. America seems finally to have fallen out of Trump’s spell.

In each race, Trump’s heavy-handed input boomeranged. (…)

Not only did Trump thrust himself into the centre of each news cycle; he went out of his way to belittle the electorate’s chief concerns. Affordability was a “Dumocrat [sic] hoax”, Trump insisted. Though the Iran war and its inflationary effects was a dominant theme, Trump told voters he had kept every promise. One of those was to avoid wars in the Middle East.

Some believe that he showed clear signs of cognitive decline. “I’ve actually kept far more promises than I made,” Trump cryptically suggested the day before the election. (…)

Democrats will now control both chambers of the US Congress in a result that even Trump might find “too big to rig”.

There are two immediate consequences. The first is that the Republican campaign to replace him as the 2028 nominee will begin straightaway. Indeed, Ron DeSantis, the outgoing governor of Florida, arguably kicked that off before the polls had even closed. Without naming Trump, he said no public official should make money from holding office. That suggests an anti-corruption backlash following an election where that theme topped many recent polls.

The second consequence is that Trump’s unpredictability is likely to become an even larger feature of his presidency. To those who oppose him, Tuesday night was a lightning strike. But Trump is rarely outbid in the drama stakes.

Whichever way he reacts, the 2026 result will change America’s course. The 2018 Republican midterm defeat was the end of Trump’s beginning, to borrow Churchill’s phrase. This week’s high turnout a decade after Trump descended that escalator spells the beginning of his end.

BTW: “I really want you to pretend I’m on the ballot,” Trump said at his final rally Sunday in Salina, Kansas.

“Trump says GOP losses are because he’s not on the ballot. The president’s first comments on midterm results.”

“I have the ultimate power — it’s called ‘veto,'” he told CBS News, even saying he would welcome the nickname “Mr. Veto.”

But Dems need a strong leader, quick. Any idea?

“The immediate financial effects of a Democratic sweep aren’t that great. Pricing in risks for 2028 that weren’t previously taken seriously, however, threatens to be a big deal.” (John Authers)

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.