BOOMFLATION CONFIRMED
On September 4, after the release of the August Services PMI, I suggested that the US economy seemed to be shifting gears.
The August CPI released on September 14 accelerated from mild June-July core and services inflation.
I boldly titled my September 24 post “Boomflation!” following the September Flash PMI:
“The Services PMI has thus jumped from 54.6 in July to 56.5 in August and now to 58.7 in September with strong new orders. The September Manufacturing PMI’s 3.1 points jump to 57.0 with accelerating new orders confirms that business is clearly booming now in both manufacturing and services”.
Add “the most severe supply chain bottlenecks seen in the near-two-decade survey history” and the ingredients are there for sustained inflation in coming months.
Supply shortages with little prospects for quick improvements provide strong pricing power, everything feeding on itself.
The October Flash PMI confirmed:
- US economic growth is broadening and accelerating to “booming conditions”.
- Employment growth is also accelerating, “at the fastest rate since June 2022”.
- Corporate costs are also surging due to “material shortages, low stock levels, overloaded suppliers, labour shortages, rising back orders and shipping or import delays”.
- Strong demand allows businesses to broadly boost selling prices.
I wrote: “The strengthening labor demand is particularly significant since wage inflation is the only missing ingredient in current subdued inflation scenarios.”
The October employment report provided that missing ingredient, showing +165k new jobs and having revised the August-September total from +162k to +246k. In effect, the US economy created nearly as many jobs (411k) in 3 months than during the previous 7 months (450k).
Unsurprisingly, wage inflation has now entered the picture.
Between March and July, wages rose 2.4% annualized on average. August to October: +3.9%, October +4.5%.
The wage component of the Employment Cost Index was a low 3.1% in Q3. Job switchers are now getting a 4.7% wage bump, up from 3.5% in May.
CPI-Core Services inflation was a low 3.1% in Q3.
The price pipeline is filling up as Ed Yardeni illustrates:
PPI-Final Demand is up 6.4% YoY but PPI-Processed Goods is up 14.2% and Unprocessed Goods +21.7%.
Ten-year Treasury yields have retreated from their October 6 peak of 5.33% to 4.86%. Investors dismissed the employment report, focusing on the new narrative of slowing data center expansion and a more subdued wealth effect to curb any excess demand.
The 5-year breakeven inflation rate remains well within the FOMC target, however elusive it has been since 2024. This is a strong bet on Warsh delivering or, perhaps more simply, on an hopeful decline in oil prices.
Question is: how many rate hikes will be needed?
This week we get the CPI (Tuesday), the PPI (Friday) and 10 Fed officials scheduled to speak.
San Fran Fed Mary Daly told CNBC on Friday that “the job market remains stable and solid, but not booming.”
For her info, from the recent PMI surveys:
- Manufacturing is generating jobs at a pace not seen for five-and-a-half years. Backlogs of work increased for an 8th successive month, with the latest net increase the steepest since April’s near four-year peak.
- New services business inflows rose sharply. Demand was reported to be high. Jobs growth was solid. Companies were keen to expand employment to help support new business and as part of company expansion plans. Backlogs of work are rising steeply and to the greatest degree in four-and-a-half years.
JP Morgan economist wrote that he is seeing “a few hints” of ending wage disinflation but refuses to call it:
Certainly GDP growth was good in 3Q and business surveys look decent in October, which would be supportive of faster job gains. But the unemployment rate has hardly budged over the last few months and remains right in line with where it was from mid-2024 to mid-2025.
Business surveys don’t only look decent, they’re sweating booming conditions. And BTW, the unemployment rate is a lagging indicator, as most people know. BTW #2, the labor force is declining and so is the participation rate.
Feroli also noted that “aggregate earnings (the payroll proxy) are rising 6.2% saar over three months, equaling the fastest rise of the last few years.”
Americans have yet to show any inclination to restrain consumption:
(…) Credit-card and other revolving debt outstanding climbed $16.3 billion, the most since November 2023. Non-revolving credit, which includes car and school loans, rose $11.5 billion — capping the fastest three months of such borrowing since 2022. (…)
The data suggest consumers are leaning on credit cards to keep spending as worker pay struggles to keep pace with inflation.
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DATA CENTER WATCH
Morgan Stanley confirms SemiAnalysis projections that planned compute supply will not be impacted much in 2027.
It’s more an issue for the 96 GW expected in 2028. Based on election results, 37.5 GW may be subject to a “pause” with another 15 GW subject to “conditions”. While pauses are the more impactful outcome, conditions can be onerous: requiring data centers to pay grid costs to protect ratepayers, ending tax incentives, imposing water limits, setting requirements for onsite backup power, mandating labor requirements and banning non-disclosure agreements during permitting (most of which seem sensible to me). If the data center buildout starts to slow at some point, upgrading to better NVIDIA chips might be the only way to generate more tokens.
While “conditions can be onerous”, they likely would not be critical in a world where hyperscalers see themselves in an existential race. According to infrastructure cost data mapped by Epoch AI, the chip stack and its associated networking infrastructure account for nearly 80% of a facility’s total cost.
- The governor-elect of Texas, Gina Hinojosa, has explicitly said that all currently permitted datacenters in Texas will be allowed to finish construction. This essentially covers all of the 2027 and likely well into 2028. “It is not that I hate data centers. I hate the way they are taking advantage of Texas, and that stops when I’m governor.”
- Ohio Governor-elect Dr. Amy Acton pledged to block any future data center projects unless they explicitly meet rigorous community, grid, and resource standards.
- Google Takes Over Wyoming Data Center That Crusoe Had Pitched The big players will grab whatever capacity is freed by smaller developers.
- Trump signed an executive order in July 2025 seeking to expedite the permitting of data centers on public land saying the facilities were a priority for the administration’s goals of manufacturing and technical dominance. A top Senate Democrat is putting the Trump administration’s moves to build data centers on public land in the crosshairs, foreshadowing a brewing fight when his party takes control of Congress next year. (Bloomberg)
- Alberta’s data centre policies will help lure projects, power producers say
- Ford government to approve AI data centres ‘sooner rather than later’ amid moratorium calls
- “A lot of people have been asking us today about data centers and maybe now what has happened post midterms in the US will mean less capacity for the US regions,” Shemara Wikramanayake said, speaking after Macquarie reported half-year earnings on Friday. “Australia has land, we have sunshine, we have energy, we have a lot of capacity to build cable connections to the US West Coast.”
- Google to Spend $15 Billion in Malaysia Data Center Expansion Malaysia has emerged as SE Asia’s main data center hub, attracting companies from Oracle Corp. and Amazon.com Inc. to Alibaba Group Holding Ltd. and ByteDance Ltd.
- Nvidia’s answer to data center backlash: retrofitting Apollo’s old phone buildings. Telecom buildings were originally engineered to support heavy, power-hungry analog switching gear, meaning they already have substantial, highly stable power connections. The proposal pitched by Nvidia involves converting 130+ Brightspeed properties spread across roughly 20 U.S. states. Nvidia estimates that retrofitting these specific buildings could collectively unlock 1 gigawatt (GW) of power capacity. Verizon and others own thousands of these buildings. Verizon has already begun its own trials converting them into edge data centers.
In truth, not all US compute demand can be imported. Foreign data centers cannot replace the US domestic footprint for certain critical functions:
- Inference and Network Latency: Interactive AI consumer prompts, gaming, financial high-frequency trading, and real-time enterprise tools require round-trip latency under 20–50 milliseconds. Placing server stacks thousands of miles away introduces physical fiber transit delays that degrade user experience. Edge and inferencing clusters must still reside close to US population centers.
- Data Sovereignty and Compliance: US federal, defence, and heavily regulated healthcare/finance records are subject to strict data-locality rules (such as ITAR, HIPAA, FedRAMP, and DOD clearance frameworks). Foreign facilities generally cannot store or process these workloads under US law.
But foreign facilities can be used for workloads that are not sensitive to millisecond-level network delays:
- AI Foundation Model Training: Training frontier neural networks is asynchronous and takes months of continuous, isolated number-crunching. It does not matter whether an algorithm trains on cluster nodes in Sturgeon County, Alberta, or Ashburn, Virginia, provided the facility has reliable multi-gigawatt power and high-speed inter-chip networking.
- Batch Analytics and Back-Office Processing: Data archiving, nightly risk modelling, batch rendering, and large non-urgent data pipelines can run across international borders with minimal operational friction.
Necessity is always the mother of inventions. AI data centers are no exception as technology is evolving rapidly, helping reduce footprint through increased efficiency and better resource management.
Betting on entrepreneurial motivation and innovation carry better odds than betting on regulations stifling AI growth.
2026: The State of Enterprise AI Companies Are Spending 5x More on AI Now
Hot off the press (Nov. 3, 2026)
Mainstream coverage of enterprise AI has fixated on companies capping what employees can spend, like Apple cutting engineers’ daily limits. The data says the opposite: Menlo’s fourth State of Enterprise AI report, built on a mid-September Morning Consult survey of around 400 US enterprise decision-makers responsible for about $4 billion in AI spend, shows adoption is not only growing but accelerating off a bigger base. The story of 2026 is agents, and the shift from paying for seats to paying for tokens. (The AI Daily Brief)
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Enterprise AI deployment spend scaled to $177B by September 2026, up from $33B last year. Growth is accelerating: 5.4x vs. 3.9x a year ago. Every dollar that went into developing models this year is generating $1.70 of revenue.
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Agents changed the math: OpenRouter agent traffic is up 37x since overtaking human traffic in February, tying spend to work performed rather than users.
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For now, money follows capability: Frontier labs command 69% of deployment dollars (vs. 50% last year). Anthropic’s share of enterprise API spend increased from 40% to 55%, OpenAI’s from 27% to 31%, while Google’s fell from 21% to 9%. Open-source remains 4% of spend despite 19% of usage.
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AI spend concentrates where agents work best: Coding ($34.0B) and chatbots ($25.0B) make up 76% of the $77.3B app market because they offer environments in which agents can act, workflows they can learn, and results they can verify.
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AI-natives are winning new agent categories like coding, which is 96% AI-native. Compared to last year, incumbents are gaining share in IT (91%), data science (88%), and HR (68%).
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AI is expanding the software economy: 55% of AI dollars is from net new spend, rather than existing software or labor budgets.
- In the race to win AI builders, Anthropic and OpenAI now account for 86% of enterprise LLM API spend, up from 67% last year. As the market consolidates around the frontier leaders, model capability—not price—is proving to be the decisive competitive advantage.
Chinese Producer Inflation Hits 5.7% for Post-Covid Era High
Prices at the factory gate climbed 5.7% in October from a year earlier, after a gain of 5% in September, according to data released by the National Bureau of Statistics on Monday. (…)
Nine industries — led by upstream sectors such as coal mining, oil and gas extraction and fuel processing — contributed to over 6 percentage points to the overall increase in producer inflation, NBS statistician Dong Lijuan said in a separate statement. (…)
At the same time, the surge in producer inflation masks a deep divergence within China’s industry, with only half of the 30 key sectors tracked by the NBS recording price gains while the rest all saw declines.
By contrast, the consumer-price index slipped more than forecast to 0.7% in October, versus 0.9% in prior month. The core CPI, which strips out volatile food and energy prices, slid to 0.8%, matching this year’s low. (…)
While higher gasoline prices provided a lift to CPI, other categories including consumer goods, gold jewelry and services all saw moderating price gains, according to Dong. A steeper decline in the cost of fresh vegetables, pork and fruit resulted in a 0.54 percentage point drag on consumer inflation.
Non-food: +1.5% YoY in October. Fuel costs rose by +20.2% YoY in October (vs. +14.9% in September), transportation services price inflation increased by 5.3% in October (vs. 4.5% in September), and telecom equipment price inflation rose to 16.1% in October (vs. 14.3% in September). (GS)
This ING chart suggests China is getting out of its deflation problem.
EARNINGS WATCH
From LSEG IBES:
435 companies in the S&P 500 Index have reported earnings for Q3 2026. Of these companies, 83.2% reported earnings above analyst expectations and 13.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 82% of companies beat the estimates and 15% missed estimates.
In aggregate, companies are reporting earnings that are 5.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.4% and the average surprise factor over the prior four quarters of 7.7%.
Of these companies, 73.2% reported revenue above analyst expectations and 26.8% reported revenue below analyst expectations. In a typical quarter (since 2002), 63% of companies beat estimates and 37% miss estimates. Over the past four quarters, 77% of companies beat the estimates and 23% missed estimates.
In aggregate, companies are reporting revenues that are 2.5% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.5%.
The estimated earnings growth rate for the S&P 500 for 26Q3 is 33.4%. If the energy sector is excluded, the growth rate declines to 28.1%.
The estimated revenue growth rate for the S&P 500 for 26Q3 is 14.4%. If the energy sector is excluded, the growth rate declines to 12.7%.
The estimated earnings growth rate for the S&P 500 for 26Q4 is 29.5%. If the energy sector is excluded, the growth rate declines to 24.5%.
The strong economy brings strong earnings. The last 2 weeks were particularly solid and analysts are scrambling to revise upwards:
Mentions of inflation on S&P 500 earnings calls have reached the highest level in more than two years, underscoring growing concerns over skyrocketing costs and weakening consumer confidence.
From paint makers to spice manufacturers, company bosses have been evaluating the impact of rising prices, coming up with ways to alleviate the pressure and reassure investors worried about the impact on margins. (…)
S&P 500 Valuation Dives As Earnings Soar
(…) Forward earnings rose to a record $418.25 [IBES is at $405.71]. It is converging on the 2027 estimate of $426.28, which continues to climb. (…)
The S&P 500 forward P/E fell to 17.6 last week, below the 2025 Liberation Day low. P/E plunges typically accompany corrections and recessions. (…)
Since the bull market began on October 12, 2022, the S&P 500 has risen 106.2%. Forward earnings is up 75.5%, while the forward P/E is up 22.5%.
The P/E and E both drove the rally until the forward P/E peaked in October last year. Since then, E has done all the work. Investors are finding it harder to predict the return on all the AI capital spending. They won’t pay an excessive multiple given that uncertainty. (…)
The S&P 500 Semiconductors industry accounts for much of the P/E drop. The industry index’s forward P/E has plunged to 13.1, well below the S&P 500’s. Semis are now cheaper than they were during the 2022 bear market.
Good odds …
Source: @RyanDetrick
… though not starting well …
Data: FactSet; Chart: Matt Phillips/Axios
… no dry powder …
… and more selling than buying:
(…) A Bloomberg analysis of thousands of corporate and regulatory filings and credit deals shows markets and economies around the world are now more dependent on tech than ever before. And much of that dependence rests on AI. Any downturn in the AI industry, either in the buildout of its infrastructure or the valuations of its stocks, will reverberate far beyond Silicon Valley.
(…) About 44% of pension holders’ equity investments hinge on tech, based on a Bloomberg review of more than 70 pension funds.
Pension funds aren’t the only ones piling in. Bloomberg’s analysis shows tech has emerged as the largest share of equity investments for hedge funds and insurance companies as well. (…)
Tech firms have borrowed $296 billion in investment-grade debt this year through Oct. 12, turning them into the largest borrowers of any industry outside of finance, a Bloomberg analysis of corporate bond deals shows.
The six largest hyperscalers are expected to spend more than $850 billion this year to finance projects tied to AI, an 83% increase from 2025. And that figure may rise to as much as $9 trillion through 2031, Bloomberg Intelligence analyst Robert Schiffman estimated before the midterms.
This year alone, tech heavyweights have priced a record nine US high-grade bond sales of at least $25 billion — once a rare event reserved for massive acquisitions. That’s more than the entire market produced in the previous eight years combined.
Technology is now nearly the biggest source of junk-bond issuance. Its share of the market has almost tripled since last year to a record 19.7%, driven by data center financing. AI infrastructure developers including TeraWulf Inc. and Applied Digital Corp. alone have sold more than $43 billion of high-yield notes this year through Oct. 13, up from just $8.5 billion last year and zero before 2025. (…)
Investment in tech hardware, software and data centers now comprises more than a third of all US business investment — the most on record in data going back to 1947. In growth terms, that share is even starker: Those categories accounted for the vast majority of all US investment expansions over the past year and have now eclipsed the boost they provided at the height of the dot-com bubble, underscoring how much of the economy’s momentum is riding on the AI boom. (…)
US, Iran Edge Closer to Deal With Nuclear Issue Back in Play
The US and Iran are moving closer to a potential breakthrough in efforts to end the war, with Tehran showing a willingness to discuss issues related to its nuclear program that were previously off the table, according to a diplomat with knowledge of the talks.
Iran is studying proposals related to its atomic activities that were presented by chief mediator Qatar, according to the diplomat, who asked not to be identified discussing sensitive information. Any concession on that issue could lead to a significant step forward in negotiations, which have been stagnating since the collapse of an interim peace deal agreed in June. (…)
In other recent diplomatic moves, Iranian Foreign Minister Abbas Araghchi discussed “efforts aimed at establishing stability in the region” in separate phone calls with his Saudi and Qatari counterparts on Thursday, according to a statement on his official Telegram channel. He also spoke to his opposite numbers in the United Arab Emirates, Turkey, Kuwait, Cyprus and Jordan. (…)
Al Jazzera has much more:
(…) Speaking at the university event, Qatar’s Prime Minister and Minister of Foreign Affairs Sheikh Mohammed bin Abdulrahman bin Jassim Al Thani said that “for the past couple of weeks, we have worked with colleagues in the US administration who have very genuine intentions to find a way to contain the situation and de-escalate it”.
Mediation efforts continue “to prevent the situation from spiralling out of control”, he confirmed, adding that “thanks also to some wise voices in Tehran, we have prevented that from getting out of control”. (…)
On Thursday, Iran offered the US a new nuclear and peace proposal via Qatari mediators, to be discussed only after Washington meets Tehran’s seven demands, a senior Iranian official told Reuters. The US is examining the proposal, Reuters reported.
Iran has made meeting its seven demands a condition for reopening the Strait of Hormuz and restarting peace talks, including on its nuclear programme. The demands include the lifting of sanctions on Iran, the unfreezing of Iranian assets and the end to the US naval blockade of its ports in and around the Strait of Hormuz, among other things.
It has also stepped up ties with Russia, with its top security official, Mohsen Rezaei, travelling to Moscow for talks on Thursday. During that visit, Rezaei said: “On the issue of diplomacy, we have announced seven conditions to the Americans. As long as they do not execute our seven conditions, we will neither open the Strait of Hormuz nor have negotiations.”
Meanwhile, the US has insisted a deal on Iran’s nuclear capacity must be part of any ceasefire agreement before wider peace talks can restart. (…)
Iran continues to tightly control shipping lanes through the strait, where several ships have been damaged in recent days. It has granted exemptions to shipping restrictions to Iraq and Qatar, in the Gulf region, as well as to India and China. (…)
Iranian officials said Iran has the capacity to strike further than the Gulf using weapons manufactured in Iran.
On Thursday, a spokesman for the Supreme Advisor to the Commander of the Aerospace Force of the Islamic Revolutionary Guard Corps said: “In the event of a new aggression, any country or force that helps America attack Iran can be a legitimate target of the Islamic Republic.”
Iran’s state media outlet Tasnim News reported: “Our missile bases have a suitable range to target the Zionist regime and American bases,” adding “Iran’s response to the possible new aggression of the enemies will not be geographically limited.”
Iran has also previously warned that cables, data centres and artificial intelligence (AI) facilities across the Gulf region could be attacked if war with the US erupts again. (…)
Meanwhile, Iran’s Revolutionary Guard Corps navy says at least seven tankers have caught fire after sailing into mines while attempting to transit through the Strait of Hormuz using “unauthorised routes” near Oman this week. (…)
US Secretary of State Marco Rubio played down the chances of a breakthrough in talks on ending the conflict with Iran, saying Tehran’s demands to date are unacceptable and in some cases “outrageous and ridiculous.”
Rubio’s comments to reporters contrasted with Donald Trump’s tone after CNN quoted the president earlier Sunday as saying it’s “highly unlikely” he’ll order more strikes on Iran if negotiations make substantial progress.
“You have a number of countries that continue to engage them with different ideas, but I wouldn’t say we’re on the verge of a breakthrough,” Rubio said in Florida before leaving to meet Group of Seven counterparts in Paris, where the Iran war will be on the agenda. (…)
Iraq has reached understandings with the United States to allow Iraqi oil exports through the Strait of Hormuz via a shipping lane near Oman, Foreign Minister Fuad Hussein said in an interview with Al Jazeera.
He said Iraq’s losses from the Iran war and disruptions to oil exports had reached $60 billion.
Iraq’s oil exports recovered in October after a sharp drop the previous month. Exports rose to about 3.5 million barrels per day from 2.65 million bpd in September, according to Iraqi energy officials.
SO WHAT
Bruce Mehlman:
For months every indicator flashed “big blue wave.” If anything, they undersold it.
The next two years will be the most disruptive & unpredictable in modern memory. Business will be squeezed between a still-powerful Executive Branch it must work with and an electorally-emboldened Congress determined to find & expose corruption. Both parties face early, bruising and drawn-out presidential primaries pitting populists against more mainstream contenders.
And all this while AI transforms everything at accelerating speed and new forces reshape the world order in real time.
Buckle up.
Someone suggested to dismiss the notion of a lame duck president. Think mad dog.