Weakness in Chinese investment is spreading

Benchmark revision shows less worrisome US inflation

Recent increases in US long-term rates surprisingly little impacted by inflation expectations

Even with strong capex, US nonfinancial corporations are generating more cash than they are investing

Investor sentiment worldwide is positive, especially in AI-led Asia

Sectoral shift in US job openings

Meteoric rise in AI-related semiconductor exports fueling South Korea's export boom

Regional Fed surveys showing further manufacturing acceleration in August

Sharp drop in China demand for oil helping to limit impact of Middle East conflict on the price

Decades high real price of copper posing physical challenge to investment boom

Rising US long-term real yields point to strong demand for investment funding

US retail sales accelerate even as consumers remain gloomy

Retail gasoline price still well above pre-conflict level and now rising again

PMIs showing widespread revival of global economy

Crude oil price has returned to pre-conflict level but traffic through Hormuz still subpar

Surging orders for computers and electronics propelling durable goods orders

Next year's inflation forecasts are on the rise and above target

Disrupted global supply chains placing upward pressure on US goods prices

Construction of data centers has overtaken transportation construction in US

Elevated energy prices putting intense upward pressure on input prices around the globe

US is big leader in global surge in private AI investment

Larger-than-usual income tax refunds this year are supporting consumer spending

Sharply rising share of AI-related jobs

Inflationary impact of surge in oil prices larger in Europe than in the US

Futures market thinks the price of oil will recede significantly over the next six months

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Andrew Cates

**When the winners stumble**
The market retreat in the week to 16 October was striking for its pattern rather than its scale. Assets that had delivered the largest gains since the start of the year generally suffered the largest losses. For every ten percentage points of year-to-date gains, roughly 1.8 points were surrendered during the week (chart 1). Emerging-market equities and the Nasdaq were among the biggest casualties; broad US bonds and long-dated investment-grade credit edged higher. This looks more like a reversal of crowded positions than a wholesale reassessment of the economic outlook. But that distinction should not be too comforting. When market leadership is narrow, even modest doubts about its durability can prompt an outsized adjustment. Whether this episode proves fleeting will depend partly on the earnings and investment assumptions underpinning those earlier gains.

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**A global expansion with one powerful engine**
This week’s export data from Japan offer a revealing measure of the scale of the AI investment boom. Shipments of semiconductors and electronic parts are growing by more than 50% y/y, while exports of chip-making machinery have also surged. Total exports are rising at a much more modest pace (chart 2). Machinery exports are especially revealing: they reflect investment in future productive capacity, not merely demand for chips today. A weaker yen has inflated export values, but cannot plausibly explain the entire divergence. The strength of this investment cycle is real. So is its concentration. Much of the apparent resilience of global manufacturing now depends on the willingness of a relatively small number of firms to keep building computing capacity. The longer that continues, the more important the eventual returns on that investment become.

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**Britain’s awkward inflation arithmetic**
The latest UK labour-market figures complicate the outlook for inflation and interest rates. Private-sector regular pay growth, after slowing for much of the past two years, has levelled off at around 3% (3 month average, y/y) and edged higher in the latest monthly reading. Unemployment fell to 4.7% in the three months to August from 4.9 per cent in July, while payroll employment has recorded a modest increase (chart 3). Yet vacancies continue to decline, suggesting that demand for labour remains fragile. It would be premature to call this a renewed tightening of the labour market. Equally, the Bank of England cannot assume that wage disinflation will continue unaided. The uncomfortable possibility is that underlying pay pressures are proving sticky even as businesses remain reluctant to hire. That is precisely the combination that makes monetary policy difficult.

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**Housing bears the weight of high rates**
Across much of the advanced world, housing markets have reached a similar destination by different routes. Annual nominal house-price inflation has slowed to close to zero in the US, the UK, Germany and France; Canadian prices are still falling (chart 4). Adjusted for consumer-price inflation, all five markets are losing ground. Their mortgage systems, housing supply and ownership patterns differ substantially. What they share is a prolonged period of expensive finance. The consequences extend beyond homeowners’ paper wealth. Weaker housing markets weigh on construction, household confidence and the collateral available to support borrowing. They also constrain property-related tax revenues. Housing is one of the clearest channels through which more restrictive monetary conditions and higher bond yields are working. It helps explain why an economy that continues to grow can nevertheless feel sluggish to many households.

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**China’s investment problem deepens**
China’s latest figures this week challenge the idea that investment has simply migrated from property development to more productive industries. Real-estate investment is contracting by more than 20% y/y. Manufacturing investment has also turned negative, and investment in power, gas and water supply has followed it below zero after several years of rapid growth (chart 5). These are different sectors, with different drivers, but their simultaneous weakness is telling. Industrial production is still expanding by more than 5% y/y while retail sales are growing by barely 1%. China continues to produce far more vigorously than its households spend. That leaves growth dependent on exports at a time when trading partners are increasingly resistant to absorbing additional Chinese supply. For the rest of the world, the result is weaker Chinese demand alongside continued downward pressure on traded-goods prices.

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**The rising cost of power**
Electricity has continued to emerge as a major constraint on the very investment boom that has helped sustain growth. Wholesale prices have increased sharply across major markets over the past year: French prices are more than three times their earlier level, those in Spain and the UK have roughly doubled, and prices in the US Mid-Atlantic market have risen by close to 80% (chart 6). The causes are not identical. French nuclear availability and Iberian hydrological conditions matter, as do local generation and transmission bottlenecks. It would be too simple to attribute every increase to data centres. Nevertheless, growing demand from electrification and computing is arriving faster than power systems can always accommodate. This matters well beyond the technology industry. Higher electricity costs squeeze households and energy-intensive businesses before any promised productivity dividend from AI becomes visible. The paradox of this expansion is becoming clearer: the investment intended to make economies more productive may, in the meantime, make them more expensive to run at least in the short term.

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The global economy has proved remarkably resilient in the face of war, political uncertainty and persistently high borrowing costs. Yet resilience is not the same as strength. Growth has become increasingly dependent on a narrow investment boom, particularly in artificial intelligence, while its financial and physical costs are mounting. Last week's market retreat exposed the concentration of investor enthusiasm (chart 1), while Japanese exports revealed the growing importance of semiconductor investment to global industry (chart 2). Elsewhere, the picture is less reassuring. British wage disinflation appears to be stalling (chart 3), housing markets remain subdued (chart 4), and China's investment weakness has spread well beyond property (chart 5). Meanwhile, rising electricity prices point to another constraint on growth (chart 6). The underlying question is whether the investment sustaining the expansion can deliver sufficient productivity gains to justify its rising costs.

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Charts of the Week: Growth on Borrowed Strength

Kathleen Stephansen, CBE

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Initial claims for unemployment insurance dropped by 6,000 to 194,000 in the week ending October 17 from 200,000 in the week ending October 10, revised from 199,000. This is the lowest level since the July 18 week and suggests a relatively stable labor market. The four-week average was 197,750 in the October 17 week, down from 198,750 in the October 10 week, revised from 198,500. The Action Economics/Haver Analytics Survey looked for 200,000 claims to have been filed.

The total number of unemployment insurance beneficiaries—also known as “continuing claims”—rose 25,000 to 1.728 million in the week ending October 10, up from 1.703 million in the week ending October 3, revised from 1.710 million. This is the highest level since the August 29 week. The four-week moving average was 1.711 million in the October 10 week, up from 1.707 million in the October 3 week. The insured unemployment rate was unchanged at 1.1% in the October 10 week, where it has held since the week of August 29.

The insured unemployment rate varies greatly across individual states and territories. In the week ending October 3, no state had an insured unemployment rate above 2.00%; the highest was in New Jersey (1.98%). The lowest rates were in South Dakota (0.20%), Louisiana (0.29%), Florida (0.31%), Alabama and North Dakota (both 0.33%), North Carolina (0.35%), Arkansas (0.36%), Iowa and Tennessee (both 0.41%), Kentucky and Nebraska (both 0.43%), Kansas and Wyoming (both 0.44%), Idaho (0.45%), New Hampshire (0.47%), Georgia (0.48%), and Mississippi, Virginia and Wisconsin (all 0.49%). Rates in other notable states include Texas (0.89%), Pennsylvania (1.18%), Illinois (1.26%), New York (1.37%) and California (1.67%). These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They begin in 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986.

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- New claims declined by 6,000 to 194,000 in the week of October 17.
- Continuing claims rose by 25,000 to 1.728 million in the week ending October 10.
- The insured unemployment rate was unchanged at 1.1% in the week of October 10.

U.S. Initial Unemployment Claims Dropped in the Week of October 17

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Mortgage applications fell 5.3% w/w (-40.4% y/y) in the week ending October 16, the 7th consecutive weekly decline and after declining 2.7% w/w (-37.2% y/y) in the week ending October 9, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey. Applications for loans to purchase a house fell 7.3% w/w (-17.9% y/y) in the latest week, after declining 4.0% w/w (-16.1% y/y) in the October 9 week. Applications for loan refinancing fell 2.0% w/w (-58.6% y/y) in the October 16 week following a decline of 0.4% w/w (-56.0% y/y) in the October 9 week.

The effective interest rate on a 30-year fixed-rate loan fell 12bps to 7.63% in the week ending October 16 from 7.75% in the week ending October 9, and after rising for 8 consecutive weeks. The rate on 15-year fixed-rate mortgages fell 18bps to 6.91% in the October 16 week from 7.09% in the October 9 week. The 30-year Jumbo rate fell 19bps to 7.50% in the latest week from 7.69% in the October 9 week. The rate on a 5-year ARM declined 9bps to 6.87% in the October 16 week from 6.96% in the October 9 week.

The share of applications for refinancing an existing loan rose to 39.0% of total applications in the week of October 16 from 37.7% in the week ending October 9. The adjustable-rate mortgage (ARM) share of activity was unchanged at 10.5% in the latest week.

The average size of a mortgage rose 0.5% w/w (-10.3% y/y) to $372,100 in the week ending October 16, after declining 2.0% w/w (-7.5% y/y) to $370,200 in the week ending October 9. The average size of a purchase loan was unchanged at $444,700 in the October 16 week after declining 0.8% w/w in the October 9 week. The average size of a loan to refinance a mortgage rose 4.5% w/w to $258,400 in the week ending October 16 after declining 3.9% w/w to $247,200 in the October 9 week.

The Mortgage Bankers Association Survey covers 75% of all U.S. retail residential mortgage applications and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts. The base period and value for all indexes is March 16, 1990=100. The figures for weekly mortgage applications and interest rates are available in Haver’s **SURVEYS** database.

- Applications for loans to purchase and applications for loan refinancing both declined in the latest week.
- Interest rate on 30-year fixed-rate loans fell 12bps to 7.63%, the first decline in 8 weeks.
- Average loan size rose slightly in the October 16 week.

U.S. Mortgage Applications Fell in the October 16 Week

Robert Brusca

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Inflation in the United Kingdom is back to misbehaving in September. The HICP rendition of inflation posted a 0.5% increase, its second in a row, following a 0.6% increase in July. The CPIH, however, performed exactly the same, with a 0.5% increase in September and August, after a 0.6% gain in July. This is going to put the Bank of England's back up against the wall when it comes to making its next interest rate decision.

**Hot, hot, hot**: Inflation runs hot in the United Kingdom. The CPIH version shows a 6.6% annual rate over three months, a 4.2% pace over six months, and 3.6% over 12 months. This is a clear accelerating profile with inflation clearly over the 2% mark over each one of those horizons. A year ago, inflation was rising 4.1% year-over-year. There's very little here to provide any escape from the conclusion that interest rates need to go up and inflation is a problem that needs some strict attention.

**Core inflation is rising as well**: Core inflation in the U.K. under the CPIH measure rose 0.4% in September after rising 0.2% in August and 0.4% in July. The sequence of core inflation rates from 12 months inward shows a 12-month pace of 3.1%, a six-month pace of 3.2%, and a three-month pace of 4.1%. These increases are faster-paced step by step as horizons shorten. However, like the headline, all three of these metrics are above 2% and once again there is this accelerating trend in place, even for the core, and that has to be an even more difficult pill for the Bank of England to swallow.

**Inflation acceleration:** If we look at the tendency to accelerate, acceleration occurred in 58.3% of the categories in July; that proportion fell to 41.7% in August, and it was back up to 50% in September. So, as of September, the proportion of these categories showing acceleration is split pretty much 50/50, making it less of a clear acceleration imperative on volatile monthly data. However, over three months compared to six months, 75% of the categories are accelerating; over six months compared to 12 months, again 75% of the categories are accelerating; over 12 months compared to 12 months ago, that proportion drops to 41.7%. But the drop in the breadth of inflation is also related to the fact that the 12-month inflation rate had dropped from a year ago at 3.8% to 3.5%; it dropped more, from 4% to 3.1%, in the case of the core CPIH. In other words, inflation has fallen from a very excessive pace to a still excessive pace, and that drop is ‘endorsed’ by a drop in breadth. Breadth can reinforce direction. And now inflation and breadth both are rising – a bad sign.

**Inflation ranking**: We also can look at how inflation ranks compared to where it's been and on this basis that we wind up with another troubling finding. The HICP version of inflation has an 82nd percentile standing; the CPIH version also has an 82nd percentile standing and the CPIH core measure has a slightly higher 82.7 percentile standing. So, inflation is high even by historic experience; that compares current year-over-year inflation in September to inflation rates back to the year 2000. On that timeline, in fact, the median for inflation has a 77th percentile standing and the average pace for inflation has a 72nd percentile standing across categories. Now both of these are slightly lower than the actual CPIH version at a ranking of 82%. What that tells us is that inflation has been even more virulent in those categories that have a higher weight in the CPI.

**Summing up**
On balance, this is a poor report; it will probably put the Bank of England's back up against the wall to enforce another rate hike. It's hard to see how the central bank can look at these various measures of inflation and their path and decide to pass on a rate hike at its next meeting, so brace yourself.

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United Kingdom

U.K. CPI Goes Off the Rails Ahead of BOE Meeting

Winnie Tapasanun

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The Pending Home Sales Index (PHSI), a forward-looking measure of home sales based on contract signings, dropped 7.3% m/m to 66.0 in September following a 0.3% increase in August (unrevised) and a 2.6% decline in July (unrevised), data from the National Association of Realtors (NAR) showed, indicating a marked weakening in homebuying demand amid high mortgage rates and worsening housing affordability. September was the third m/m decrease in four months and the lowest PHSI level on record. The year-on-year rate decelerated to -11.3% in September, the deepest y/y fall since August 2023, from -4.7% in August (-0.8% in September 2025). The index had fallen 47.2% since its October 2021 high of 125.1.

The m/m drop in September pending home sales coincided with an increase in the average 30-year fixed mortgage rate to 6.86%, the highest since January 2025, after a 13-bps rise to 6.67% in August, according to Freddie Mac. These rates, while below a peak of 7.62% in October 2023, had remained above a low of 5.22% in August 2022 and more than double a record-low 2.68% in December 2020.

By region, September pending home sales showed a widespread decline, with the steepest m/m and y/y drop in the West. Sales in the West tumbled 9.2% (-15.0% y/y) in September after a 3.0% rebound in August, and sales in the South slumped 8.2% (-12.0% y/y) following a 2.4% August increase; both regions fell m/m for the third time in four months. Sales in the Midwest decreased 6.5% (-8.7% y/y) on top of a 1.8% August slide, and sales in the Northeast fell 4.2% (-9.4% y/y) after falling at the same pace in August; both regions declined m/m for the fourth straight month.

The pending home sales index measures sales at the time the contract for the purchase of an existing home is signed, similar to the Census Bureau's new home sales data. In contrast, the National Association of Realtors' existing home sales data are recorded when the sale is closed, which is usually a couple of months after the sales contract has been signed. In developing the pending home sales index, the NAR found that the level of monthly sales contract activity leads the level of closed existing home sales by about two months.

These PHSI data date back to 2001 and are available in Haver's **PREALTOR** database. Monthly and weekly mortgage interest rates can be found in the **USECON**, **WEEKLY**, and **SURVEYS** databases.

- PHSI -7.3% m/m (-11.3% y/y) to an all-time index low of 66.0 in Sept; third decline in four mths.
- Home sales down m/m and y/y in all four regions, w/ the steepest drop in the West (-9.2% m/m, -15.0% y/y).
- 30-year mortgage rate up to 6.86% in Sept., highest since Jan. ’25, weighing on homebuying demand and affordability.

U.S. Pending Home Sales Fall to Record Low in September Amid High Mortgage Rates

Economy in Brief: December 2006

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