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On AI’s Rollercoaster Ride & Canada’s Moneyball
Frontier AI models are debuting fast and furiously, with no sign of “pacing” yet. Today, Melissa takes stock of the AI boom, breaking down a host of recent developments into bullish, mixed, and bearish categories. Net, net, we’re bullish on the AI boom, fueled by exploding demand and enormous infrastructure investment. But we acknowledge caveats including uncertain returns on investments and risk from credit exposure. … Also: Canada is taking a strategic “Moneyball” approach to filling the hole that lost trade with the US is leaving in its economy, William reports. Trade agreements with numerous smaller economies are in the works.
Prospect of Accelerating Wage Growth In A Strong Economy
I. Is Wage Growth Accelerating? Wage growth signals labor market conditions. Just as shortages of goods tend to push prices higher, worker shortages tend to push wages higher. When labor demand outstrips labor supply, employers must compete more aggressively for workers, resulting in faster wage growth. Former Fed Chair Jerome Powell's framework for assessing labor-market tightness compares labor demand, using the sum of household employment plus job openings, with the labor force (chart). By that measure, demand has slightly exceeded supply for four straight months, the longest such streak since March 2023. Powell's measure of excessive labor demand correlates positively with the Atlanta Fed's Wage Growth Tracker, which may be starting to increase (chart). The Wage Growth Tracker rose to 4.1% y/y in August, the fastest pace since September 2025 (chart). Wage growth for job switchers accelerated to 5.0%, the strongest since June 2024. Average hourly earnings growth slowed to 3.1% y/y in August, the weakest pace since 2021 (chart). We place greater weight on the Wage Growth Tracker because it is less affected by workforce composition shifts. For example, the retirement of higher-paid Baby Boomers can depress average hourly earnings even when underlying wage growth remains firm. So what's the verdict? The labor market isn't tight enough yet to trigger a significant acceleration in wage growth. However, labor demand has been firming while labor supply is being constrained by tighter immigration policies and the ongoing retirement of Baby Boomers (chart). As a result, wage growth is likely to move higher as labor-market conditions continue to tighten. A sustained pickup in wage growth would add to the list of inflationary pressures that already includes energy, tariffs, and the AI buildout. For now, the good news is that unit labor cost (ULC) inflation rose just 1.4% y/y in Q2 (chart). ULC is the ratio of hourly compensation to productivity. II. US Economy Recent economic indicators continue to confirm that the US economy is booming. That's great for corporate earnings. On the other hand, it is one reason bond yields are rising. In our view, bond yields are not currently high enough to slow the economy, which is less interest-rate sensitive than it was in the not-so-distant past. Consider the following: (1) JOLTS. Job openings fell to 7.1 million in August, the lowest since March (chart). We wouldn't read too much into the monthly decline, however, given the series' volatility. The six-month moving average rose to its highest level since March 2023 and has increased for five straight months. Similarly, 35% of small businesses reported unfilled positions in August, well above the historical average of 24%. Contrary to the widely accepted "no-hires-no-fires" description of the labor market, hires totaled 5.2 million in August, slightly exceeding separations (layoffs plus quits) (chart). Indeed job postings turned positive on a y/y basis for the first time in four years, suggesting that labor-market activity continued to strengthen in September (chart). (2) Consumer confidence. How do consumers perceive the current state of the labor market? September's Conference Board data show 54.5% of respondents say jobs are available, above the long-run average of 48.3% (chart). Those saying jobs are hard to get rose from 20.3% to 21.9%. (3) Consumer spending. As expected given the ongoing strength in the labor market, consumer spending remains robust. Redbook same-store retail sales rose 8.2% y/y during the week ended September 25, remaining well above the 2025 average of 5.8% (chart). (4) Manufacturing. Manufacturing activity remains strong too. The average of the five regional Fed manufacturing surveys remained elevated at 13.4 in September, suggesting that the national ISM M-PMI likely remained solidly in expansion territory during the month (chart). Meanwhile, the average prices paid and received measures rose to their highest levels since 2022, indicating that upward pressure on consumer prices is likely to persist (chart). III. Fed Speak Not surprisingly given the latest news, two voting FOMC members recently made hawkish comments. New York Fed President John Williams said that "if the economy evolves in a manner broadly consistent with my forecast, one further upward adjustment of the federal funds target range may be appropriate late this year." The comment suggests that Williams still expects another rate hike but is willing to be patient, potentially waiting until December before acting. Similarly, Fed Governor Michael Barr said that "in my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion." Our view remains that the Fed should at least reverse last year's three 25bps "insurance" cuts. When making those cuts, Fed policymakers underestimated the economy's strength and were overly confident that inflation was on a sustainable path back to the 2.0% y/y official target. Two additional rate hikes would better align monetary policy with the current balance of risks to the Fed's dual mandate.
On Australia & The Global Mountain Of Debt
The Reserve Bank of Australia is tightening monetary policy to corral stubbornly high inflation and limit imported second-round inflationary effects from the Middle East war. Australia serves as a bellwether for the global economy, argues William, so its challenges presage the same for other economies. … Aggravating Australian inflation stickiness are hot services inflation rates and years of productivity declines. … Also: Mountainous government debt globally hasn’t alarmed global financial markets much, yet. Will it when money is no longer cheap? William looks at the risks of such high debt, particularly for emerging market economies, and the potential responses of governments.
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