Inflation cooling, some question data

The latest U.S. CPI report showed headline inflation running at approximately 2.7% year-over-year, down from roughly 3.0% earlier in the fall and below consensus expectations near 3.1%. Core CPI (excluding food and energy) slowed to about 2.6% YoY, its lowest reading since 2021, primarily driven by moderation in goods prices. However, this report follows a 43-day federal government shutdown, during which the Bureau of Labor Statistics was unable to collect its full CPI sample, forcing data interpolation across several categories. Several economists cautioned that this print may understate true inflation pressures, and Fed officials reiterated they will not base policy decisions on a single, potentially distorted data point.

• The missing data due to the government shutdown does make this report questionable
• The Fed is likely to wait for confirmation of the downtrend before incorporating it into its models
• However, if inflation is indeed moderating, it will give the Fed freedom to continue cutting rates in 2026
• The markets seem to have “believed” the number, as the S&P 500 rose over 1.5% in the two days following the announcement
• This could serve as the catalyst for the year-end “Santa Rally” that markets have been finding elusive

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Yields rise, led by Japan

Global bond yields moved higher this week, led by Japan after the Bank of Japan raised its policy rate to roughly 0.75%, the highest level in nearly 30 years. Japanese 10-year government bond yields climbed above 2%, a level not seen since the late 1990s, reflecting a decisive shift away from ultra-easy monetary policy. Despite the rate hike, the yen weakened to ~157 per dollar, suggesting markets remain skeptical that tightening will be sustained. The move reverberated globally, pushing U.S. Treasury and European sovereign yields higher. Japan’s policy shift matters because JGBs have long served as the anchor for global carry trades and duration exposure. Rising Japanese yields represent a structural tightening in global financial conditions.

• Japan is no longer suppressing global yields, a stark contrast to decades of policy
• During the summer of 2024, a spike in yields and a weak yen sparked a sell-off in global risk assets due to the unwind of the “yen-carry” trade
• While we have not seen the same this time, it is worth paying attention to
• The rise in Japanese yields has pressured global yields higher, and comes at a time when the Fed and other Central Banks have been lowering short-term interest rates
• Higher yields are a headwind to rate-sensitive parts of the economy, including real estate and “big-ticket” goods (those that require financing e.g. autos)

OpenAI raise shows capital intensiveness of industry

OpenAI is reportedly in discussions to raise up to $100 billion in new capital, a transaction that could value the company between $750 and $830 billion, making it one of the largest private fundraises in history. This would follow an October secondary transaction valuing the firm near $500 billion, implying a dramatic step-up in valuation in a short period of time. The capital would be directed primarily toward AI infrastructure, including data centers, compute capacity, and advanced chip procurement, underscoring how capital-intensive frontier AI has become. OpenAI’s annualized revenue is estimated in the $12–20 billion range, highlighting the gap between current cash generation and future capital needs.

• AI is evolving into a capital-heavy infrastructure business
• Valuations now hinge on long-term productivity gains, not near-term profits
• This comes on the back of news this week that Blue Owl was backing out of a $10bn data center project with Oracle, which was for OpenAI
• Anecdotally, this seems like some investors are beginning to question the long-term viability of investing in the industry
• This again draws parallels to the fiber optic overbuild during the Internet’s early days in the 1990s

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