AI capex enters the Fed's inflation case with October hike pricing past even money

EU mid-market update: AI capex enters the Fed's inflation case with October hike pricing past even money; UK headroom halved and French CDS at post-2020 wides before either budget lands; Pezeshkian in New York with a Gulf slot scheduled and no Iranian bilateral.

Notes/observations

- Monday priced the same AI buildout at two completely different costs of capital. AMD jumped 9.6% to a record $613.31 and crossed $1T of market value, Meta rose more than 11%, the Philadelphia semiconductor index gained 4.3% and the Nasdaq closed at a record; at the same time SoftBank began marketing more than $11B of high-yield debt at roughly 9–10% to finance its OpenAI commitment, while its SB Energy vehicle has encountered similarly expensive debt around the 10% area. Public equities look to be capitalising the scarcity rents of the companies selling the accelerators, networking and AI products; credit is charging the entities that must buy those assets years before the associated cash flows arrive. The divergence is getting large enough to become part of the AI economics themselves: Big Tech is now supporting as much as $300B of data-centre/chip exposure through guarantees and special-purpose structures, while SoftBank increasingly replaces bridge financing with permanent expensive debt. AMD reaching $1T therefore says likely less about the cost of building AI than about who is currently allowed to pass that cost downstream. The suppliers are being valued as if compute remains scarce; the financiers are already asking what happens if the customers carrying the scarcity premium cannot earn their way out of 9–10% money.

- The seven-day Hormuz proposal circulating among traders looks suspiciously close to June’s failed ceasefire architecture. The unverified Iranian message—lift the U.S. blockade on Iranian ports and stop military operations around the Strait, and Tehran could reopen Hormuz within a week—recreates the same basic exchange embedded in the June memorandum, where Washington was to unwind the naval blockade while Iran restored safe commercial passage. What has changed is the bargaining environment: Saudi exports are already recovering through Hormuz, STS traffic around Oman has expanded, and only 17 commodity vessels crossed over the weekend versus 37 a week earlier, so the Strait is simultaneously more usable for barrels and less normal as a shipping system. Pezeshkian’s arrival in New York now gives that old bargain a physical negotiating venue just as Trump keeps the military option open.

- UK has lost roughly half its fiscal cushion without Parliament voting to spend another pound. August borrowing came in at £18.3B versus £15.5B expected, year-to-date borrowing is now £8.1B above the OBR forecast, and higher gilt yields have helped reduce fiscal headroom from more than £24B in March to just over £10B. Tax receipts are not collapsing; inflation-linked welfare and public-service spending plus a more expensive discount rate are doing the damage. That creates an awkward sequel to last week’s BoE discussion over long-gilt QT: reducing mechanical duration supply can make the market easier to clear, but it cannot restore budget headroom already consumed by the yield curve. The gilt market has effectively started editing the October 28 budget before Healey presents it.

- Alibaba’s most consequential AI number today is probably 20GW, not 5–10 trillion parameters. Eddie Wu says Alibaba Cloud wants more than 20GW of global data-centre capacity by 2032, while the new Zhenwu V900 arrives in Q1 2027 and can be assembled into clusters of as many as 500,000 accelerators. The model roadmap gets the headlines; 20GW turns the announcement into a six-year balance-sheet commitment. Alibaba Cloud external revenue was already growing 45% y/y in June and AI-product revenue has now posted twelve consecutive quarters of triple-digit growth, but June-quarter capex reached CNY67.7B and free cash flow swung to negative CNY44.7B. Owning the chip, model, supernode and customer does improve economics—but every idle rack now belongs to Alibaba as well. Shares rose more than 5% in Hong Kong after the announcement.

- Timing makes Bessent’s weekend AI talks with China look almost comically narrow. Washington proposed a bilateral AI notification mechanism for national-security-level incidents and a standing AI dialogue, while USTR said high-end chip export controls were not discussed. Xi arrives in the U.S. tomorrow for a September 23–25 state visit; forty-eight hours beforehand, one of China’s largest cloud operators has announced a domestic accelerator, half-million-chip clusters and enough planned data-centre capacity to make silicon independence an operating objective rather than a slogan. AI diplomacy is therefore being scoped around what happens after a dangerous system exists—incident notification, transparency, crisis communication—while the competition over who can build those systems fastest remains largely untouched. The stronger yuan adds another piece of summit choreography: the PBOC has allowed it toward 6.69/$, its strongest level in more than three years, reducing one obvious source of trade friction before Xi arrives.

- New York has become a waiting room for an Iran decision Trump has deliberately not made. Iranian state media says President Masoud Pezeshkian travels to New York today; Washington issued visas to the core Iranian delegation, and Trump has said he would be open to meeting him despite simultaneously keeping renewed military action on the table. The public White House calendar is revealingly asymmetric: Trump has a 2:45 ET meeting with Gulf leaders, while no Pezeshkian bilateral is scheduled and additions remain possible. Saudi Arabia, the UAE, Qatar, Oman, Bahrain and Kuwait therefore get a formal opportunity to frame Hormuz, Yemen and Houthi risk before any improvised U.S.-Iran contact. That is occurring just as Saudi Arabia has pushed crude back through Hormuz aggressively—around 14M barrels loaded onto seven supertankers on Sunday—while the damaged East-West pipeline still constrains the Red Sea alternative. Diplomacy is being conducted against an oil system that has already begun adapting faster than the politics.

- Zelenskiy is trying to put three very different assets under one ceasefire: Ukraine’s power grid, its grain exits and Russia’s refineries. He meets Trump today pushing an energy truce after Ukrainian drones inflicted substantial damage on Russian refining while Russian strikes intensified against Ukrainian power, ports and transport infrastructure; Trump has specifically raised concern about refinery damage. Press reports that Russia again damaged the Zatoka/Bilhorod-Dnistrovskyi rail bridge sharpen the asymmetry: roughly 3,000 grain wagons are reportedly headed toward the Danube and could require 26 days or more without the shortcut. Ukraine would therefore be giving up one of the few tools currently imposing direct revenue and fuel costs on Russia in exchange for protection of infrastructure whose failure hits winter electricity, farm liquidity and export cash flow simultaneously. Reuters has separately documented a sharp escalation in attacks on Ukrainian railways, with 1,700 railway facilities hit so far in 2026. The negotiation is not simply “stop bombing energy”; it looks like an attempt to decide which side’s economically valuable infrastructure becomes off-limits first.

- France has reached the same destination by a different route. French sovereign CDS has climbed to its highest since March 2020; the finance ministry projects debt at 119.3% of GDP this year and 121.7% in 2027. Lecornu is preparing €54B of savings, but those cuts must pass a fragmented parliament immediately ahead of a presidential election. The unpleasant arithmetic is that higher spreads themselves increase the amount of fiscal repair eventually required, so political difficulty and funding cost can reinforce each other before any actual budget defeat occurs. France is still funding normally; the market is simply charging in advance for the possibility that the promised consolidation arrives late, smaller or not at all.

- Trump’s meeting with Delcy Rodriguez tonight may contain more balance-sheet work than diplomacy. Venezuela’s delegation is already discussing $150–200B of sovereign/PDVSA debt, energy, mining and access to overseas assets with the IDB, IMF, World Bank and private counterparties; U.S. companies are simultaneously negotiating new oil and gold projects, while Halliburton has signed fresh Venezuela agreements and Exxon has been discussing a possible return. Trump gets another potential source of non-Middle-East crude; creditors get a restructuring process; U.S. service companies get a market whose infrastructure has spent years underinvested. The political normalization and the debt restructuring are increasingly the same transaction.

- SoftBank is pushing the OpenAI financing burden straight into public high yield. The group is selling more than $11B of unsecured dollar/euro debt, with reported early demand above $20B, largely to meet the next $10B OpenAI payment due in October; the dollar tranches are being marketed around 9–10% despite the BB+ rating. Its bondholders receive a fixed junk coupon while Son keeps essentially all of the upside if OpenAI’s valuation compounds from here. Strong books would therefore may say less about enthusiasm for AI models than about investors’ willingness to finance SoftBank’s liquidity bridge between today’s private-market marks and tomorrow’s hoped-for monetisation. The contrast with SB Energy, whose roughly $4.9B debt financing has met much cooler demand, is even cleaner: markets will lend against SoftBank’s existing asset stack and Arm-linked balance sheet far more readily than against an AI data-centre project whose cash flows are still largely prospective.

- Oura is a useful control experiment for Anthropic’s IPO hesitation. The smart-ring company has launched a roadshow at roughly $15.6B, seeking as much as $2.2B, after revenue rose 74% to $1.21B; Eli Lilly and Dragoneer are considering meaningful anchor orders. Anthropic, meanwhile, is contemplating pushing its own offering beyond the midterms and releasing another frontier model before listing as Astra eats into some enterprise mindshare. The public-equity window is therefore demonstrably open enough to price a fast-growing technology company despite 5% Treasuries. Anthropic’s problem is more peculiar: prospective shareholders are being asked to put a public-market multiple on a company whose product leadership can change between the roadshow and the first earnings call. A new model before the IPO is therefore partly product defence and partly an attempt to freeze the competitive snapshot on the day investors price the stock.

- AI capex has started appearing inside the Fed’s inflation argument, which is a much bigger macro shift than another semiconductor rally. Goolsbee said strong demand is now contributing materially to U.S. inflation and specifically pointed to booming AI investment alongside persistent services inflation; October hike pricing has climbed to roughly 56% from 43.5% a week ago. That creates a strange loop around today’s Alibaba announcement and the U.S. hyperscaler buildout: the sector investors expect eventually to raise productivity is currently consuming enough construction, electrical equipment, labour, power and financing to strengthen near-term demand. Central banks therefore have to finance the bridge between the expensive buildout and whatever productivity dividend comes later. AI can be disinflationary in the destination and inflationary on the way there.

- Cross-asset: yesterday’s AI rebound is still carrying Asia—MSCI Asia ex-Japan +0.75%, Korea roughly +1.6%, Taiwan near record highs—while Europe opened essentially flat at 642 on STOXX 600. The dollar index is around 100.4 and USD/JPY reached 157.47 despite Friday’s BoJ hike; Japanese authorities reportedly conducted a rate check last week, keeping intervention risk live. Brent has bounced roughly 1.7% to ~$102 after five down sessions, while the more actively traded November WTI contract is around $93.7; gold is -0.6% near $4,319 as higher-for-longer pricing reasserts itself. The Nasdaq closed at a record Monday after the semiconductor index gained 4.3%, with Meta +11.4% on early Muse enthusiasm. France remains the conspicuous European rates outlier even while equity volatility is subdued.

-Asia closed higher with NZX50 closing +0.4%. EU indices -0.5% to +0.2%. US futures +0.0-0.2%. Gold -0.6%, DXY +0.1%; Commodity: Brent -0.9%, WTI -1.6%; Crypto: BTC +1.3%, ETH +0.5%.

Asia

– Alibaba CEO Wu: Aims to make global data center capacity operated by Alibaba Cloud >20GW by 2032; notes the launch of the Zhenwu V900 chip in Q1 2027 - comments from the Alibaba Apsara Conference.

– China regulator has drafted new AI rules to protect minors - SCMP.

– South Korea said to affirm plans to seek $20B annual investment cap on US investments; both sides have not reached an agreement on the previously speculated Westinghouse stake investment; South Korea President Lee calls for sanctions against North Korea to be lifted in return for suspending nuclear program; South Korea is also considering nuclear and Alaska as the next US projects - financial press.

– South Korea's National Pension Fund said to be in talks for India govt bond investment license - press.

– India Central Bank (RBI) said to be again likely selling USD to support the Rupee currency - financial press.

– Taiwan Central Bank (CBC) is planning to meet with banks to ensure lending to companies - EDN.

– Indonesia nickel hub is planning to cut production; cites the impact of the El Nino driven drought - US financial press.

– Thailand Finance Ministry Official: Cabinet approves consumer subsidy scheme extension; to use THB40B for the extension.

– Fitch raises Sri Lanka to 'B-' from 'CCC+'; Outlook stable.

Europe

– Mercedes-Benz reportedly considering closing two plants if cost cuts can't be found - German press.

– Volkswagen China unit Head: China's passenger car market expected to decline ~20% in 2026.

– Reportedly UK PM Burnham to meet with EU Commission Pres Von Der Leyen tomorrow regarding EU car rules - press.

– Trump to meet with Denmark and Greenland leaders on Tues - Fox News.

– Hungary Ruling Party said to reject President's top prosecutor pick - press.

– (UK) Traditional banks seek fintech funding for UK banking hubs - FT.

Americas

– Anthropic request to dismiss Reddit lawsuit is denied; Suit related to AI scraping of content - press.

– IPSOS poll: Pres Trump's approval rating drops to 32%, lowest of his political career; Republican support falls to 73% v 82% a week earlier.

– White House releases President Trump's schedule for Tues: Trump is due to meet with Japan PM at 12:30 PM ET in New York; the GCC leaders meeting is due to be held at 2:45 PM ET.

– Reportedly Canada introduces bill to speed project reviews to one year - press.

– US, UAE oil companies considering Sacha Oil Field investment in Ecuador - press.

Conflict/tensions

-(IR) Traders circulating unverified press chatter saying Iran had conveyed to the Trump administration its intention to open the blockade of the Strait of Hormuz within "7 days" if US accepted demands such as lifting the blockade of Iranian ports.

– United Kingdom said to be close to agreement to help Saudi military defend against Houthis - press.

– G7 issues statement on the Middle East: Situation in Yemen represents an unacceptable threat to regional stability and security, to global energy security.

– Qatar official: Continue to work to facilitate an agreement between US and Iran, including short term one - Iran press.

Trade/energy

- France President Macron said to seek delay to EU methane regulation - press.

- France Pres Macron said to push EU to relax diesel and jet fuel rules amid crisis - press.

- US President Trump will propose $5B rebuild fund for Middle East energy - WSJ.

- EU Commission Pres Von der Leyen, Australian PM Albanese welcomed conclusion of FTA talks and progress on Horizon Europe; Discussed raw material cooperation.

- Canada Trade Min said the country is making great 'headway' in concluding the FTA with India; to continue to have talks with the US.

- Vietnam leader says deal with the US is 'close', denies re-routing China goods – US financial press.

- Turkey and U.S to cooperate on small modular reactors (SMR) - press.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [FTSE +0.17% at 10,757.72, DAX +0.08% at 25,594.77, CAC-40 +0.34% at 8,166.70, IBEX-35 +0.28% at 19,779.16, FTSE MIB -0.36% at 52,184.50, SMI +0.20% at 13,984.00, S&P 500 Futures -0.02%].

Market focal points/key themes: European equities edged higher on Tuesday, with the Euro Stoxx 50 rising 0.15%, the CAC 40 gaining 0.34%, the FTSE 100 up 0.17%, the IBEX 35 adding 0.28% and the DAX essentially flat at +0.08%, while the FTSE MIB slipped 0.36%, extending Monday’s rebound as softening crude prices and fresh Middle East diplomatic signals supported risk sentiment. Brent futures extended the prior session’s 3% decline amid reports of successful alternate routes out of the Persian Gulf, while President Trump’s openness to direct talks with Iranian President Pezeshkian further deflated energy-risk premia, even as French sovereign CDS jumped to its highest level since March 2020 on fiscal-deficit and political-gridlock concerns. The most notable individual movers were Allegro, surging 11.5% after first-half results beat expectations and management raised its 2026 outlook, and Kingfisher, rising 9.5% on an H1 profit beat and higher full-year guidance, against Ericsson’s 4.0% drop on a Morgan Stanley downgrade to Underweight and TP ICAP’s 3.5% decline following board and management changes. Support also stemmed from the Federal Reserve’s recent rate hike and ECB President Lagarde’s reaffirmed data-dependent stance, though desks remained focused on whether UN-week diplomacy can deliver lasting de-escalation or whether core-European fiscal strains will pressure valuations into the final quarter.

Equities

- Consumer discretionary: Kingfisher [KGF.UK] +9.5% (H1 adjusted pretax profit beat expectations, prompting higher FY profit guidance; the third tranche of its £300m buyback also begins), TUI [TUI1.DE] -2.0% (trading update; sees booked Rev over the last four weeks was 1% below Winter 2025/26), Burberry [BRBY.UK] +3.0%, LVMH [MC.FR] +0.5% (advanced despite RBC downgrading both to Sector Perform from Outperform and cutting LVMH's price target to €475 from €575).

- Healthcare: Roche [ROG.CH] +1.0% (enicepatide met the primary endpoints in Phase II trials covering type 2 diabetes and obesity).

- Technology: ASM International [ASM.NL] +1.0% (European chip read-through from the overnight US semiconductor rally led by AMD, Intel and Arm), Prosus [PRX.NL] +4.5% (Tencent holding read-through after the Chinese group rallied on its AI image-model launch, alongside new AI and product leadership appointments at Prosus).

-Telecom: Ericsson [ERICB.SE] -4.0% (Morgan Stanley downgraded to Underweight from Equal Weight with a SEK90 price target).

Speakers

- (US) Fed's Musalem (non-voter, hawk): When stripping out supply-related factors, inflation is still too high at up to 3% - interview comments.

- (US) Pres. Trump: Fake news is a threat to democracy, and I will do whatever is necessary to make sure that the USA Thrives. Make America great again!

- (SA) UK PM Burnham says he has agreed to request from the Saudis a time-limited defensive air-to-air refueling to assist in stabilizing the region.

- (UR) EU Foreign Affairs Policy Chief Kallas: EU needs to send more assets to the Red Sea to protect shipping; Would need 10 more naval vessels in the Red Sea.

- (US) Transportation Secretary Duffy: Telecom lines have been repaired, all airport operations in the Northeast are 'resuming'.

- (EU) ECB Lane: European economy should continue to grow at a steady, but moderate pace provided the energy shock does not intensify - Le Temps.

- (FR) France President Macron: Discussed Ukraine-Russia energy strikes with Trump; To discuss halt to energy strikes with Ukraine President Zelensky.

- (PH) EU Von Der Leyen: Spoke to Philippines President Marcos and we just agreed to FTA.

- (AU) RBA Gov Bullock: It has been a 'bit of a wild ride' as Gov; unemployment rate of 4.5-5.0% would probably ease inflationary pressure - [Fireside Chat with Michele Bullock, Governor] Committee for Economic Development of Australia (CEDA), The Fullerton Hotel, Sydney NSW.

- (NZ) RBNZ Gov Breman said the recent increases in global oil prices and longer-term interest rates reflect the 'challenging' environment; sees risks inflation could overshoot forecasts - US financial press.

- (KR) Bank of Korea (BOK) board member Chang Yong-sung reiterated to assess inflation and growth for rate hikes; cites the central bank's financial stability report – financial press.

- (EU) Trade Commissioner Sefcovic: Reached trade agreement with Philippines, deal to liberalize over 94% of tariff lines; To visit China between Oct 8-9th for trade talks.

- (IN) India Fin Min Sitharaman: Every disagreement should not become a litigation; Govt is worried over rupee (INR) depreciation.

Economic data

- (BE) Belgium Sept Consumer Confidence: -10 v -7 prior.

- (IS) Iceland Aug Wage Index M/M: +0.1% v -0.3% prior; Y/Y: 5.7% v 5.7% prior.

- (TW) Taiwan Aug Unemployment Rate: 3.3% v 3.3%e.

- (TW) TAIWAN AUG EXPORT ORDERS Y/Y: 71.4% V 63.0%E.

- (ES) Spain July Trade Balance: -€5.2B v -€7.7B prior (early release).

- (PL) Poland Aug Real Retail Sales M/M: -0.3% v +0.6%e; Y/Y: 3.8% v 5.0%e.

- (DK) Denmark Sept Consumer Confidence Indicator: -13.7 v -13.1 prior (update).

- (TR) Turkey Sept Consumer Confidence: 91.9 v 90.8 prior.

- (ZA) South Africa July Leading Indicator: 118.2 v 119.3 prior.

- (FR) France July Retail Sales (ex-Auto) M/M: 0.8% v 0.4% prior.

- (UK) AUG PUBLIC FINANCES (PSNCR): +£10.0B V -£26.8B prior; net borrowing: £18.3B v £15.5B.

- (FI) Finland Aug Unemployment Rate: 9.1% v 9.9% prior.

- (NL) Netherlands Aug House Price Index M/M: -0.1% v +0.5% prior; Y/Y: 3.3% v 3.9% prior.

- (NL) Netherlands Sept Consumer Confidence: -33 v -34 prior.

Fixed income issuance

- (UK) DMO sells £4.75B in new 4.625% MAR 2032 gilts; AVG yield: 4.843% V 4.613% prior; bid-to-cover: 3.07X V 3.34X prior; tail: 0.4BPS V 0.2BPS prior.

- (PH) Philippines sells PHP30.0B in 5-year Bonds: Avg Yield: 7.438%.

Looking ahead

- 05:30 (DE) Germany to sell €5.0B in 2.90% Oct 2031 BOBL.

- 05:30 (HU) Hungary Debt Agency (AKK) to sell 3-Month Bills.

- 05:30 (ZA) South Africa to sell combined ZAR2.55B in 2038, 2039 and 2042 bonds.

- 05:30 (EU) ECB allotment in 7-Day Main Refinancing Tender (MRO) (prior €14.892B with 74 bids recd).

- 05:40 (UK) BOE allotment in 6-month GBP-enhanced liquidity repo operation (ILTR).

- 06:00 (UK) Sept CBI Trends Total Orders: No est v -25.0 prior; Selling Prices: No est v 22.0 prior.

- 06:00 (IE) Ireland Aug PPI M/M: No est v 3.2% prior; Y/Y: No est v 7.3% prior.

- 07:00 (RU) Russia announcement on upcoming OFZ bond issuance (held on Wed).

- 07:00 (BR) Brazil Central Bank (BCB) Sept Minutes.

- 08:00 (PL) Poland Aug M3 Money Supply M/M: 0.8%e v 0.3% prior; Y/Y: 11.4%e v 11.3% prior.

- 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to leave Base Rate unchanged at 5.50%.

- 08:00 (MX) Mexico July Retail Sales M/M: No est v -0.2% prior; Y/Y: No est v 2.7% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:15 (US) ADP Preliminary Employment Change for 4-weeks ending Sept 5th: No est v +16.25K prior.

- 08:30 (US) Sept Philadelphia Fed Non-Manufacturing Activity: No est v -10.6 prior.

- 08:55 (US) Weekly Redbook LFL Sales data.

- 09:00 (NG) Nigeria Central Bank (NBN) Interest Rate Decision: No analyst estimates; current level is 26.50%.

- 10:00 (US) Sept Richmond Fed Manufacturing Index: No est v 4 prior.

- 10:00 (EU) Euro Zone Sept Preliminary Consumer Confidence: -16.0e v -15.5 prior.

- 11:30 (US) Treasury to sell 6-Week Bills.

- 13:00 (US) Treasury to sell 2-Year Notes.

- 15:00 (AR) Argentina July Wages M/M: No est v 2.9% prior.

- 16:30 (US) Weekly API Crude Oil Inventories.

- 17:00 (KR) South Korea Sept Consumer Confidence: No est v 104.5 prior.

- 19:00 (AU) Australia Sept Preliminary Manufacturing PMI: No est v 52.0 prior; Services PMI: No est v 53.2 prior; Composite PMI: No est v 52.7 prior.