With Inflation Heading Lower, We Can Expect a Midterm Rate Cut

On “Jobs Thursday” we did not publish our usual “instant” analysis, partly because we were already on Bloomberg TV that morning and then on Bloomberg Radio.

Yields gained back some ground after the relatively weak jobs report (headline plus revisions was negative, the private sector underwhelmed and unemployment only dropped because the labor force participation rate dropped by a relatively large 0.3%).

I remain convinced that we will get a rate cut before the midterms, and it will be based on not only lower inflation (which I believe is coming) but based on metrics that are higher quality (in terms of timing and accuracy) that was has been used in the past, and those “better” data sources will (and already do) point to lower levels of inflation (Truflation, Zillow Rent, etc.).

The TV interview wound up focusing on AI. It wasn’t the topic I was most looking forward to, but was difficult to avoid when overnight headlines included:

• OpenAI potentially “giving” the U.S. a 5% stake
• Meta (META) offering to sell compute rather than using all of their compute for themselves
• Apple (AAPL) requesting the ability to use Chinese made memory chips, in phones to be sold in China

For each of these headlines, I think there is a positive spin and a negative spin. We will need time to see which is the correct take, though with current valuations and recent trading patterns, I’d be cautious on the AI story.

Government Investment

It certainly helped (INTC) (our top pick starting 2026 and 2025), so it could help other companies. On the other hand, plenty of chip companies, especially those with U.S. manufacturing, did extremely well and didn’t get the government involvement.

Is it a sign that, after allegedly postponing the IPO, there is a need for an “unconventional” partner?

Selling Compute

The compute created is so valuable to entities that regardless of how profitable your own usage is, selling some “excess” compute is the best strategy.

When did “excess” compute become a thing? Is this a “metaverse” moment, where the company pivots?

Chinese Chips

Apple’s request is limited in scope (Chinese chips in products sold in China). This reinforces our concept that, not just at the national level, but at the corporate level, there is a much higher degree of sensitivity to national security issues than before (this is a good thing).

The drive for AI and data centers has been inflationary, but in a way that had limited impact on consumers. Electricity yes, but other things seemed less obvious. It seems that we are at the point consumer electronics prices are going to be difficult to maintain, which would hit consumers.

When talking to investors and corporations, I still have a few main themes in AI:

• The need for the AI and data center industry to ramp up its community outreach: My view that this industry needs to do a better job convincing people why they not only want and need AI, but that they want it in their backyard.
• The comparisons to the fiber buildout during the dot-com boom: Ultimately the fiber got used, but there was a period of overbuild. The “excess” comment is what I keep coming back to on this subject.
• The risks of political backlash as politicians latch on to inflationary fears and/or job loss fears is real. Taxes? Restrictions? I don’t know how this plays out, but something that I thought was more of a 2028 issue, rapidly seems to be a 2026 issue.

Stock futures have rebounded from Thursday’s losses, but let’s give this a day or two, for the market to digest what some of these headlines really mean. Often “Sunday night futures” action has difficult following through to the start of U.S. trading, and I suspect that will be extra difficult this week, since it was not just a long weekend, but a very important 250^th anniversary long weekend, where a lot of people were far more focused on friends and family than markets (as it should be).