The economy is running hot, the Fed is reaching for the thermostat, and Intel lost a third of itself · Daily Briefing

In 30 seconds: A wave of US economic data showed strong business investment and consumer spending in Q3 but hotter-than-expected core PCE inflation and rising benefit costs, complicating the Fed's path and fueling debate over whether further rate hikes are necessary. Brad Setser's analysis shows China's current account surplus has surged to approximately $900 billion over the past four quarters—over 4% of GDP—significantly understated in official figures, implying substantial yuan undervaluation that the IMF has consistently missed. Iranian limpet mine attacks in the Strait of Hormuz, record-low US distillate inventories, and strong refining margins drove Big Oil earnings beats for ExxonMobil and Chevron, while geopolitical risk kept energy markets on edge ahead of US midterm elections. A broad tech selloff drove Intel to a record single-day drop of 28.5%, Alphabet to its worst session ever (-12.6%), and pushed the Nasdaq 100 into its third correction of the year, with semiconductor stocks and mega-cap tech bearing the brunt of the damage.

Business investment up 12.7% in 3Q26. On the bright side, business investment surged 12.7% on a quarter-over-quarter annualized basis, the highest since 3Q20. Real final sales to private domestic purchasers, the measure that strips out inventories and trade to show you what the domestic economy is actually doing, ran at 4.9%, up from 4.6% in 2Q26. They are also not saving much: the September personal savings rate stood at 3.8%, the first reading with a 3-handle since 2022. The inflation picture is less cheerful. Core PCE on a three-month annualized basis jumped to 2.9%, up from 2.2% previously. Supercore measures for both CPI and PCE moved upward in September, both heading in the wrong direction and further away from the Fed's 2% target. ECI state and local wages: 0.6%. U.S. wage growth: 3.1%. Private sector pay excluding incentive-paid occupations slowed to 3.1%, the lowest since Q1 2021. So where does this leave the Fed? The St. Louis Fed President judged that additional firming of monetary policy will be necessary, and soon. His more likely scenario: inflation stays too high unless the Fed raises rates further. The dovish counter: the strongest case on inflation is that everything in the labor market looks like what you would expect in a roughly 2% inflation world, with inflation falling, not rising. Rate hike odds: down 74% to none. The Chicago PMI printed 55.3, slightly below the 56.0 expected.

There is a number that should be getting more attention than it is. China's current account surplus over the past four quarters has reached approximately $900 billion, or roughly 4% of GDP. That is a very large number. The balance-of-payments goods and services balance jumped by $75 billion in Q3 last year alone. The headline figure is already striking, but the argument is that it remains significantly understated even so. Gold: $3,896.20. China is importing a lot of it, and every ounce shaves a little off the surplus that shows up in official statistics. Of the $900 billion in net financial outflow associated with that surplus, roughly $700 billion appears to be denominated in foreign exchange rather than yuan. That compositional detail matters if you are trying to figure out what the currency should be worth. The IMF, for its part, has not covered itself in glory here. the IMF really missed the second China shock and the rise in China's surplus; a year ago the IMF's flagship external report forecast a surplus of under $400 billion, or 2% of GDP. The rest of us can just call it a miss.

The Strait of Hormuz is back in the threat matrix. Iranians in a small speedboat attacked a tanker by attaching limpet mines to the hull first time since 2019, suggesting a change in tactics by Tehran. Two explosive devices were attached to the hull above the waterline. On the supply side, US total oil production hit 22 million barrels per day in August, the first time above 22 million barrels per day, revised up 301,000 barrels per day from the previous Aug estimate based on weekly data. And yet demand is telling a different story. US total oil demand came in at 20.595 million barrels per day in August, the lowest since 2022 for August readings. Diesel demand was very weak, lowest for the month since Covid-19 era. Gasoline demand was the weakest for August since the pandemic. The hurricane season, for its part, was one of the weakest in recent history, removing one variable that might have tightened balances further. The real pinch is in distillates. US distillate stocks sat at 103 million barrels as of October 23, the lowest for this time of year in more than 40 years of weekly data, even with refiners running almost flat out to maximise production. The clean products shortage (mostly diesel and jet fuel) breaks down in thirds: a third is directly the Persian Gulf; another third is China (which is linked to the Middle East); and a third is Russia-Ukraine (which he thinks is going to take a "lot longer" to resolve). ExxonMobil 3Q earnings delivered strong results driven by high oil and gas prices and sky-high refining margins. ExxonMobil guided investors to expect a similar level of buybacks next year as in 2026. Chevron 3Q earnings similarly posted strong results, profiting from sky-high refining margins and record refining throughput, though Chevron used the windfall to cut debt further rather than increase share buyback size. Natural gas settled at $2.89, down 2.24% on the day.

Sometimes the market decides that the future is worth less than it was yesterday, and it communicates this by setting several things on fire at once. The market does not owe you a single explanation. Gold: $3,896.20, down 3.35% on the day.