Charts of the Week: When Expectations Meet Reality

Summary

• Democrats secured control of both houses of Congress in the US midterm elections, ending unified Republican control & creating divided government for the remainder of President Trump's term.
• Concerns about living costs & the war with Iran influenced voting patterns, contributing to Democratic gains that exceeded expectations.
• Divided government may limit further tax cuts & public spending while complicating budget negotiations & federal borrowing.
• Confidence in the AI investment boom has weakened due to doubts over financing, valuations, & returns.
• Greater scrutiny of data centres & energy demand adds uncertainty to the market environment.
• Forecasters have revised policy-rate outlooks upwards more sharply than long-term bond-yield forecasts, reflecting a divergence in expectations.
• In Japan, long-term yield forecasts have risen more sharply than policy-rate expectations due to concerns about government borrowing & fiscal sustainability.
• The South Korean KOSPI index has fallen sharply since its June peak while consensus growth projections have continued to improve.
• Demand for mortgages, commercial property loans, & business credit in the US has weakened sharply according to the latest Federal Reserve loan officer survey.
• Large-scale technology construction is sustaining aggregate capital spending even as conventional private sector investment remains lacklustre.
• US banks have expanded lending to non-bank financial institutions at a remarkable pace, making these loans a larger share of bank balance sheets than before the pandemic.
• Manufacturing PMI surveys indicate returning supply constraints with longer delivery times & renewed pressure on input costs across major economies.
• Competition for electrical equipment, specialist components, tariffs, & disrupted trade routes are contributing to supply strain.
• France's debt burden has risen markedly since 2019 while its primary balance & credit standing have deteriorated.
• Japan & the UK face scrutiny regarding their fiscal positions, while several countries previously viewed as Europe's fiscal weak links have reduced debt ratios.
• Sovereign bond investors are paying closer attention to fiscal credibility as the traditional division between prudent core & vulnerable periphery no longer fits the evidence.