Robust U.S. Jobs Report Lifts Dollar and Mortgage Rates, Lowers Rate Expectations Amid Pivotal Week for AI

Good Afternoon. This week was highly eventful for the economy and Gen AI. The economic releases section below provides details about the economy, but let me cover AI first. There is a famous quote by Victor Hugo: “No one can stop an idea whose time has come.” Gen AI seems to be one such idea whose time has come. It doesn't matter if you don’t believe in its potential or if the return on the CAPEX investments is unclear. This week's events show that leading corporations and investors worldwide are convinced of AI’s potential and are investing top dollars behind this innovation. More coverage on AI is in the Curated Insights section. Below are the key events from this week:

1. OpenAI secured funding at the valuation of $157bn from leading investors and corporations, including Nvidia.

2. OpenAI also secured a line of credit from the syndicate of major financial institutions.

3. Banks and investors reviewed OpenAI's financial statements and other material, and they were convinced of its profit potential considering the valuation and credit line. One such data point Sarah Friar (OpenAI CFO) shared is that ChatGpt has increased active users by 50 million in just last one month.

   

   Source: CNBC

4. Nvidia and Accenture announced a partnership to scale Enterprise AI.

5. In an interview, Nvidia CEO Jensen Huang said there is an insane demand for the new Blackwell chips.

6. OpenAI will transform from a non-profit to a for-profit company, leading to multiple high-profile departures, including Mira Murati (CTO) and three other founding team members. Expect OpenAI IPO in the future.

For the week:

• The S&P 500 is up 0.22%, the Nasdaq is up .10%, and the Dow 30 is up 0.09%.

  

  Source: Barchart

CNN's Fear & Greed Index now stands at 74 (Greed) out of 100, up 6 points from last week. Details here

The top five trending stocks on Reddit are Nvidia, SPY, Tesla, Meta, and Palantir. Read More

Here is a summary of this week’s key economic releases:

• Overall, there is robust economic data on all fronts this week. Only the manufacturing PMI missed the forecast. Nonfarm payrolls increased by 254,000 last month, surpassing the expected 150,000, while the unemployment rate fell to 4.1% from 4.2%. Previous job growth figures for July and August were revised upward by 72,000.

  

  
  

Target Rate Probabilities for Nov 7th FOMC Meeting:

After that robust employment data this week, the 50bp rate cut looks really off the table now, and it’s reflected below with a 97.4% probability of a 25bp cut.

* Data as of 5 Oct 2024 03:43:25 CT (CME FedWatch)

OpenAI closed its latest funding round on Wednesday. Below are the key points:

Funding:

• OpenAI raised $6.6 billion, valuing the company at $157bn, almost twice the ~$80bn valuation reported in February when employees sold their shares.

• The key investors are Thrive Capital ($1.25bn), Microsoft (~$1bn), Nvidia ($100mil), SoftBank ($500mil), Tiger Global ($350mil), Cathy Wood’s Ark Investments ($250mil), Altimeter Capital ($250mil), Khosla Ventures, Fidelity and MGX, with Nvidia being a surprise name. Nvidia's investment will mostly be funneled back to itself to buy new chips. 😄

• OpenAI told investors they can’t put money into its biggest private competitors.

• Investors can withdraw funding if Open AI fails to convert from a non-profit to a for-profit firm.

Line of Credit:

• The company also secured a $4bn line of credit, which can be extended by an additional $2bn. The loan is unsecured and can be tapped in the next three years. JPMorgan Chase, Citi, Goldman Sachs, Morgan Stanley, Santander, Wells Fargo, SMBC, UBS, and HSBC participated.

• The interest rate on the draw from the LoC will be the Secured Overnight Funding Rate (SOFR) plus 100 basis points. “This means we now have access to over $10 billion in liquidity, which gives us the flexibility to invest in new initiatives and operate with full agility as we scale,” OpenAI wrote in a Thursday blog post. Read More
  

Nvidia and Accenture have announced a strategic partnership to accelerate the adoption of generative AI in businesses. Nvidia CEO Jensen Huang says demand for next-generation Blackwell AI chip is ‘insane.’ Read More

Strong job growth in September has alleviated recession fears and positioned the Federal Reserve closer to achieving a soft landing for the economy, diminishing the likelihood of significant interest rate cuts in the next meeting. Read More

The dollar is set for its best week in two years as stronger-than-expected U.S. payroll data erases expectations of a 50bp Fed rate cut in November. Read More

Mortgage rates surged following a stronger-than-expected U.S. jobs report, which dampened hopes for significant rate cuts. Read More

Mark Zuckerberg became the world's second-richest person for the first time on Thursday, surpassing Jeff Bezos as Meta Platforms Inc.'s stock continues to rise.

Spirit Airlines is reportedly considering filing for Chapter 11 bankruptcy protection. The airline faces an Oct. 21 deadline to refinance debt due next year. Read More

Nike beat earnings expectations but fell short on revenue as it works to fix its product assortment and rework its approach to innovation. Despite Euromonitor projecting modest 2% growth in overall U.S. footwear sales and 5.6% growth in athletic footwear for 2024, Nike faces challenges with its North American footwear and apparel sales declining by 14% and 10% in the most recent quarter. Read More

Paychex Inc. reported a strong start to fiscal 2025, with Q1 earnings showing GAAP EPS that exceeded estimates and revenue reflecting a year-over-year increase despite challenges from the expiration of the Employee Retention Tax Credit program. Recently, the company launched three new products, a couple of which use the latest Gen AI capabilities. Read More

Constellation Brands Inc. reported strong performance in its beer segment for Q2 2025, with notable net sales and operating income growth. However, the company faced headwinds in its wine and spirits segment, which experienced a decline in both net sales and operating income. The company said higher employment has led to a recent deceleration in the growth rate in consumer demand for its products. Read More

Artificial Intelligence:

My Blog on the potential of AI:
AI will surely improve human productivity, and some benefits are starting to materialize, as I covered in last week's newsletter, where I shared the analysis from Bain & Company. However, I don’t think it will be able to match all human capabilities or replace humans, as some say. Please check my blog “Why AI Can’t Replace Humans” for more details.

How much human work can AI do in the next 25 years?: 
Vinod Khosla of Khosla Ventures is known for identifying and investing in many innovative start-ups. His company was one of the investors in the OpenAI this week. In his blog, Vinod Khosla recently mentioned that he estimates AI to perform 80% of the work in 80% of all jobs in the next 25 years, i.e., 64% (80% X 80%) of total human work. Knowing Mr. Khosla’s credentials, I trust this is the total opportunity size. However, I think it won't be easy to materialize the full potential of AI due to multiple factors. Below are the key points:

• Mr. Khosla only considers AI to reach 80% of total jobs, so he also thinks AI can’t do 20% of high-skill human jobs.

• Regarding this 80%, I think it’s too optimistic to assume AI can do 80% of the work. We should split this 80% into skilled vs. low skilled and estimate. I think AI can do 80% of the low-skilled human work and maybe 30% of the skilled work (for the reasons I mentioned in my blog).

• According to Statista Research, 44% of the global workforce is currently in low-skill jobs, expected to be 39% by 2030, so let's say ~40%. This number is far lower for the US, i.e., 16%.
  

  In summary, below are conservative estimates:

  

  So, the total opportunity size range will be 44% to 64%, and 44% is the conservative estimate or, say, ~45%. Now, this is just the total opportunity size. This number will be even lower for the developed markets, e.g., low-skilled jobs are just 16% in the US, so ~32%.
  

  Multiple challenges will exist to materialize this opportunity. There will be a new regulation and also pushback from a low-skilled labor force, where most gains are expected.
  

  Regulation: I work in the mature banking industry with established regulatory bodies such as the FRB, FDIC, OCC, etc. It’s been 16 years since the Global Financial Crisis, and regulation is still evolving, with the Basel III Endgame being the latest iteration. If a mature industry like banking takes ~20 years to regulate effectively, a new AI setup impacting multiple industries will have identical or even more time required to establish effective regulation, slowing down progress.
  

  Pushback from Low-Skilled Labor: The recent US port strike shows strong opposition to automation, with the union leader calling it “cancer.” So, it won't be easy for governments and companies to push AI quickly in the areas where it matters the most. However, eventually, it will happen. Mr. Khosla cited that in 1900, 40% of the US labor force was employed in agriculture; in 1970, it was 4%. It took three generations. He expects the AI cycle to be much faster, but it's hard to estimate.
  

  The two challenges I mentioned above can cause even the conservative/realistic ~45% opportunity size (over the next 25 years) to be adjusted down.
  

  In conclusion, AI is a long-term opportunity. Even if AI can do 20% of human work in the next 25 years, that will significantly improve the quality of life, especially for low-skilled labor. This topic deserves a detailed blog post, which I will write about soon. However, the last important thing I will mention here, which I agree with, is that, according to Mr. Khosla, most AI ventures will end in financial loss. In aggregate, more money will be made than lost, but by a small concentration of world-changing companies.

  
  

Top Risks for the Markets: A survey by Janus Henderson showed that high-net-worth investors have decreased their risk appetite in 2024 compared to 2023. Overall, the portfolio managers are still optimistic about the US markets but have identified below the top risks they are closely monitoring:

1. Concentrated Job Creation: 75% of the jobs created in the past year have been in the education and health services, government, and hospitality sectors. Lack of participation from across sectors could slow overall job growth.

2. AI capex spend: The commercial success of unprecedented AI capex spending needs to be monitored. Subpar gains in productivity will slow down the current spending.

3. Rise in loan delinquencies: The share of credit card and auto loan delinquencies has been the highest since the global financial crisis.

   

   Source: Janus Henderson