It was an eventful week. Tuesday’s midterms delivered a decisive “blue wave” as Democrats won both chambers, ushering in divided government and narrowing the administration’s legislative runway. Republican tax and spending initiatives will be harder to advance, while Democratic priorities face a presidential veto and the Senate’s 60-vote filibuster threshold (report).

Markets rallied on Wednesday before reversing on Thursday as investors reassessed the implications of a Democratic Congress and key gubernatorial gains for AI infrastructure and data-centre investment. AI-related stocks led the sell-off, with the Nasdaq plunging nearly into correction territory. Markets were up on Friday on a strong jobs report, but remained on track to end the week lower. Oil prices plunged by over $10/barrel to about $90/barrel for the WTI benchmark on expectations of an earlier end to the Iran conflict.

The equity sell-off likely tightened financial conditions, although lower Treasury yields mitigated the impact. As this week’s report notes, conditions remain accommodative historically, with tightening driven mainly by market volatility from repricing of near-term rate expectations and concerns about AI valuations rather than broad credit restrictions. This week’s Fed’s Senior Loan Officer Opinion Survey showed slight tightening in business-loan standards, but nothing concerning.

Tighter financial conditions have yet to meaningfully slow the economy. The new Congress inherits a resilient economy with growth likely to accelerate to 2.5% Q4/Q4 this year from 2.0% in 2025. The downside is higher inflation. This week’s ISM surveys highlighted that tension. October’s services index edged lower, while manufacturing counterpart continued to rise, with both remaining above 50 and signalling expansion. But, their prices-paid components have remained elevated, nearing pandemic-era readings and raising the risk of persistent cost pressures (Chart 1).

Higher interest rates and months of elevated gas prices may be starting to weigh on consumer spending, particularly on big-ticket items. Vehicle sales fell to an annualized 15.5 million units in October. Higher tax refunds, financial-market wealth gains and job growth have supported consumer spending and debt payments despite inflation, but resilience could weaken if these supports falter. Our report shows rising 30-day mortgage delinquencies among prime and super-prime borrowers and a growing share of consumers devoting more than 40% of income to debt payments.

Against this backdrop, Friday’s payroll report offered reassurance. Payroll gains handily beat expectations, rising 165k in October (Chart 2). Upward revisions added to the report’s strength, with August and September revised up 84k in total. The unemployment rate edged down to 4.1% from 4.2%. Attention now turns to next week’s CPI inflation report, likely to show inflation remains too hot amid a resilient economy and labour market, leaving the runway open for another Fed rate hike in December. Markets agree, pricing about 75% odds of a December hike, up from 70% a week ago.

Ksenia Bushmeneva, Economist | 416-308-7392