One of this week’s key data points was released today: the US employment report, with potentially important implications for the Fed’s next interest-rate decision.

The US economy created far fewer jobs than expected in September, pointing to a notable softening in the labor market. Nonfarm payrolls increased by just 29’000, significantly below expectations of around 84’000, while the unemployment rate rose to 4.2% from 4.1%.

The weakness was reinforced by substantial downward revisions to previous months. August payroll growth was revised from +162’000 to +133’000, while July was revised into negative territory at –10’000. Combined, the revisions removed around 60’000 previously reported jobs.

The market reaction was immediate. Expectations for another Fed rate hike in October fell sharply, with the weak employment report significantly reducing the probability of further near-term monetary tightening.

Markets: long-awaited relief for the bond market retreating from the multi-year highs reached earlier this week

• Equities: Moving higher with Tech in the top position

• Bonds: yields falling sharply - US 2y yield above 4.78%, US 10y yield above 5.20%, Japan 10y yield 3.11%

• Commodities: Oil prices falling on news Europe will release oil reserves, WTI at USD 89/barrel and Brent around USD 99/barrel;
  Precious metals prices higher, gold USD 4’185/oz, silver USD 61/oz

• Currencies: US dollar weaker - Japanese Yen unchanged USDJPY 158

• Cryptos: higher - Bitcoin around USD 86k

• Volatility: The VIX index higher, back below 16 (good opportunity for hedging!)

My View: The market reaction looks very short-sighted to me.

Investors are once again celebrating weaker economic data because it reduces the probability of another Fed rate hike. In the very short term, that is understandable: lower rate expectations provide relief for bonds and support equity valuations.

But the underlying message from today’s report is hardly positive.

The US labor market appears to be losing momentum considerably faster than expected, while previous employment numbers have again been revised lower. At the same time, inflation remains above the Fed’s target, energy costs remain elevated and financial conditions have tightened substantially as bond yields have surged.
This creates an increasingly uncomfortable combination: slower economic momentum without inflation having been fully defeated. As Fed Chair Kevin Warsh recently emphasized, “inflation is too high for too long.”

For the Fed, the situation therefore becomes more complicated rather than easier. A weaker labor market reduces the room for heavy additional tightening, while persistent inflation limits the room for meaningful easing.

For equities, I therefore see little reason to interpret today’s weak employment report as fundamentally bullish. Lower yields provide short-term relief, but weaker growth ultimately means weaker earnings potential.

The market may currently celebrate the reduced probability of another rate hike. The more important question, however, is increasingly becoming: Why should the Fed no longer be able to hike?
If the answer is a rapidly weakening economy, today’s “good news” for markets could ultimately turn out to be bad news after all.

Middle East crude oil flows are returning close to normal, with the 10-day average of exports reaching 17.5 million barrels per day, around 98% of pre-war levels. The recovery has been supported by Saudi Arabia restoring flows through its East-West pipeline.

However, the improvement in crude exports masks continued severe disruption in refined fuel supplies. Refined products shipped through the Strait of Hormuz are averaging only 677’000 barrels per day, compared with 3.6 million before the war. Combined crude and product shipments remain at around 80% of pre-war levels.

The resulting global fuel shortage, compounded by Ukrainian attacks on Russian refineries, has pushed diesel prices in the US to record highs. This represents an important economic risk, as higher diesel prices increase transportation and production costs and can add further inflationary pressure.

Meanwhile, security conditions in the Strait of Hormuz remain far from normal. Iran continues to attack tankers, forcing exporters to adopt alternative logistics. More than 70% of crude crossing Hormuz in August was transferred between tankers off the UAE or Oman, using a shuttle system protected by the US military.

Markets:

• Equities: Mixed - Asian markets positive this morning, Europe down while US markets are more or less unchanged thanks to tech sector

• Bonds: yields moving higher - US 2y yield above 4.85%, US 10y yield above 5.31%, Japan 10y yield 3.10%

• Commodities: Oil prices higher, WTI at USD 92/barrel and Brent around USD 102/barrel;
  Precious metals prices marginally lower, gold USD 4’150/oz, silver USD 60/oz

• Currencies: US dollar moving higher - Japanese Yen unchanged USDJPY 158

• Cryptos: unchanged - Bitcoin around USD 84k

• Volatility: The VIX index higher, above 17 (last chance for hedging!)

My View: Crude oil availability has improved, but the broader energy crisis has not normalized. Instead, pressure is increasingly shifting toward refined fuels, particularly diesel, while Middle East exports remain dependent on costly and potentially unsustainable security arrangements.

I also continue to see upside pressure on oil prices. Demand should remain elevated as depleted inventories need to be rebuilt, while the risk of renewed supply disruptions remains significant.

The US is relatively well positioned to manage its domestic oil requirements. However, regions that remain heavily dependent on imported energy, particularly Europe and Asia, are more exposed to continued supply constraints.

At the same time, the shortage of refined products is unlikely to disappear quickly. This keeps the risk to energy prices tilted to the upside and could maintain inflationary pressure even as crude oil flows improve.

Meanwhile, stress in the bond market continues to intensify. With the US 10-year yield above 5.3%, financial conditions are tightening further.
Bonds are already sending a clear warning signal. The question is what follows next.
The longer yields remain at these levels, or continue to rise, the greater the pressure on equity valuations, financing costs, leveraged positions and economic activity.

I increasingly believe that the entire market structure is vulnerable to a sharp adjustment. That does not mean markets have to fall immediately, but the risk is growing with every day that bond yields remain under pressure while equities continue to price in a highly favorable outcome.

Be prepared for a potentially sharp move lower.

US inflation data came in softer than expected today, but the details deserve a closer look.

The PCE price index rose 0.3% month-on-month, while core PCE increased by only 0.2%, below expectations of 0.3%. On an annual basis, core PCE inflation came in at 3.4%, compared with expectations of 3.7%.

At first glance, this looks like meaningful progress on inflation. However, there is an important caveat.

The Bureau of Economic Analysis implemented its annual update of the National Economic Accounts today, incorporating more complete source data as well as methodological improvements affecting, among other measures, the PCE price index. This means that part of the decline in previously reported inflation reflects revisions rather than a sudden improvement in underlying price pressures. The 3.0% annual core PCE figure should therefore be interpreted with some caution.

At the same time, the US economy appears to have been considerably stronger than previously estimated. Second-quarter GDP growth was revised sharply higher to an annualized 2.2%, from the previous estimate of 1.5%. Consumer spending and business investment were stronger than previously reported.

Bond Yields Remain Elevated
The 10-year Treasury yield remains above 5.2%, close to its highest level since 2007, while the 30-year yield remains around 5.5%, after recently reaching levels not seen since 2002.

Markets:

• Equities: Mixed, Europe down while US markets hold up well with Tech outperforming

• Bonds: yields little change after - US 2y yield above 4.85%, US 10y yield above 5.24%, Japan 10y yield 3.07%

• Commodities: Oil prices higher, WTI at USD 91/barrel and Brent around USD 99/barrel;
  Precious metals prices almost unchanged, gold USD 4’185/oz, silver USD 60/oz

• Currencies: US dollar falls slightly - Japanese Yen unchanged USDJPY 157

• Cryptos: moving higher - Bitcoin above USD 84k

• Volatility: The VIX index lower, back below 16 (good level for hedging!)

My View: Anyone expecting today's softer inflation data to trigger a significant bond rally has so far been disappointed.

I continue to see little fundamental justification for materially lower yields. Inflation remains well above the Fed's target, economic growth has just been revised significantly higher, and energy prices remain elevated.

While softer monthly inflation reduces some of the immediate pressure for further monetary tightening, the stronger GDP figures point in the opposite direction.

This leaves the Federal Reserve in an increasingly uncomfortable position: inflation remains too high, while economic activity is proving more resilient than previously thought.

I continue to expect the Fed to raise interest rates again at its October meeting. Market pricing still clearly favors unchanged rates. In my view, investors may therefore have to adjust to an interest-rate environment that remains higher for longer, and moves even higher than currently anticipated.

The implications extend far beyond the bond market. With the US 10-year Treasury yield above 5.2% and the 30-year yield around 5.5%, financing conditions are becoming increasingly challenging. Governments, companies, consumers and highly leveraged investors are all facing a substantially higher cost of capital.

The longer yields remain at these levels, or continue to rise, the greater the pressure on the financial system.
The question is increasingly becoming: Where does something break first?

For equities, I increasingly see the current environment as one of the last opportunities to reduce exposure before risks potentially accelerate.

The AI investment cycle, which in my view has already shown clear signs of overshooting, is now beginning to show cracks.
That does not necessarily mean a financial crisis is imminent. However, at current levels of leverage and financing costs, it may not take much for an initial shock to trigger a much broader and faster market adjustment.

Tonight, Micron Technology's earnings release after the US market close will provide another important test of the extraordinarily optimistic expectations embedded in the AI and semiconductor sector.

The warning lights continue to flash. Yet financial markets remain remarkably complacent.

In my view, the risk is no longer simply that markets have underestimated the challenges ahead. It is that when investors finally begin to price in those risks, the adjustment could be both rapid and severe.

The historic sell-off in US Treasuries continues, pushing benchmark yields to levels not seen in decades.

The US 10-year Treasury yield has risen for six consecutive weeks, climbing above 5.20% intraday, its highest level since 2007. At the long end of the curve, the 30-year yield reached 5.50%, a level last seen in 2004.

Pressure is also building at the short end, with the 2-year yield above 4.90%, as markets increasingly price in the risk of further monetary tightening.

At the same time, concerns over rising US debt levels and the growing supply of government bonds are adding further pressure, particularly at the long end of the yield curve.

Markets:

• Equities: Tech and AI bet ooutperforming the rest of the market.

• Bonds: yields little change after yesterday’s spike - US 2y yield above 4.90%, US 10y yield above 5.19%, Japan 10y yield 3.07%

• Commodities: Oil prices falling after yesterday's rally, WTI at USD 93/barrel and Brent around USD 105/barrel;
  Precious metals prices almost unchanged, gold USD 4’280/oz, silver USD 64/oz

• Currencies: US dollar weakens - Japanese Yen unchanged USDJPY 157

• Cryptos: Falling after strong rally - Bitcoin above USD 84k

• Volatility: The VIX index remains around 15 (good level for hedging!)

My View: The message from bond markets is becoming increasingly difficult to ignore: the global cost of capital is moving materially higher.

While the bond rout deepens, equity investors appear remarkably relaxed, focusing primarily on the recent decline in oil prices.

But how long can this divergence continue?

The relationship between bonds and equities is becoming increasingly uncomfortable. A 10-year Treasury yield above 5% and a 30-year yield around 5.50% materially raise the discount rate for equities and increase financing costs across the economy. This should matter particularly for long-duration, high-valuation growth stocks, yet these are precisely the areas currently outperforming.

For now, lower oil prices are providing some relief. But the bond market is sending a very different message: inflation risks remain elevated, monetary policy may have to stay tighter, and the cost of capital continues to rise.

In my view, the widening disconnect between bonds and equities cannot continue indefinitely.

Either bond yields need to fall materially, or equity markets will eventually have to adjust to the new reality of higher rates.

With the VIX still around 15, investors continue to price remarkably little risk.

Financial markets have been driven by one powerful force over recent days: hope.

Hope for improving oil flows. Hope for diplomacy in the Middle East. Hope for progress toward ending the Russia–Ukraine war. And increasingly, renewed hope surrounding the AI story.

The most tangible development came from the Middle East. US and Iranian representatives held three hours of talks in New York, with President Donald Trump describing the discussions as “very good.” Further talks appear possible, reviving expectations of a diplomatic off-ramp. Iran, however, continues to insist on conditions for ending the conflict and reopening the Strait of Hormuz.

At the same time, Saudi Arabia has restarted its East-West pipeline, which allows crude to reach the Red Sea while bypassing the Strait of Hormuz. Operations have resumed at a reduced rate, while a return to full capacity could still take several weeks.

These developments have been enough to trigger a sharp correction in oil prices and fuel optimism across financial markets.

Meanwhile, hopes — and perhaps some fantasies — surrounding AI have started to rebuild as well, adding another layer of momentum to technology stocks.

Markets:

• Equities: recent strong performance, mainly in Tech sector comes to a halt

• Bonds: yields little changed to the upside - US 2y yield above 4.79%, US 10y yield above 4.99%, Japan 10y yield 2.99%

• Commodities: Oil prices rising slightly after sharp correction, WTI at USD 90/barrel and Brent around USD 100/barrel;
  Precious metals prices continue to move lower, gold USD 4’305/oz, silver USD 65/oz

• Currencies: US dollar moving higher - Japanese Yen unchanged USDJPY 158

• Cryptos: Strong falling after strong rally - Bitcoin above USD 85k

• Volatility: The VIX index remains below 15 (good level for hedging!)

My View: The magnitude of the rally over recent days, pushing the Nasdaq back to an all-time high, surprised me.

In my view, the move can partly be explained by a short squeeze and technical buying as positive momentum accelerated, rather than by a comparable improvement in underlying fundamentals. I continue to see little fundamental justification for such a strong move higher in equities.

There remains an important distinction between hope and reality.

One of the main catalysts has been the sharp decline in oil prices, largely driven by hopes that oil flows will improve materially. Saudi Arabia restarting its East-West pipeline is a positive development, but the broader supply situation remains fragile. The Strait of Hormuz remains severely disrupted, major differences between the US and Iran remain unresolved, and alternative supply routes remain vulnerable to further attacks.

At the same time, bond yields have fallen only marginally. With the US 10-year yield still close to 5%, pressure from elevated financing costs has not gone away.

Positioning has likely played an important role as well. Since the Fed’s rate hike last week, investors positioned for weaker equity markets, including myself, have repeatedly been caught on the wrong foot in the recent days, forcing some to cover short positions and adding further momentum to the rally.

And then there is AI. Optimism has returned remarkably quickly, yet I continue to question how extraordinary capital spending, extremely optimistic growth assumptions, rising safety concerns and intense global competition can ultimately justify current valuations.

For now, markets appear to be trading on hope, momentum and positioning rather than a meaningful improvement in fundamentals.

The key question is whether fundamentals will catch up with that hope, or whether markets will have to catch up with reality.
It is only a matter of time before markets adjust to reality. When they do, they are likely to overshoot in the opposite direction.

Stock markets started the week on a strong note, with technology stocks clearly outperforming.

The main driver behind today’s risk-on move is the sharp decline in oil prices, combined with slightly less pressure from bond yields. Oil fell around 5%, with WTI dropping below USD 100 per barrel, providing some relief to inflation concerns and supporting equity markets.

The decline in oil comes as markets price in renewed hopes for diplomacy in the Middle East and improved oil flows through the Strait of Hormuz. However, geopolitical risks remain elevated and the underlying situation remains fragile.

Investors are also increasingly turning their attention to the Trump–Xi meeting on Thursday, September 24, where trade, technology, AI and geopolitical issues are expected to feature prominently.

Markets:

• Equities: strong performance,particularly in technology stocks, with characteristics of a short squeeze

• Bonds: yields little changed - US 2y yield above 4.76%, US 10y yield above 4.96%, Japan 10y yield 2.99%

• Commodities: Oil prices fell sharply by almost 5%, WTI at USD 96/barrel and Brent around USD 100/barrel;
  Precious metals prices fell as well, gold USD 4’345/oz, silver above USD 66/oz

• Currencies: US dollar moving higher - Japanese Yen fallsUSDJPY 158

• Cryptos: Strong rally - Bitcoin above USD 86k

• Volatility: The VIX index remains below 15 ( good level for hedging!)

My View: I am rather surprised by the strength of today’s move.

I have repeatedly highlighted that the direction of equity markets increasingly depends on the oil price, and today is a clear example. The sharp decline in oil provides temporary relief for inflation expectations, bond yields and therefore equity valuations.

However, I see little fundamental justification for such a strong move higher in equities.

Today’s rally has many characteristics of a short squeeze. Since the Fed’s rate hike last week, market participants positioned for a weaker equity market have repeatedly been caught on the wrong foot, forcing some investors to cover short positions and adding further momentum to the rally.

At the same time, the broader macro picture has not materially improved. Bond yields remain extremely elevated, monetary policy is becoming more restrictive, energy prices remain high despite today’s decline, and geopolitical risks have not disappeared.

Oil prices are falling primarily because the market is currently pricing in improving supply flows and renewed hopes for diplomacy rather than another deterioration in the Middle East.

In other words, no bad news is already good news for investors.

With volatility below 15 and risk appetite returning quickly, investors once again appear remarkably comfortable despite the number of unresolved risks.

I therefore remain cautious. Today’s relief could prove temporary, and I expect market dynamics to change quickly again.

Three major central banks this week, and three hawkish messages.

After the Federal Reserve raised interest rates by 25 basis points on Wednesday, the Bank of England struck a distinctly hawkish tone yesterday, followed today by another rate hike from the Bank of Japan.

The BoJ raised its policy rate by 25 basis points from 1.00% to 1.25%, bringing Japanese interest rates to their highest level since 1995. The decision was made by a 7–2 vote, with two members preferring to wait. At the same time, Governor Kazuo Ueda signaled that the central bank has entered a new phase focused on preventing inflation from overshooting its target, leaving the door open for further rate hikes.

Yesterday, the Bank of England kept its Bank Rate unchanged at 3.75%, but the underlying message was clearly more hawkish. The decision was made by a 6–3 vote, with three MPC members already voting for an immediate 25-basis-point hike to 4.00%. The BoE also warned that rates may have to rise if the Middle East conflict and higher energy prices generate more persistent inflation pressures.

The message from global central banks is becoming increasingly clear: the Fed, ECB, BoE and BoJ are all increasingly focused on renewed inflation risks, particularly those coming from higher energy prices.

Markets:

• Equities: relief rally seems already coming to an end with European indices down and US Futures falling back from intraday highs

• Bonds: yields moving up again - US 2y yield above 4.73%, US 10y yield above 4.97%, Japan 10y yield 2.99%

• Commodities: Oil prices unchanged after intraday rebound, WTI at USD 101/barrel and Brent around USD 104/barrel;
  Precious metals prices unchanged after starting the day higher, gold USD 4’360/oz, silver above USD 66/oz

• Currencies: US dollar moving higher - Japanese Yen falls despite the BoJ rate hike USDJPY 158

• Cryptos: continued to rally - Bitcoin above USD 78k

• Volatility: The VIX index unchanged below 16 (opportunity for hedging!)

My View: As mentioned yesterday, I expected the relief rally following the Fed announcement, but I also expected it to be short-lived.

The underlying problems have not disappeared. Tensions in the Middle East continue, while the global oil market remains under significant pressure. Saudi supply disruptions are affecting deliveries to European refineries, while diesel markets are becoming increasingly tight. None of this is the kind of news flow that would normally point toward sustainably lower energy prices.

For weeks, I have highlighted that markets were underestimating the situation in the oil market and that oil prices were trading too low relative to the underlying geopolitical and supply risks. That view remains unchanged.

In my opinion, oil remains the dominating factor for global financial markets in the short term.

The transmission mechanism is becoming increasingly important: Higher energy prices → higher transportation costs → renewed inflation pressure → upward pressure on bond yields → more pressure on central banks to raise interest rates → pressure on consumers and house owners

At the same time, consumer weakness continues to intensify as households face higher financing costs and increasingly higher energy and transportation expenses.

This combination, weakening consumers, persistent inflation, rising bond yields and increasingly hawkish central banks, is not fertile ground for risk assets. Quite the opposite.
Yet equity markets continue to show remarkably little concern, while volatility remains extremely low.

At some point, markets will have to confront this reality. The question is not whether these pressures matter. The question is when markets will finally start pricing them in.

Financial markets are staging a relief rally following yesterday’s Federal Reserve decision, with equities rebounding, bond yields retreating and volatility falling.

The Federal Reserve raised interest rates by 25 basis points to 3.75%–4.00%, with policymakers voting unanimously 12–0 in favor of the increase. Fed Chairman Kevin Warsh delivered a distinctly hawkish message, stressing that inflation “is too high and has been for too long.”

Importantly, the Fed also signaled that yesterday’s move may not be the last. The latest projections show that the large majority of policymakers expect at least one additional rate hike before the end of the year.

Today, the Bank of England left interest rates unchanged at 3.75%, despite UK inflation accelerating to 3.1% in August from 2.9% in July. The decision was made by a 6–3 majority, with three policymakers already voting for a 25-basis-point hike. The Bank also warned that inflation risks have shifted further to the upside.

Tomorrow, the Bank of Japan is widely expected to raise rates by another 25 basis points to 1.25%, which would bring its policy rate to the highest level in 31 years.

Markets:

• Equities: Rebounding after recent losses

• Bonds: yields falling - US 2y yield above 2.69%, US 10y yield above 4.95%, Japan 10y yield 3.0%

• Commodities: Oil prices moving lower, WTI at USD 101/barrel and Brent around USD 104/barrel
  Precious metals prices higher, gold USD 4’360/oz, silver above USD 66/oz

• Currencies: US dollar almost unchanged after yesterday's strong move - Japanese Yen unchanged USDJPY 156

• Cryptos: joined the relief rally - Bitcoin above USD 76k

• Volatility: The VIX index falls back below 16 (opportunity for hedging!)

My View: I mentioned ahead of the Fed decision that we could see a relief rally once the uncertainty surrounding the meeting disappeared. That rally has arrived, but I believe it could come to an end relatively quickly.

Listening carefully to Kevin Warsh’s press conference, the message was clearly hawkish. Inflation remains too high, and the Fed appears prepared to tighten monetary policy further if necessary. One 25-basis-point increase will not suddenly bring inflation back toward the Fed’s 2% target.

There has, however, been one important source of relief over the past two days: oil prices have moved lower, although they remain clearly above the USD 100 level. At the same time, oil transportation costs have skyrocketed, adding another layer of pressure to overall energy costs. Tanker freight rates have recently reached record highs amid continued disruptions around the Strait of Hormuz.

Therefore, the recent decline in headline oil prices should not be interpreted as an all-clear for inflation. Unless oil prices and transportation costs decline substantially, I see a strong case for the Fed to raise rates again as early as October.

So the question is: Why should the relief rally continue?
Almost all the major risk factors that existed before the Fed meeting are still there: elevated inflation, historically high bond yields, oil above USD 100, geopolitical uncertainty, pressure on consumers and governments from higher borrowing costs, and the prospect of further monetary tightening.

What did change yesterday is that the Fed demonstrated its willingness to act despite political pressure, therefore strengthened Fed credibility and independence.

Investor sentiment has quickly deteriorated toward “Extreme Fear”, which historically can create attractive entry points for risk assets. This time, however, I remain cautious.

Stress in global bond markets continues to build. With three major central banks in focus within just three days, monetary policy is once again taking center stage.

The US 10-year Treasury yield climbed above 5% yesterday, reaching its highest level since 2007, as persistent inflation concerns, elevated oil prices and expectations of tighter monetary policy continue to put pressure on government bonds.

The move is not limited to the United States. Bond yields remain elevated globally, with Japan’s 10-year yield around 3%, while European government bond yields are also trading near multi-year highs.

Today, yields are moving largely sideways as investors wait for tonight’s Federal Reserve decision. Markets now widely expect the Fed to raise rates by 25 basis points to 4.00%.

And the Fed is not the only major central bank in focus this week.

Tomorrow, the Bank of England is expected to keep interest rates unchanged at 3.75%, despite UK inflation accelerating to 3.1% in August from 2.9% in July.

On Friday, the Bank of Japan is expected to raise rates by 25 basis points to 1.25%, which would bring its policy rate to the highest level in 31 years.

Markets:

• Equities: Rebounding after recent losses

• Bonds: yields moving sideways - US 2y yield above 2.62%, US 10y yield above 4.97%, Japan 10y yield 3.0%

• Commodities: Oil prices moving lower, WTI at USD 102/barrel and Brent around USD 105/barrel
  Precious metals prices higher, gold USD 4’355/oz, silver above USD 64/oz

• Currencies: US dollar almost unchanged - Japanese Yen unchanged USDJPY 155

• Cryptos: continue to fall - Bitcoin towards USD 75k

• Volatility: The VIX index falls back below again 17 (opportunity for hedging!)

My View: What a difference a few weeks can make. Before Jackson Hole, almost no market participants expected a September rate hike. Even a week ago, investors remained divided over whether the Fed would actually move.
My view remained clearly outside the broad market consensus: With Iran war to start, I said the Fed needs to raise rates again to address persistent inflationary pressures.

Before the Iran war and the renewed oil shock, markets expected the Fed funds rate to be around 3% by September. Tonight, it is expected to move to 4%. A 25-basis-point hike itself should not have a major impact on markets, as it is now largely priced in. In fact, the decision could provide some short-term relief.

However, the bigger issue goes far beyond tonight’s decision. In my view, the Fed is still running behind the curve, and the bond market already started to recognize it.
I therefore expect the upward pressure on bond yields and downward pressure on bond prices to persist, even if tonight’s decision temporarily calms markets.

The second oil-price shock within a relatively short period is increasingly feeding through to inflation and, in my view, could have a broader economic impact than the first shock in May.
Much will depend on the oil price from here. Oil inventories are tighter and strategic reserves provide considerably less flexibility than during the first shock. This reduces the ability to cushion another major supply disruption.
I therefore expect upward pressure on oil prices to persist, with the risk of another substantial price spike remaining elevated.
If the current environment persists, I believe another Fed rate hike will ultimately be necessary.

Interestingly, the sentiment index has moved back into “Fear” territory, yet broader financial markets are still showing remarkably little genuine stress.
This divergence deserves attention. As highlighted in my Weekend Mailing, investor complacency could suddenly come to an end. If sentiment turns decisively, today’s highly crowded and leveraged market could quickly face a situation where almost everyone tries to exit through the same door at the same time.

In such an environment, a market drawdown could unfold very quickly.

AI leaders call for a slowdown. Fresh concerns around the rapid development of artificial intelligence are putting AI-related stocks under pressure.

OpenAI CEO Sam Altman said the company welcomes safety requirements for frontier AI labs and joined other leading AI executives over the weekend in calling for the industry to slow the pace of AI development.

Altman warned of two ways AI progress could go “very badly”: society could ultimately lose control of the future to AI, or too much power could become concentrated in the hands of a single person or company.

The warnings are not limited to OpenAI. Anthropic CEO Dario Amodei has also called for an immediate slowdown in the development of increasingly powerful AI models, warning that capabilities are advancing faster than the industry’s ability to ensure adequate safety and oversight.

Safety concerns have intensified significantly in recent days. Last week, an Anthropic researcher resigned, warning that some of those developing advanced AI systems believe the technology could pose catastrophic risks before the end of the decade. Employees at both Anthropic and rival OpenAI have subsequently raised further concerns about the potential consequences of increasingly powerful AI systems.

Markets:

• Equities: Falling mostly led by Tech and AI related stocks

• Bonds: yields moving higher - US 2y yield above 2.6%, US 10y yield above 4.99%, Japan 10y yield 2.99%

• Commodities: Oil prices rise again, WTI at USD 104/barrel and Brent around USD 109/barrel
  Precious metals prices fall, gold USD 4’275/oz, silver above USD 63/oz

• Currencies: US dollar moving higher - Japanese Yen falls sharply USDJPY 154

• Cryptos: rise - Bitcoin towards USD 78k

• Volatility: The VIX index moves higher above 17 (last opportunity for hedging!)

My View: The fact that the companies leading the AI race are themselves calling for the race to slow down should get investors’ attention.

After the extraordinary amount of capital that has flowed into AI infrastructure, semiconductors and related companies, this raises an important question for financial markets:

What happens to today’s extremely optimistic AI growth assumptions if safety concerns, regulation or the industry itself ultimately forces AI development to slow down?

But there may be another dimension investors should consider. Do the leading US AI companies increasingly realize that China is catching up faster than previously expected?

The AI race between the US and China is in full swing, and recent developments suggest that the technological gap has narrowed substantially. This makes calls from some of America's most important AI companies to slow frontier development particularly interesting.

President Trump highlighted exactly this strategic dilemma over the weekend, rejecting calls for a slowdown and stressing the importance of winning the AI race against China.

This creates an extraordinary contradiction: The US government wants to accelerate to beat China, while some of America's leading AI companies are warning that development is moving too fast.

At the same time, the financial stakes are enormous. Anthropic is moving toward a potential IPO, while OpenAI has postponed its own listing plans until next year. Both companies will continue to require enormous amounts of capital to finance the computing power and infrastructure needed to remain at the frontier.

So another question arises: Could the window of opportunity to raise enormous amounts of investor capital be starting to close?

The entire AI investment story still depends heavily on expectations of extraordinary future growth. If concerns about safety intensify, China continues to close the technological gap and broader financial markets enter a period of turbulence, investor appetite, and valuations, could change very quickly.

What looks like an almost unlimited pool of capital today may not remain available indefinitely.

This story adds another layer of uncertainty to an already challenging market environment. Technology and AI-related stocks have held up remarkably well despite the growing number of red flags across financial markets.

Investor complacency could suddenly come to an end, as highlighted in my Weekend Mailing. If sentiment turns decisively, a highly crowded market could quickly face a situation where almost everyone tries to exit through the same door at the same time.

In such an environment, a market drawdown could unfold very quickly.

At the same time, markets are increasingly pricing in another Fed rate hike, with the probability now around 90%, compared with roughly 50/50 only last week.

Higher bond yields, oil above USD 100, renewed inflation pressure, geopolitical risks and now growing uncertainty surrounding the AI investment story create an increasingly challenging combination.

The number of flashing red lights is increasing, while markets are still pricing in remarkably little stress.

US inflation remained stubbornly elevated in August, reinforcing the case for the Federal Reserve to raise interest rates at next week’s meeting.

The Consumer Price Index rose 0.4% month-on-month and 3.4% year-on-year, both in line with expectations.

However, underlying inflation pressures were somewhat stronger than anticipated. Core CPI increased 0.3% month-on-month, 0.1 percentage point above consensus, while the annual core rate came in at 2.4%.

Despite persistent inflation, elevated bond yields and oil prices above USD 100/barrel, investors appear remarkably complacent. US equity futures initially spiked following the release, while volatility moved lower.

Markets:

• Equities: Moving higher, with US futures initially spiking after the CPI release

• Bonds: yields falling from intraday highs - US 2y yield above 2.6%, US 10y yield above 4.92%, Japan 10y yield 2.99%

• Commodities: Profit taking in oil prices, WTI falling back below USD 99/barrel and Brent around USD 104/barrel
  Precious metals prices jump, gold USD 4’390/oz, silver above USD 65/oz

• Currencies: US dollar almost unchanged - Japanese Yen moves higher USDJPY 153

• Cryptos: Risk-on sentiment moves prices higher - Bitcoin above USD 77k

• Volatility: The VIX index falls back towards 15 (good opportunity for hedging)
  

My View: After yesterday’s Producer Prices, today’s CPI report is the final major inflation indicator the Fed will receive before next week’s policy meeting, which concludes on Wednesday.

As highlighted in my Weekend Mail, I continue to believe the Fed needs to hike rates. From an economic perspective, I see little reason not to. The bigger question is one of credibility and independence in case the Fed should keep rates on hold.

What concerns me even more is the market’s reaction. There are currently several major warning signs: persistent inflation, oil above USD 100/barrel, historically elevated bond yields and continued geopolitical uncertainty.

Yet markets are showing almost no signs of stress. Equities remain resilient, risk assets are moving higher and volatility has fallen back towards 15.

This combination should not be ignored. Complacency seems to be the biggest risk right now.

When investors stop taking obvious risks seriously, markets become increasingly vulnerable to a sudden repricing. With volatility still low, I continue to see attractive opportunities to hedge portfolios before markets potentially start taking these warning signs more seriously.

US producer prices added another warning signal for inflation.

The Producer Price Index (PPI) rose 0.4% in August, in line with expectations, while July was revised slightly higher to +0.1%. On an annual basis, producer price inflation accelerated to 5.4%, slightly above forecasts and remaining at a highly elevated level.

Excluding food and energy, core PPI increased 0.2%, slightly below expectations of +0.3%.

The latest data comes at a particularly difficult moment for the Federal Reserve. Oil prices have surged above USD 100/barrel, adding another potential source of inflationary pressure, while government bond yields continue to climb.

As a result, markets are increasingly adjusting their expectations for next week's Fed meeting. The probability of a September rate hike has risen to around 70%, although a significant share of investors still expects the Fed to leave rates unchanged.

Markets:

• Equities: Broadly lower

• Bonds: yields moving to new highs - US 10y yield above 4.92%, Japan 10y yield 2.92%

• Commodities: Oil prices substantially higher, WTI around USD 100/barrel and Brent around USD 106/barrel
  Precious metals prices fall, gold USD 4’365/oz, silver above USD 64/oz

• Currencies: US dollar slightly higher - Japanese Yen falls, USDJPY 154

• Cryptos: Risk-off sentiment is weighing on cryptos - Bitcoin falling down to USD 77k

• Volatility: The VIX index rises slightly 17 (still good opportunity for hedging)
  

My View: Scott Bessent's attempts to calm the bond market have so far produced an uncomfortable result: US borrowing costs have risen even further.

The message from the bond market is becoming increasingly clear. Investors see persistent fiscal deficits, a rapidly growing debt burden, stubborn inflation and renewed upward pressure from energy prices. If Washington wants investors to finance this debt, they are increasingly demanding higher compensation.

The latest PPI reading gives bond investors another reason to demand higher yields.

This is also increasingly moving market expectations towards the scenario I have been highlighting for some time. I have consistently expected the Fed to raise rates in September, while the broader market remained considerably more optimistic about the inflation outlook and monetary policy.

Markets are now starting to price this scenario more aggressively, with the probability of a hike rising to around 70%. However, a significant share of investors still expects rates to remain unchanged.

With producer inflation at 5.4%, oil above USD 100 and bond yields reaching new highs, the Fed's room for manoeuvre is becoming increasingly limited.

The inflation problem is far from solved, and the bond market is increasingly forcing investors to face that reality.

Tomorrow’s CPI figures should provide further clarity on the inflation outlook and could ultimately determine the Fed’s decision next week.

Oil prices continue to rise substantially, with Brent crude trading above USD 100 per barrel again after several weeks below that level.

The main driver remains the escalating conflict between the US and Iran. The US has started targeting Iranian oil tankers, while Tehran retaliated immediately with attacks on US naval assets and military bases across the Middle East.

One fact remains unchanged: the Strait of Hormuz is effectively closed and remains far from normalization.

Markets:

• Equities: broadly down while tech stocks held up well.

• Bonds: yields moving above recent highs - US 10y yield 4.84%, Japan 10y yield 2.88%

• Commodities: Oil prices substantially higher, WTI around USD 97/barrel and Brent around USD 101/barrel
  Precious metals prices higher, gold back towards USD 4’400/oz, silver above USD 67/oz

• Currencies: US dollar slightly higher - Japanese Yen higher, USDJPY 154

• Cryptos: suffer with risk-off stance - Bitcoin back towards USD 78k

• Volatility: The VIX index rises slightly above 16 (still good opportunity for hedging)
  

My View: For several weeks, my view on oil has stood clearly apart from the broader market consensus. While investors were pricing in a normalization of the Strait of Hormuz and relatively contained oil prices, I repeatedly highlighted that oil was trading too low relative to the underlying geopolitical and supply risks.

That risk is now increasingly being repriced.

At the same time, oil inventories fell to historically low levels, limiting the ability to offset supply disruptions through reserve releases indefinitely.

The broader implications are becoming increasingly important for financial markets: higher oil prices → renewed inflation pressure → higher bond yields → tighter financial conditions.

This is exactly the wrong direction for both Washington and financial markets.

With oil above USD 100, bond yields pushing back towards new highs and geopolitical tensions escalating, the probability of broader market turmoil is increasing.

Last week, I increased my existing long volatility exposure, as I continue to see meaningful downside risk in equity markets.

Seasonality adds another risk factor: September and October have historically been challenging months, particularly around US midterm-election years.

For now, my positioning remains defensive.

The US labor market delivered a significant upside surprise in August.

Nonfarm payrolls jumped by 162’000, well above the consensus estimate of just 53’000, while the unemployment rate remained unchanged at 4.1%, in line with expectations.

August marked the strongest monthly job gain since March and represents a clear rebound from the slowdown seen during the summer months.

This comes just one day after markets rallied following comments from Fed Governor Christopher Waller, who indicated that he intends to vote against a rate hike in September.

The combination highlights the growing uncertainty around the Fed’s next decision.

Markets:

• Equities: Mixed

• Bonds: yields moving back higher after yesterday's drop - US 10y yield 4.78%, Japan 10y yield 2.91%

• Commodities: Oil prices almost unchanged, WTI around USD 91/barrel and Brent around USD 96/barrel
  Precious metals prices lower after yesterday's rally, gold at USD 4’430/oz, silver falls below USD 66/oz

• Currencies: US dollar slightly higher - Japanese Yen falls again, USDJPY 156

• Cryptos: - Bitcoin back below USD 80k

• Volatility: The VIX index fell back below 15 (still good opportunity for hedging)
  

My View: With the labor market showing renewed strength, the Fed can increasingly focus on its main remaining problem: inflation.

A resilient labor market gives policymakers significantly more room to keep monetary policy restrictive or tighten further without having to worry immediately about employment.

That makes next week’s inflation data even more important.

If inflation remains elevated or surprises again to the upside, I see a September rate hike as a very realistic scenario, particularly after today’s strong employment report.

Investors remain almost evenly divided on the September decision, highlighting just how uncertain the outlook has become.

In my view, the combination of a resilient labor market and persistently elevated inflation continues to argue for tighter monetary policy rather than an early end to the Fed’s hiking cycle.

The next Fed meeting will be an important test of how independently the central bank can really act.

Global bond yields have climbed to their highest levels since 2008, as rising oil prices fuel renewed inflation concerns and Fed Chairman Kevin Warsh’s hawkish stance pushes markets to price in further monetary tightening.

In Japan, the 10-year government bond yield reached 3.0% for the first time since 1996, while US Treasuries remain under significant pressure. The US 30-year Treasuries are experiencing its worst run since 2006.
Importantly, US yields have now moved clearly above the levels seen before Treasury Secretary Scott Bessent’s recent interventions in the bond market. The temporary relief has effectively disappeared.

As yields rise, bond prices fall. With investors increasingly expecting yields to move even higher, selling pressure in the bond market is building as investors try to avoid further price losses. This creates the risk of a self-reinforcing dynamic: further bond selling pushes prices lower and yields even higher.

Inflation is adding further pressure. Eurozone annual inflation accelerated to 3.3% in August from 2.9% in July, making an ECB rate hike in September increasingly likely.

Markets:

• Equities: Global stocks moving lower

• Bonds: yields moving higher - US 10y yield 4.79%, Japan 10y yield 3.0%

• Commodities: Oil prices moving higher, WTI around USD 87/barrel and Brent around USD 92/barrel
  Precious metals prices lower, gold at USD 4’375/oz, silver falls below USD 65/oz

• Currencies: US dollar slightly higher - Japanese Yen falls again, USDJPY 160

• Cryptos: - Bitcoin back below USD 78k

• Volatility: The VIX index slowly moving highe towards 16 (still good opportunity for hedging)

My View: I started highlighting the trend toward higher yields early, and it seems investors are finally beginning to recognize the reality.

As mentioned repeatedly, investors focusing purely on equities while ignoring the macro picture and developments in other asset classes could be making a serious mistake. Yield levels like these cannot simply be ignored. And neither can what is happening inside bond portfolios.

Bonds are generally classified as lower-risk investments because they typically experience less volatility than equities and, when held to maturity, provide a defined return through coupon payments and repayment of principal.
However, during periods of persistently rising yields along the whole yield curve, bond prices fall, moderately at the short end, but potentially significantly at the long end of the curve.

This matters because conservative and risk-averse investors traditionally hold substantial allocations to bonds. Many of these investors are therefore losing money precisely in the asset class they consider the defensive part of their portfolios.

For much of the period between the Global Financial Crisis and the Russia-Ukraine war, investors operated in an environment of declining yields and disinflation. Falling yields pushed bond prices higher and generated attractive returns for bond investors.

Today, that mechanism is running in reverse with expectations:Higher inflation → higher yields → lower bond prices → negative returns in bond portfolios.

At the same time, higher government yields increase refinancing costs and accelerate the debt problem. The debt spiral is not moving in the right direction, and it is gaining speed.

This becomes particularly important as we enter September, historically one of the more difficult months for equity markets, with midterm-election years deserving additional attention.

The key message remains unchanged: yields are at dangerously high levels, bond markets continue to flash warning signals, and the pressure from debt, inflation and refinancing costs is increasing rather than disappearing.

This is one of the major risks I have highlighted for some time, and one of the reasons why I remai mainly positioned for falling markets.

After roughly a month of relative military calm, the US and Iran have exchanged strikes again, bringing geopolitical risk in the Middle East back into focus.

American forces struck an island in the Strait of Hormuz, while Iran responded by launching attacks on the United Arab Emirates and Jordan.

At the same time, US Treasury Secretary Scott Bessent said today that the objective of the economic pressure on Iran remains to force Tehran back to the negotiating table. However, he also acknowledged that President Trump believes Iran is still “not ready” to make a deal.

Markets: risk appetite fades

• Equities: Most major indices are trading in the red as geopolitical uncertainty returns

• Bonds: Yields are moving higher again. The US 10-year yield is back around 4.76%, while the Japanese 10-year yield has risen to around 2.95%.

• Commodities: Oil prices are higher, with WTI around USD 85/barrel and Brent around USD 90/barrel.
  Precious metals stabilized following Friday's decline, with gold around USD 4,430/oz and silver around USD 66/oz.

• Currencies: The US dollar is weaker against most major currencies, while the Japanese yen has stabilized around USDJPY 160

• Cryptos: slighlty higher - Bitcoin around USD 78k

• Volatility: The VIX index remains at low levels moving back above 15 (still good opportunity for hedging)
  

My View: The resumption of strikes does not come as a surprise to me. The combination of renewed military action and continued economic pressure confirms that the conflict remains far from resolved.

As highlighted repeatedly over recent months, I have remained skeptical that this conflict can be brought to a sustainable end under the current circumstances. The fundamental issues remain unresolved: the Strait of Hormuz, Iran's nuclear ambitions, sanctions and the broader geopolitical balance in the region.

The US increasingly appears to be searching for a way out without having found one. Washington is combining military pressure with economic pressure in the hope of forcing Tehran back to negotiations. But if Iran remains unwilling to accept Washington's terms, the options become increasingly limited.

And the political clock is ticking. The US midterm elections are getting closer. Oil prices remain elevated, inflation remains persistent and US consumers are already paying more for goods and services.
A renewed escalation in the Middle East, particularly one that pushes energy prices significantly higher, would add another layer of pressure on the US consumer and the economy.

That creates an increasingly uncomfortable situation for the Trump administration: maintaining pressure on Iran risks higher oil prices and inflation, while backing away risks appearing politically and strategically weak.

With the midterms approaching, the pressure on Washington to find a solution will only increase.

For markets, the key risk remains unchanged: any meaningful escalation around the Strait of Hormuz could quickly turn today's relatively calm market reaction into a spike in oil prices and a much larger risk-off move.

All eyes will be on Kevin Warsh later today, when he delivers his first major speech since becoming Federal Reserve Chairman at the annual Jackson Hole symposium.

Markets will focus on whether Warsh adopts a hawkish tone on inflation and provides any guidance on the future path of interest rates. Investors will also watch for comments on the recent stress in the Treasury market and Treasury Secretary Scott Bessent’s interventions.

Expectations for clear guidance remain low.

Nevertheless, with inflation rising again, Treasury yields elevated and consumer weakness becoming more visible, his tone alone could move markets.

Markets: wait and see

• Equities: European stocks higher while US falls after yesterday’s move

• Bonds: yields moving higher - US 10y yield back at 4.69%, Japan 10y yield 2.93%

• Commodities: Oil prices stable, WTI around USD 83/barrel and Brent around USD 88/barrel
  Precious metals prices higher, gold at USD 4’610/oz, silver moves above USD 70/oz

• Currencies: US dollar almost unchanged Japanese Yen falls again, USDJPY 160

• Cryptos: lower after recent rally - Bitcoin back below USD 80k after a quick move above USD 81k

• Volatility: The VIX index remains at low levels falling below 15 (still good opportunity for hedging)

My View: A hawkish Warsh could put short-term pressure on risk assets.

Gold and silver could face a short-term setback, although my medium- to long-term constructive view on precious metals remains unchanged. The recent crypto rally could also lose momentum.

A stronger focus on inflation could push bond yields higher again, potentially offsetting the impact of Bessent’s recent interventions.

The Fed faces a difficult combination: inflation remains too high, while higher costs increasingly pressure consumers and an economy already carrying historically high levels of debt.

Cutting rates risks fueling inflation, while staying restrictive increases pressure on consumers, growth and debt refinancing costs.

My view remains unchanged: the Fed is still behind the curve. Therefore, anything other than a hawkish tone from Warsh would come as a surprise to me.

Nvidia delivered another massive quarter last night, reporting USD 96.2 billion in revenue, while Q3 guidance came in at an extraordinary USD 108 billion.

Even more impressive was the longer-term outlook. The company indicated estimated revenue growth of around 70% for fiscal 2028, significantly above previous Wall Street expectations.
Based on the current consensus projection of approximately USD 396 billion in revenue for fiscal 2027, another 70% increase would take Nvidia's annual sales to roughly USD 673 billion.
At that level, Nvidia would overtake Apple and Alphabet based on current Wall Street revenue projections and rank behind only Amazon among the largest US technology companies.

And according to CEO Jensen Huang, even that extraordinary growth rate is constrained by supply rather than demand.

“Our demand is much greater than 70%,” Huang said during the earnings call. “Our supply allows us to confidently deliver 70%, and we’re going to continue to work with our supply chain to increase on that.”

Markets: Nvidia shares are up more than 7% in pre-market trading

• Equities: AI-related stocks are rallying, with Nasdaq futures up more than 1%.

My View: The strong quarter itself is not much of a surprise. Neither is the strong outlook at current stage.
Nvidia remains at the very center of the unprecedented global AI infrastructure buildout, and Jensen Huang's comments make one thing very clear: the immediate problem is not demand. It is supply.

But this is exactly where I continue to question the sustainability of the broader AI cycle. Why?
Because in my view, the AI sector is increasingly driven by the same force currently dominating parts of the equity market: FOMO.

Companies are afraid of falling behind and potentially losing the AI race. As a result, they are buying as much computing capacity as they can secure. The primary question currently does not appear to be: What return will we generate on this investment?

Instead, it is: What happens if our competitors invest and we don't?

That creates an extraordinary demand dynamic. But extraordinary demand today does not automatically mean extraordinary returns tomorrow.

Remember the Toilet Paper?
Think back to the beginning of the pandemic. There was never fundamentally a shortage of toilet paper. But people became afraid that there could be one. That fear itself created the shortage. People rushed to stores and bought far more than they actually needed because everyone feared being the one left without any.

I increasingly see similarities in today's AI chip market. Companies fear being left behind. Therefore, every available chip is being bought. The enormous demand then reinforces the perception that even more capacity is needed, encouraging companies to invest even faster.

The difference, of course, is that we are not talking about toilet paper. We are talking about hundreds of billions, potentially trillions, of dollars in capital expenditure. And that capital is not free.

The bigger question: Who ultimately pays for It?
Nvidia's numbers demonstrate how much money is currently flowing into AI infrastructure. They do not yet answer the much more important long-term question: How much money will ultimately come out of it?
The hyperscalers are spending enormous amounts on chips, data centers, energy infrastructure and networks. Increasingly, part of that expansion is also being financed through debt.

At the same time, several constraints are becoming increasingly difficult to ignore:
Higher bond yields make financing these investments more expensive.

Data centers require enormous amounts of electricity, while power availability and grid capacity are becoming bottlenecks in several regions.

Operating costs remain substantial, even after the infrastructure has been built.

Resistance against new data centers is increasing in some communities because of electricity consumption, water usage, land requirements, noise and infrastructure pressure.

And perhaps most importantly, the end consumer is showing increasing signs of weakness.

That matters because somewhere at the end of the AI investment chain, someone eventually has to generate enough additional revenue and cash flow to justify these enormous investments.

At the same time, pressure on consumer credit is increasing, banks are becoming more cautious and tighter lending standards could further constrain economic activity.

None of this questions Nvidia's current operational strength. The company is delivering extraordinary numbers and currently sits in perhaps the strongest position anywhere in the AI ecosystem.

Another important driver behind Nvidia’s extraordinary revenue growth is its enormous pricing power. With demand exceeding supply, Nvidia can sell not only more chips, but also increasingly expensive chips. However, this raises an important question: How sustainable is that pricing power?
Therefore, today’s exceptional revenue growth should not simply be extrapolated into the future. More competition could eventually pressure both Nvidia’s pricing power and margins.

Nvidia's success today does not automatically validate the economics of every dollar being invested across the AI ecosystem.
That distinction is becoming increasingly important. For the current growth trajectory to continue at anything close to today's pace, AI ultimately needs to generate enough productivity gains, revenues and cash flows to justify hundreds of billions in infrastructure investment.

Maybe it will. But today's valuations already assume that it will.
They leave very little room for a scenario in which AI infrastructure spending slows, financing costs remain elevated, power constraints intensify or companies simply begin asking a question that currently seems secondary:

What is the actual return on all this investment?

Nvidia just crushed the numbers. The bigger test for the AI cycle will come when its customers have to prove that they can do the same.

The Federal Reserve’s preferred inflation measure provided another reminder today that inflation remains far from defeated.

The Personal Consumption Expenditures (PCE) Price Index rose 0.2% month-on-month in July, pushing the annual headline inflation rate to 3.7%. Both readings came in 0.1 percentage point above market expectations.

Core PCE, which excludes volatile food and energy prices and is generally considered a better indicator of underlying inflation trends, increased 0.2% month-on-month and 3.3% year-on-year, in line with expectations.

Markets: reacted negatively to the inflation data,

• Equities: Europe higher while US falls

• Bonds: yields rebound after yesterday’s drop - US 10y yield back at 4.66%, Japan 10y yield 2.89%

• Commodities: Oil prices fall for second day, WTI around USD 81/barrel and Brent around USD 87/barrel
  Precious metals prices little changed, gold at USD 4’615/oz, silver moves towards USD 68/oz

• Currencies: US dollar moves higher, Japanese Yen falls again, USDJPY 159

• Cryptos: lower after recent rally - Bitcoin above USD 78k

• Volatility: The VIX index remains low around 15 (still good opportunity for hedging)

My View: As highlighted repeatedly in recent publications, inflation remains one of the most important indicators to watch going forward.

And the environment is hardly supportive of a sustained return toward the Fed’s 2% target. Tariffs, renewed trade wars, geopolitical conflicts and elevated commodity prices all have the potential to create additional inflationary pressure.
At the same time, extremely high government debt levels and rising bond yields are pushing debt-servicing and refinancing costs increasingly higher.

This creates a difficult combination for the Federal Reserve.

The risk is that the Fed remains behind the curve. If inflation proves more persistent or starts accelerating again, policymakers could eventually be forced to raise rates faster, even as economic growth and the consumer are already weakening.

That would intensify the pressure from both sides: higher prices reduce purchasing power, while higher interest rates increase financing costs for consumers, companies and governments.

The first cracks are already visible in the US consumer. As highlighted in my recent Market Insights, July retail sales fell, “help with mortgage” are googled like in 2008.

The longer inflation stays elevated, the more difficult the situation becomes.

The Fed faces an increasingly uncomfortable choice: tolerate inflation above target or tighten financial conditions further and risk accelerating the economic slowdown.
Neither is particularly attractive for financial markets. Inflation is therefore not just an inflation story anymore. It is increasingly becoming a growth, debt and financial-stability story as well.

Canada strikes back. Just days after US–Canada trade negotiations collapsed, tariffs are back in focus.

Today, Canada announced retaliatory tariffs on CAD 27.6 billion, roughly USD 20 billion, of US goods, matching the latest US tariffs dollar-for-dollar. Washington's new 50% tariffs on the same value of Canadian goods came into effect on August 22.

Canada's counter-tariffs will take effect on September 8, with duties ranging from 15% to 50% across hundreds of products. The measures target sectors including steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics.
At the same time, Ottawa unveiled a CAD 7.5 billion support package for Canadian businesses and workers affected by the escalating trade conflict.

The tit-for-tat escalation marks another significant deterioration in the relationship between two of the world's closest trading partners.

Only days ago, both sides still appeared relatively close to reaching an agreement. Instead, negotiations collapsed and have now been replaced by 50% tariffs and direct retaliation.

Markets:

• Equities: So far, the market reaction remains surprisingly muted, with no major moves in either US or Canadian equities.

My View: Are tariffs coming back as a major market topic?

Investors had almost forgotten about the tariff story. Attention shifted toward the Middle East, inflation, rising global bond yields and, increasingly, the US debt situation.

However, current escalation between Canada and the US is an important reminder that the trade wars are far from over.

The first question is why Washington is again willing to escalate tariff pressure against one of its most important trading partners.
One possible explanation increasingly worth considering is the US fiscal situation.
As highlighted repeatedly in recent Market Insights, the bond market is starting to demand greater fiscal discipline from Washington. US debt has moved above USD 40 trillion, refinancing costs are rising rapidly, and investors are increasingly questioning the sustainability of the current fiscal trajectory.

Against this backdrop, tariffs serve more than one purpose. They are a negotiating instrument, but they also generate additional government revenue.
This does not mean that reducing the debt burden is the sole or even primary reason behind the latest tariffs. The Trump administration has consistently used tariffs to pursue broader trade, industrial and political objectives. But with fiscal pressure increasing, the revenue component should not be underestimated.
Washington urgently needs additional sources of income while simultaneously trying to avoid politically difficult spending cuts or tax increases.

The second interesting development is Canada's willingness to retaliate aggressively.
Until now, most countries confronted with US tariff threats have ultimately prioritized negotiations and concessions over a major escalation. China has been the clearest exception.

Canada is now taking a noticeably tougher approach. It raises an interesting broader question: Are governments increasingly concluding that demonstrating strength is more effective than immediately making concessions to Washington?

Recent geopolitical confrontations, including the US conflict with Iran, may reinforce the perception that aggressively pushing back can create negotiating leverage. Whether this strategy will work for Canada remains to be seen, but Ottawa is clearly signaling that it is not willing to simply accept Washington's terms.

For financial markets, today's announcement may still look like a side story. But investors should not ignore the signal. If the US increasingly turns toward tariffs as both an economic policy instrument and a source of government revenue, Canada may not be the last country facing renewed pressure.
And if more governments respond with meaningful retaliatory tariffs, the consequences could quickly become more relevant for global trade, corporate margins, supply chains and, importantly, inflation.

Tariffs are back on the radar — and today's escalation shows that this topic is far from resolved.