“Small Potatoes” burning!

Iran hits ships near Hormuz in retaliation for U.S. attacks on tankers

Iran said on Wednesday it had attacked 10 ships near the Strait of Hormuz after the U.S. sank five Iranian oil tankers, in the biggest declared wave of tit-for-tat attacks on shipping by both sides since the start of the six-month-old war.

The attacks in and around the vital waterway sent the price of oil surging, with the international Brent crude benchmark breaching US$100 a barrel for the first time since July. The politically sensitive average retail price of diesel fuel in the United States hit a fresh all-time high above US$5.94 a gallon.

Iran also said it had fired ballistic missiles at a base used by U.S. forces in Jordan. Attacks by both sides since the end of August have shattered a month of relative calm, with the U.S. and Iran hitting military, shipping and energy assets.

Recent days have also seen an escalation in fighting between Saudi Arabia and the Houthis in Yemen, a second theatre of war that threatens global energy supplies from the Middle East.

The Americans said they destroyed five Iranian oil tankers overnight, releasing video of ships ablaze before they sank. The U.S. military’s Central Command called its attacks a response to Iran’s Islamic Revolutionary Guard Corps targeting a U.S. Navy warship twice with ballistic missiles over the previous two days. No Americans were harmed, the U.S. said.

Washington has announced a new policy of attacking Iranian tankers in retaliation for fire that threatens its warships. Iran says it is imposing a wider off-limits zone around the strait and using new, more capable missiles to attack U.S. ships. (…)

Escalating combat between Saudi Arabia and the Iran-aligned Houthis that control most populated parts of Yemen has created additional uncertainty for energy markets. On Tuesday, the Houthis launched an attack on four cities in Saudi Arabia, causing huge fires at oil installations that were visible from space. Saudi authorities said 73 people were wounded. (…)

The group has extended the disruption of shipping from the Gulf to the other side of the Arabian Peninsula, at the entrance to the Red Sea.

From the FT:

Jorge León, head of geopolitical analysis at Rystad Energy, said traffic through the strait had “come down massively” during the recent escalation of hostilities, from about 8mn barrels a day during the last week of August to about 1mn b/d this week.

Oil markets were in a worse position to weather supply disruptions than earlier in the conflict because of eroded inventories and an increase in Chinese purchases of crude, he said.

“We’re at $100 again but this time around it’s more serious because the buffers are getting thinner and thinner,” said León. “Crude stocks are getting lower and product stocks — particularly diesel — are a big problem.” (…)

Mohsen Rezaei, Iran’s top security official, said on Tuesday that Washington had “received a clear warning from Iran’s new missiles”.

“Economic warfare will be met by a maritime exclusion zone across the Persian Gulf to the blockade perimeter,” he said on X. “The operational posture toward U.S. warships and bases has been fundamentally recalibrated.”

Chinese Inflation Revives as Oil Spike, AI Boom Feed Into Prices

The consumer-price index rose 0.8% in August from a year earlier, in line with forecasts and up from 0.5% in the previous month, according to data released by the National Bureau of Statistics on Wednesday.

Producer inflation rebounded to 3.8% from 3.5% in July, exceeding the median forecast of 3.6%. The core CPI, which strips out volatile food and energy prices, rose for the first time in four months to 1%.

Energy prices contributed 0.28 percentage point to the headline year-on-year gain for consumer inflation, NBS statistician Dong Lijuan said in a statement. Some food costs are also starting to pick up because of seasonal factors and weather conditions, with prices for fresh vegetables, eggs and pork rising in monthly terms. (…)

Frail consumer spending has also limited the extent to which factories are able to pass on their growing production expenses from higher global prices for oil, chips and metals. (…)

Booming demand stemming from AI is also starting to feed into prices. The cost of tablets, computers and phones all climbed at double-digit rates from a year ago, reflecting a global investment supercycle in artificial intelligence. (…)

Increases in the PPI index are still mostly driven by commodities and products benefiting from higher oil and chip prices. Industries related to coal, metals, energy, chemicals and electronics reported a surge in output prices.

Prices of consumer durables at the factory gate rose 1.2% in August, the fastest pace in data going back to 1996. The huge upswing was probably a result of higher chip costs pushing up prices of home appliances.

Diesel Crunch Threatens Lasting Price Pain, Consumption Cutbacks

The global refining sector’s diesel crunch is likely to result in tight supply for the coming months, keeping prices high and weighing on demand, according to analysts and traders. (…)

Fuel exports lost from the major processing hubs in the Middle East and Russia now amount to 2 million barrels a day each, Vitol Group’s Chief Executive Officer Russell Hardy told the Asia Pacific Petroleum Conference run by S&P Global Energy in Singapore. With refiners elsewhere already at their limit, consumers have turned to distillate fuel stockpiles, and will keep drawing.

The price of diesel — known as the workhorse fuel of the global economy — has run ahead of crude since the start of the war, with the jump in the ICE gasoil benchmark more than twice that seen for Brent, creating inflationary pressures even while oil has remain relatively stable. (…)

US exports have helped alleviate tightness particularly in import-dependent Europe. But that may not hold as diesel consumption there begins to increase as temperatures drop, given the US is not producing more, even as shipments have climbed. (…)

The vast majority of goods move with diesel.

The High-Stakes Gamble Playing Out in the Natural-Gas Market Europe has stockpiled only enough natural gas to get through a mild winter

(…) Currently, Europe’s natural gas tanks are 67% full, which is 13 percentage points lower than a year ago. One reason storage is so low is that European buyers were hoping the Strait of Hormuz would be open by now, and that Qatari LNG would be back on the market. This would push down prices and allow Europe to inject more gas into storage at the last minute. (…)

Under Wood Mackenzie’s most optimistic scenario, the region’s storage levels could fall to 21% by April 1, 2027, which is the end of the heating season. This assumes that LNG shipments from Qatar and the United Arab Emirates start flowing again soon and reach customers some time in November.

If the Strait of Hormuz stays shut for the rest of the year, Europe’s storage levels could sink as low as 14% by next April. 

Look closely at Europe’s gas stockpiles and it is clear that some countries are gambling more than others. Portugal and Poland are leaving nothing to chance. Their gas inventories are more than 90% full. Germany and the Netherlands are languishing around 50%. (…)

But, if Europe has miscalculated and needs to turn to the spot market for more supplies later this year, U.S. exporters of liquefied natural gas will profit from higher prices.

Spot prices for natural gas in Europe have already risen 75% since the end of June. A last-minute rush to stockpile for winter would send prices even higher. (…)

However, a strong El Niño weather system is expected to keep winter temperatures in the region higher than normal. This could depress demand, buying the EU a little more time to wait for LNG flows to return to normal.  (…)

Bessent Dares Traders to Bet Against Yen: ‘I Am the House Now’

Treasury Secretary Scott Bessent challenged traders to test his resolve on boosting Japan’s currency, saying when he wades into markets these days he’s effectively doing so with inside information.

“I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do,” Bessent said at a Southern Methodist University event in Texas on Tuesday. “And you can bet against me if you want.” (…)

Bessent’s remarks also underscore his unusual level of engagement on economic policymaking in Japan, which is among the world’s largest holders of US debt. Bessent has coordinated with Japan Finance Minister Satsuki Katayama on currency interventions and put increasingly public pressure on the central bank to raise interest rates, a move that would support the yen and reduce Japan’s need to sell Treasuries for market intervention.

“Whenever people say, ‘Oh, well, Treasury Secretary is taking a risk,’ — well, it’s my dream, I have asymmetric information,” Bessent said. (…)

The BOJ is leaning toward raising its benchmark interest rate by a quarter point on Sept. 18, while leaving open the possibility of accelerating the pace of hikes thereafter, according to people familiar with the matter. Bessent has repeatedly hinted over the past year that he’d prefer the BOJ to raise interest rates to help the yen rather than see repeated intervention in the market.

“Bessent’s remarks carry immense weight. The message is clear: do not defy the Treasury Secretary,” said Tadashi Matsukawa, head of bond investments at PineBridge Investments Japan Co. in Tokyo. “The old way of thinking — that interest rates would be raised once every few months — no longer applies.” (…)

“Bessent’s remarks suggest that he expects a correction in the yen’s strength even at current levels,” said Takumi Naya, head of the FX trading group at Sumitomo Mitsui Banking Corp.’s global markets operations department. “In addition to the unwinding of short yen positions, there is also a possibility that investors will shift to long yen positions. Dollar-yen could fall below 150 yen even within this month.” (…)

“Bessent’s ‘I am the house’ remark reflects the mindset of a former trader who truly understands market dynamics, which is likely why the market shows him a certain level of respect,” said Kazushige Kaida, head of FX sales at State Street Bank & Trust Co.’s Tokyo branch. “Whether it’s US Treasuries or the yen, his series of verbal warnings are probably aimed at correcting what he sees as moves that have gone too far.” (…)

“It’s possible that Bessent’s remarks on ‘asymmetric information’ may just be bluff and that he has no information beyond what the market has already priced in,” said Yujiro Goto, chief FX strategist at Nomura Securities. “The reduced risk of political interference by Prime Minister Sanae Takaichi may also be helping build momentum for further yen gains.”

Japan likely sold a portion of its holdings of foreign securities, including US Treasuries, to finance its record currency intervention, despite concern in Washington over the impact of Treasury sales on long-term yields. Katayama said on Tuesday that Japan’s stance on currencies hasn’t shifted since it conducted joint intervention with its US counterparts, and that authorities will aim to maintain an orderly FX market. (…)

Elsewhere on Bloomberg:

Osamu Takashima, Daniel Tobon and Brian Levine, strategists at Citigroup Inc.

The yen’s direction hinges on what the Federal Reserve does next week, the strategists wrote in a note.

“The present downward momentum could depress the USD/JPY to around 152.”

“Even so, if the Fed does hike, it will be difficult for the pair to become entrenched below 155.”

Maybe Bessent knows what Warsh will do…

John Authers:

(…) And indeed, the yen started at an absurdly cheap level, and it remains ridiculously weak. This is how it has performed on a real (taking into account that Japanese inflation has been the lowest in the world, which would normally mean the currency should strengthen) effective basis against a broad basket of currencies:

But why exactly is this happening now, and without desperate prodding from the US or Japanese authorities? This looks like a genuine and important market signal, but it’s come with no spending of governmental firepower a month after a massive US-Japan intervention. We now know that involved the biggest monthly decline in Japanese foreign exchange reserves on record, but it had a relatively muted effect.

The key lies in the movement of huge sums of money. The yen was not only very cheap when this episode started; it was also being bet against to a reckless degree. Once some volatility returned, plenty of traders were exposed and had an incentive to reduce their shorts — which meant that the currency would recover. (…)

In such conditions, it was not difficult to start a move. Last week’s news that Norway’s Norges Fund, one of the biggest sovereign wealth pools, was reallocating its fixed income portfolio in a way that likely shifts from Treasuries to Japanese bonds prompted speculation that more international money would move back to Tokyo and its newly competitive yields.

Jesper Koll, who publishes the Japan Optimist newsletter, points out that the rise in bond yields has left the country’s biggest quasi-national asset managers (known as the whales) nursing losses that might force them to make sales — even though they’re still sitting on big profits from overseas investments. This would be the first forced selling since 2011 (which was triggered by FX losses). He said:

This “implosion risk” is what the Treasury secretary is worried about when he says Japan is a key provider of global capital and weakness there will have spillover effects that we must guard against.

(…) Instead of hoping for a global slowdown, the strategy under Japan’s control would be to speed up repatriation of assets from overseas. If that happens, the rest of the world will need to learn how to do without Japanese funding.

Bessent Warns ‘Nothing Else Would Matter’ If China Wins AI Race

Treasury Secretary Scott Bessent warned the US faces dire consequences if it loses out in the AI race with China, highlighting the angst in Washington about its rival’s tech advances.

“There is no day after tomorrow if China wins at this,” Bessent said at a Breitbart News event in Washington on Tuesday, indicating also that the US’s large defense budget would fail to protect the nation. “If they were to pull away from us on AI, then nothing else would matter.” (…)

Bessent’s remarks also highlight worries in the US about open-weight Chinese models that are nearly as powerful as American versions at a fraction of the cost for the user. That’s happening even though the US has tried to deny China access to its most advanced tech. (…)

Opposition to Local Data Centers Rises Sharply, Annenberg Survey Finds

• Opposition to local data centers rose 12 points over four months: Three in five Americans (61%) now somewhat or strongly oppose the construction of new data centers in their area, up from 49% in the survey ending in March.
• Opposition crosses party lines and is highest among younger adults: Majorities of Democrats (69%), Republicans (54%) and independents (53%) oppose new local data centers. Opposition is highest among young adults under 30 (70%) and declines to 57% among those 65 and older, the inverse of what one might expect for a new technology.
• Views of AI overall, and demand for regulation, have held steady: 39% expect AI’s impact on the United States to be negative over the next decade, against 18% who expect it to be positive, unchanged from the spring. Two-thirds (68%) say the government has done “too little” to regulate AI.
• Medical research remains the one area where Americans expect AI to help: Across 13 areas, only medical research and discoveries draws a net-positive assessment (+41 points) in which the anticipated benefits of AI outweigh the expected negatives. The most negative areas are personal privacy and data security (-63 points), children’s safety online (-50 points), and employment and jobs (-46 points).

“What stands out is the contrast,” said Shawn Patterson Jr., an APPC research analyst. “Americans’ expectations for how AI will affect the country, and their views toward regulation, are essentially unchanged since March. Over the same period, however, opposition to a data center in their area rose 12 points. That’s a dramatic move over a relatively short period of time.”

What stands out to me is that only 18% expect AI to positively impact the US economy and that opposition is highest among young adults (70%)!

In China?

An August 18, 2026 report by NBC News revealed that Chinese data centers face virtually no organic grassroots opposition.

The Chinese government actively mitigates local urban friction through its massive “East Data, West Computing” (东数西算) state strategy.

• Instead of building facilities near heavily populated, water-stressed metro areas, China mandates the construction of massive data center clusters in sparsely populated, resource-rich western provinces.
• Beijing heavily subsidizes domestic AI data center operators, covering up to half of their total energy costs to ensure local consumer utility rates remain unaffected.
• Sentiment among young Chinese tech workers and citizens heavily aligns with national technology initiatives. The Chinese government explicitly frames AI and robotics as the crown jewels of its industrial future. Consequently, infrastructure growth is widely viewed by the public as a point of national pride and economic competitiveness rather than a localized environmental threat.

Google to Invest €13 Billion in AI Infrastructure in Finland

Alphabet Inc.’s Google is planning its biggest investment in Europe, an artificial intelligence infrastructure build out worth at least €13 billion ($15.1 billion) in Finland.

The investments over the next two years will include the construction of at least three new data centers as well as the expansion of its existing data center in the southeastern city of Hamina, the company said in a statement on Wednesday.

Google’s move is part of a large-scale build-out of computing capacity in the Nordic country, coming on top of an estimated €43 billion worth of projects being planned or executed.

Those projects are taking advantage of Finland’s relatively cold climate, which requires little cooling and where heat generated by the servers can be captured to warm up homes. In addition, 96% of electricity in the Nordic country is based on carbon-free production, mostly a mix of nuclear and renewable power. There’s also plenty of available fresh water, and most data centers in Finland are built with a closed loop system reducing water waste. (…)

The projects in Finland haven’t inspired as intense a public backlash as some of the proposed sites in the US or other parts of Europe, where concerns over land and resource use and power costs have delayed or derailed projects. (…)

Other companies building, operating or planning data centers in Finland include Microsoft Corp., Nscale, AtNorth Holding AB, Pure Data Centres Group, Nebius Group NV, DayOne Data Centers and Polarnode. There are so many projects that the government is planning a law that would require operators to register data centers to ensure officials can keep track of them all.

Trump’s next trade weapon

From Axios:

Trump is reaching for a more drastic trade war weapon, with new threats to shut foreign goods out of the U.S. altogether.

It would mark a significant evolution of the administration’s trade agenda, with potentially bigger economic fallout than the tariffs that have defined it so far.

• Trump may also have firmer legal footing for some import bans than emergency tariffs. Federal trade laws explicitly give presidents the power to prohibit imports under certain conditions, even where courts have rejected their authority to impose tariffs.
• Businesses can absorb the cost of a tariff, pass it on to customers, or some combination of both. But losing access to a key part or product altogether can result in shortages, stalled production and a chaotic scramble to find new suppliers.

Trump threatened to ban Canadian aircraft manufacturer Bombardier from selling jets in the U.S., just hours before Canada’s retaliatory tariffs on $20 billion worth of U.S. goods took effect this morning.

• “NO MORE SELLING BOMBARDIER IN THE UNITED STATES!” Trump wrote on Truth Social. “If they want our Market, they must build here, and stop treating America like a ‘piggybank.'”
• The Bombardier threat came days after Trump responded to the strong jobs report with a social media post demanding that the Federal Reserve lower interest rates, tying the demand to a sweeping threat to cut off trade with nations that would in theory include countries like Canada, Japan and China.
• “LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT,” Trump wrote. Notably, he added: “IT’S BETTER THAN TARIFFS!”

Top Trump trade official Jamieson Greer has also floated outright bans, saying last month that it could be an option to hit back at Canada’s retaliatory tariffs.

• “We’ve never done these bans; it’s quite extreme. But maybe we need to,” Greer said in an interview with the CBC late last month.
• Greer also said in July that Trump “for sure can” use emergency powers to restrict trade, after the president threatened to cut off trade with Spain.
• At the time, Greer pointed to the Supreme Court’s ruling that blocked Trump’s emergency tariffs, noting that law “clearly says you can prohibit trade.”

The U.S. has banned imports before, though usually as part of sanctions against adversaries rather than as leverage in a trade dispute with a close economic partner like Canada.

• The Supreme Court ruling that blocked Trump’s emergency tariffs highlighted that a more potent option was available to him.
• The Court ruled that IEEPA doesn’t authorize tariffs, but the law explicitly allows presidents to prohibit imports. Trump seized on that distinction the day the ruling came down. “I can embargo, but I can’t charge one dollar,” he told reporters.
• Justice Brett Kavanaugh called that an “odd donut hole” in oral arguments, noting that a president could shut down trade entirely, but couldn’t impose even a 1% tariff.
• Section 338 of the Tariff Act of 1930, which Trump has already invoked against Canada, also allows the president to exclude a country’s goods under certain conditions.

Trump’s Bombardier threat is already showing the political realities that can complicate such drastic trade moves.

• The company — and the firms that supply it — are deeply embedded in the U.S. economy, particularly in Kansas. It employs over 1,000 people in Wichita and buys from roughly 2,800 U.S. suppliers across 47 states.
• Kansas Republicans were quick to hint at the potential for economic fallout of an outright import ban.
• “I reached out to the Trump administration to make certain the President is aware of the significant contributions of Bombardier to Kansas,” Sen. Jerry Moran posted on X.

US Escalates Canada Trade War With Product Bans, New Tariffs

U.S. Adds a Whopping 162,000 Jobs in a Bright Spot for the Economy Unemployment rate stayed at a historically low level of 4.1%

(…) Economists polled by The Wall Street Journal had forecast the report would show the economy gained just 53,000 jobs. (…)

The jump in jobs came in part from rebounds in restaurant and in local-education employment that many economists viewed as one-off factors. But the U.S. has added an average of 80,000 jobs a month so far this year, which compares with monthly growth of 10,000 jobs in 2025. (…)

The jobs counts for both June and July were revised higher. The Labor Department now says that the economy added 21,000 jobs in July, rather than losing 23,000 jobs. June’s jobs gain was revised up to 31,000 from 20,000.

Average hourly earnings rose 3.1% from a year earlier, indicating that pay continues to struggle to keep up with inflation. Consumer prices were up 3.4% from a year earlier in July. (…)

Goldman Sachs:

The increase in payrolls largely reflected a rebound in leisure and hospitality (+62k) and local government education (+42k), after the two had declined by 75k and 52k over the previous two months, respectively. As we noted, both series experience large swings in employment in summer months on a not-seasonally-adjusted basis, making it difficult to seasonally adjust them well and contributing to outsized volatility in their monthly seasonally adjusted readings.

The three-month average of payroll growth stands at 71k and our estimate of the underlying pace of job growth based on the payroll and household surveys now stands at 53k.

Average hourly earnings increased 0.3% month over month in August, in line with consensus expectations. The year-over-year rate declined 0.15pp to 3.09%. Wages for production and non-supervisory workers increased by 0.34% month over month or 3.30% from a year ago. Our wage tracker stands at 2.8% annualized and 3.6% year-over-year in Q2, and our wage survey leading indicator stood at 3.5% in August.

Quite a challenge to find a trend. Even the recent 3-m change of +71k (red line) looks iffy.

But the trend in labor income (black: employment x hours x wages) is clearer, stabilized just above 4% YoY but increasingly eroded by inflation. The unusual gap between growth in labor income and spending illustrates how dissaving has contributed to the US economy in 2026.

When growth in real disposable income slipped below 2% in the spring 2025, Americans used their savings (or increased borrowings) to keep spending growth above 2%.

The savings rate has rarely touched or stayed at 3% or less in the past. In 2005-08, Americans over borrowed to create the housing crisis. This time, Americans are also spending beyond their means but using their new riches from equities. Time will tell how sustainable this is.

The August jump in employment will focus the Fed on inflation. There also, it ain’t easy to see a clear trend, at least at the consumer level.

Corporations seem to be able to deal with inflation on their physical inputs (PPI black), finding a welcome offset from quickly slowing wages while sales growth accelerated from 3-4% to nearly 10% in Q2, thanks to exploding AI spending and the war with Iran, both boosting revenues for American commodity producers.

This chart plots US exports of goods and PPI-Commodities. Both series jumped spectacularly this year, boosted by demand from AI but even more so by the war.

Year-to-date US exports growth rates (Jan-July):

1- AI & war related:

• crude oil: +47%
• fuel oil: +43%
• natural gas: +22%
• natural gas liquids: +12%
• Other petroleum products: +30%
• Fertilizers: +10%
• Aluminum: +33%
• Other non-ferrous metals: +20%
• Steel making materials: +17%
• computers: +63%
• Electricals: +13%
• computer accessories: +51%
• Telecom equipment: +13%
• semiconductors: +24%

2- Other exports:

• Automotive vehicles, parts and engines: -6%
• Consumer Goods: -2%
• Capital goods ex-AI,ex-aircrafts: -2%
• Industrial materials ex-commodities & precious metals: -6%
• Foods, feeds & beverages: +10%
•     ex-soybeans: +5%

All US exports for first 7 months: +10%

• #1 group (53% of total): +20.5%
• directly war-related (21% of total): +32.3%
• directly AI-related (32% of total): +14.0%
• #2 group (36% of total: –2.4%

So:

The US economy, corporate revenues, margins and profits are strongly benefitting from AI and the war, both pushing prices up while wage growth has slowed below inflation.

AI will continue to contribute strongly but the economy, corporate revenues, margins and profits are vulnerable whether the war ends or not.

• If the war ends, commodity prices will decline, negatively impacting nominal exports. The volume of US exports will also decline as US exports will cease to fill the war-induced gaps (e.g. crude oil, fuel, LNG, etc.).
• If the war endures, commodity shortages and prices could rise enough to choke world economies, potentially leading to recessions and financial strains.

Your guesses on these non-exhaustive scenarios is as good as mine.

About AI:

Two meaningful risks to growth beyond 2026:

• data center construction amid protests:

• More likely: power supply.

Canada sheds 42,000 jobs in August

(…) The unemployment rate held steady at 6.4 per cent. (…)

The three-month average for employment growth, a metric that economists use to smooth out volatility in the month-to-month numbers, fell from more than 60,000 in July to around 17,000 in August. (…)

The weak jobs report suggests the job market could have been struggling before the latest tariff hit, said Royce Mendes, head of macro strategy at Desjardins Securities, in a client note. “That said, the headline underperformance could just be a normalization after a period of outsized hiring,” he added. (…)

Despite a challenging trade environment, manufacturing led the gains among industries in August with a net 22,000 new jobs. Hours worked were also stronger in manufacturing, which could be evidence of efforts by some companies ramping up production before U.S. tariffs took effect, said Andrew Grantham, senior economist at CIBC Capital Markets, in a note to clients. (…)

Average hourly wages grew 2 per cent year-over-year in August, down from 2.8 per cent in July. (…)

Time Is No Longer on Iran’s Side in the Battle of the Blockades The U.S. is helping Gulf states move significant amounts of oil out of the region while thwarting Tehran’s shipments

Featured WSJ piece, but unfortunately not completely accurate and thorough. (Note that parts of what follows blends from several sources, including David’s own research, with some AI contribution which I verify as much as possible)

The WSJ long article is totally based on this little paragraph:

TankerTrackers.com estimated earlier this week that on average about 5 million barrels a day of crude oil, almost none of it Iranian, exited the Persian Gulf via the Strait of Hormuz over the previous 28 days, along with roughly 2.5 million barrels via oil ports on the Gulf of Oman, such as Fujairah in the United Arab Emirates. These exports represent more than 40% of the region’s prewar flow of oil.

• TankerTrackers numbers are accurate but they contradict the claims made by the US administration. Here’s how the various numbers compare:

Recent Windward daily logs recorded 9 vessel transits per day (e.g., 4 inbound and 5 outbound on September 2–3). This confirms Al Jazeera’s observation that vessel movements are depressed by nearly 90% compared to prewar levels (roughly 10 ships daily vs. the historic 100 ships daily), even as larger supertankers under military escort manage to move ~5 million barrels per day through the waterway.

(Windward through Sep. 7)

• “almost none of it Iranian” may be officially correct but actually inaccurate. Data from TankerTrackers.com, Kpler, and Vortexa confirm that Iran has gone roughly seven weeks without officially moving crude out of the Persian Gulf through the strait to its primary buyer, China.

But a portion of Iraqi crude transiting the Strait is actually mislabeled or blended Iranian oil. Extensive “dark fleet” tracking and enforcement actions demonstrate that illicit blending takes place to bypass the US naval blockade. Iraqi export volumes jumped to over 2.3 million b/d in August 2026. Reuters reported in May 2026 that Treasury alleged that an Iran-affiliated smuggler mixed Iranian with Iraqi oil and used false documentation to sell the combined cargo as Iraqi.

Recent Chinese import data supports the view that China is still receiving Iranian-origin oil. Kpler’s provisional estimates put China’s Iranian-oil arrivals at 785,000 b/d in June, 823,000 b/d in July, and 534,000 b/d so far in August (Aug. 24), 55% of the 1.4 million b/d average of 2025.

China’s official July customs figures reportedly recorded no direct crude imports from Iran, while imports attributed to Malaysia, a recognized transshipment hub for sanctioned Iranian oil, were about 350,000 b/d.

Chinese customs data also showed about 24,000 b/d from Iraq in July. But September-loading activity points to a rebound: market sources told Reuters that Chinese refiners had bought at least 16 million barrels of Basrah crude for September arrival. Iraq’s total August crude exports were estimated at 2.17 Mb/d by Kpler and 2.30 Mb/d by Vortexa.

(Windward)

China released its August trade data yesterday: crude oil imports, which dropped 41% between March and June 2026 (driving oil prices down), rose 22% MoM in July and another 6.1% in August. Chinese oil imports thus rose by 63 million barrels in July and August. Much came from Russia but also from Malaysia.

(ICIS)

In all, while we don’t know the exact amount, “zero Iran” seems highly unlikely. Also unlikely is the US claim that Middle Eastern crude shipments have almost completely recovered. WTI was $74 in early August, $94 today. The December futures went from $74 to $87 meanwhile.

Brent crude could surge above $120 a barrel because of intensified attacks on shipping in the Strait of Hormuz and Red Sea, Goldman Sachs warned in a new oil price forecast.

“Markets are increasingly pricing a prolonged Mideast conflict,” the bank’s analysts said in a research note Monday evening. (WSJ)

My good friend Huber Marleau:

This escalation [in oil prices] represents a fast return of the pre-existing geopolitical premium of a Middle East war that won’t end because the players are unable to find a way out of the conflict. On the one hand, Iran is in no mood to capitulate and on the other, the US midterm elections have not broken the stint. In this regard, the flaring tensions between the U.S. and Iran exacerbated inflation concerns, which, in turn, acted as the catalyst that drove 10-year bond yields up sharply to 4.80% because of the strong bond/oil correlation.

But this is not the fundamental reason.

The media has attributed this upward move to inflation and soaring term premium – a gauge that measures the extra yield investors demand to hold long-dated bonds. I disagree with their views because they are not true.

Firstly, investors’ expectations of average annual inflation over a 10-year period have gone nowhere since the Iran war began, hovering steadily around 2.3%.

Secondly, the term premium has moved sideways over the past twelve months, suggesting that worries about fiscal sustainability and Fed credibility are not warranted.

The point is that the rise in bond yields is hardly a crisis, for it reflects the restoration of the historically usual 2-3% real interest rates on top of 2-3% inflation, making 4-6% nominal interest rates perfectly normal.

This reappearance is related to a structural shift in the supply and demand for capital. Fundamentally, the US government’s insatiable demand for capital to fund large fiscal deficit spending is facing fierce competition from an unusually large supply of high-grade corporate bonds stemming from the AI capex boom, as well as the growing attraction of foreign bonds and the sell-off of overseas holdings by Japanese investors to protect the yen against the rising cost of energy.

All this is happening at a time when price-sensitive hedge funds, individuals, and investment funds have replaced the central banks as the major buying force.

Ed Yardeni neatly paints the US pickle before telling us not to worry:

The question is whether the [debt] crisis is imminent. Even more important is whether a policy response could stop the crisis from turning into a death spiral. If so, the crisis will be a buying opportunity.

Servicing the national debt is becoming a growing fiscal challenge. Treasury net interest outlays has climbed above $1 trillion on a 12-month basis, putting it on par with national defense spending. The recent rise in the yield curve, along with mounting debt, will push net interest outlays higher. There is no way to put lipstick on this pig.

Federal spending continues to rise relentlessly. CBO projections show total outlays exceeding $11 trillion over the next 10 years, driven primarily by mandatory spending and rising interest costs.

CBO projections also show annual budget deficits widening from about $1.8 trillion today to more than $3 trillion towards the end of the 2030s.

The federal budget deficit is currently running at around 6% of GDP, a level more commonly associated with recessions than economic expansions. CBO projections suggest deficits will remain above 6% of GDP for years.

Federal debt held by the public is already near 100% of GDP and, according to the CBO, is projected to exceed 150% by the mid-2050s.

Importantly, today’s debt challenge is largely a government debt problem. Household and business debt relative to GDP remains well below its pre-GFC peak, while Treasury debt continues to trend higher. The AI buildout could temporarily reverse that trend as businesses increase borrowing to fund AI-related investments. (…)

The US remains on an unsustainable fiscal path. Should investors be worried? Again, we will worry about the deficit and rising debt when the Bond Vigilantes start worrying about them.

The Bond Vigilantes have been stirring lately, but the 10-year Treasury bond yield remains between 4.00% and 5.00%. We’ve contended that this range is the “old normal,” i.e., the same range as in the years from before the Great Financial Crisis to the Great Virus Crisis. This suggests the economy is back to normal and growing at a solid pace.

(…) Bond Vigilantes tend to be on the loose when the 10-year US Treasury bond yield exceeds nominal GDP. The yield is currently well below nominal GDP. (…)

Hmmm… Respectfully Ed:

• Treasury yields went up almost non-stop from 4% in 1965 to 15% in 1982 while constantly below GDP growth. Much of the subsequent decline in yields was when GDP was growing more slowly than yields.
• What is normal? Ed’s “old normal” of 4-5% yields occurred rather rarely since 1950. Was the period 2001-2008 normal?
• Is the US economy really “back to normal”, K-shaped as it is and really only sustained by AI and the US warring Iran? I doubt the average American would consider all this normal.

This chart below plots 3 ways to assess “normality” using inflation-adjusted Treasury yields. The Cleveland Fed’s measure and the 10Y nominal minus actual core CPI inflation measure are pretty much in sync over time. The 10-Y Breakeven Inflation Rate uses expected inflation.

All three measures are at 2.5% currently, the high end of the 2001-2026 range of 0-2.5%, … but the low end of the 1980-2001 range of 2.5-5%.

I asked an AI friend why the shift?

The Pattern Itself

Your stylized fact holds up well against the data. Over 1985–2001, nominal 10-year yields ranged from 11.4% down to 4.7%, while inflation expectations were mostly 2.5–4%, leaving ex ante real yields of roughly 2.5–5%. Since 2003, market-based real yields on 10-year TIPS have averaged about 1.0%, with a floor around −1% (2012–13 and 2021–22) and a recent recovery to only 1.8–2.4% in 2024–26. The break around 2001 is real, and it’s a global phenomenon, not a US-specific one.

The Framework

A 10-year real yield decomposes into two parts: the expected average path of short-term real rates (the natural rate, r*) plus a term/risk premium. The CBO, IMF, and academic literature all conclude that the post-2000 decline reflects both a falling r* and compressed premia, driven by global saving and investment forces. So the question becomes: why was r* high before 2001 and low after?

Why Real Rates Were High, 1985–2001?

• Disinflation with credibility still being built. Volcker and early Greenspan held real policy rates high to break entrenched inflation; markets demanded a premium for lingering inflation uncertainty.

• Strong growth and investment demand. Trend productivity accelerated in the late 1990s IT boom, raising the return on capital and the demand for loanable funds.

• Structural fiscal deficits. Federal deficits of 3–5% of GDP through the 1980s and early 1990s kept Treasury supply heavy.

• Demographics. Baby boomers were in prime borrowing and working years, supporting demand for credit and capital.

Why Real Rates Fell After 2001?

• The global saving glut. Bernanke’s famous 2005 argument: after the 1997–98 Asian crisis, emerging markets and China built precautionary reserves, and oil exporters recycled commodity windfalls into US Treasuries, pushing down world real rates. The IMF estimates this EM saving surge was the largest single driver of the early-2000s decline.

• Safe-asset shortage. Global demand for safe, liquid assets is concentrated in US Treasuries, which compresses their real yields relative to other assets.

• Slower trend growth. The post-1995 productivity boom faded; slower potential growth is one of the most widely cited explanations for a lower r*.

• Weak investment demand. Advanced-economy investment rates fell sharply and persistently after the 2008 financial crisis.

• Demographics and secular stagnation. Aging populations saved more for longer retirements while investment opportunities weakened.

• Monetary policy and portfolio shifts. The 2001 recession easing, then ZIRP/QE after 2008 and 2020, anchored expected short rates near zero, while the tech-bubble bust shifted portfolios toward bonds and the “Great Moderation” lowered perceived risk.

A skeptical note for completeness: some researchers argue the savings glut is overstated — global saving rates weren’t rising robustly — and attribute the fall more to asset bubbles, risk misperception, and reserve accumulation in fixed income.

Is the Regime Changing Again?

Possibly. Real 10-year yields have climbed from −1% in 2021 to roughly 2.4% by mid-2026, driven by large fiscal deficits, sticky services inflation, deglobalization, and heavy AI-infrastructure capex — forces that could push r* back toward the old regime’s lower bound.

Even so, real yields remain well below the 3.5–4% mid-range that was routine in 1985–2001, which is why the debate over whether the low-rate era is truly over remains unsettled.

Even AI can’t decide!

But Ed can:

Here are a couple of reasons why we expect the 10-year yield to remain between 4.00% and 5.00%:

(1) US Treasury Secretary Scott Bessent has taken some actions recently to stop bond yields from rising. He has stated that the Treasury can do much more if necessary. If the 10-year Treasury yield rises to 5.00%, we expect he will announce that the Treasury intends to issue more Treasury bills and use some of the proceeds to buy back Treasury bonds. His predecessor, Janet Yellen, did that in 2023, and it worked.

Remember, Bessent worked with Stanley Druckenmiller for Soros Fund Management in the early 1990s. Together, they shorted the British pound in September 1992, netting the hedge fund over $1 billion. They “broke the Bank of England.” Bessent’s recent actions are a signal to his friends in the hedge fund community that he will break them if they short his bonds!

(2) Fed Chair Kevin Warsh has stated that the Fed is committed to restoring price stability. If inflation remains stubborn, the FOMC will probably raise the federal funds rate in September. That should restore the Fed’s credibility as an inflation fighter and ease pressure on long-term yields. We told the Fed to do that in July, but they just won’t listen.

Credibility is the word.

• Is Bessent credible saying he can break the Bond Vigilantes? I have my doubts.
• Is Warsh credible saying he means business on inflation? He said it so clearly and so often now that he has no choice. The Bond Vigilantes will see to it.

But at what cost to the economy?

As Bloomberg pointed out last week:

(…) the US economy has become increasingly insensitive to interest rate increases by the Federal Reserve. To combat inflation and tame yields on long-dated debt, more aggressive hikes will be needed. That means bonds will keep losing value as yields have yet to peak. (…)

The single largest structural change is the dominance of long-term fixed-rate mortgages. In the 1980s, adjustable-rate mortgages were far more prevalent. That meant Fed hikes transmitted almost immediately to household budgets. Today, the vast majority of US homeowners hold 30-year fixed-rate mortgages. And since many of those were refinanced at historically low rates during 2020 and 2021, debt-servicing costs remained around 10% of income despite the 2022–2023 hiking cycle.

On the corporate side, it’s similar. In the 1980s, corporate America carried more floating-rate bank debt and had less access to deep, long-duration bond markets. Investment-grade and high-yield bond markets since then have allowed companies to lock in long-term fixed-rate financing, reducing their immediate exposure to rate moves. (…)

Add urgent AI spending, urgent military spending, urgent green spending, urgent supply chain spending, all cost/price insensitive.

Who said investing was easy?

And who said “trade wars are good, and easy to win“? The same man who said Iran would quickly fold in a “small potatoes” war.

China Export Growth Rebounds as Trade Surplus Nears $806 Billion

Exports jumped 25% in August from a year earlier, slightly undershooting forecasts after an increase of nearly 24% in the previous month. Imports rose 28.2%, data released by China’s General Administration of Customs showed on Tuesday. (…)

China’s trade surplus with the US surged almost 44% from a year earlier to more than $29 billion — the widest gap since Donald Trump returned to the White House in January 2025. While exports to the US jumped 34.4% in August, China’s shipments to the European Union climbed only 6.7% — the slowest increase in 10 months.

Exports to the Southeast Asian nations in the Asean group slowed slightly but still soared just over 30% from a year earlier. Shipments to Latin America accelerated to 17.5% and climbed more than 31% to Africa. (…)

The boom in exports helped mask disruptions to shipping caused by extreme weather in August. Major ports in east China suspended operations as typhoons approached.

Cargo throughput at China’s ports fell every week last month from the prior seven days, according to official figures.

While trade volumes are on the rise, price gains are dramatically inflating the value of exports this year. With trillions of dollars pouring into AI, a shortage for semiconductors and other electronics has sent some chip prices soaring as much as 700% over the past year.

Bloomberg Economics estimates high-tech shipments contributed to more than half of China’s headline export growth in August.

Sales of integrated circuits abroad surged almost 130% in August, with exports of high-tech products up nearly 57%. Shipments of vehicles slowed. (…)

“AI demand is offsetting the impact of adverse weather, boosting export numbers higher,” Xing said. “The tariff uncertainty continues to frontload US import demand.”

• China’s Car Sales Fall 24% as BYD, Tesla Seek Reprieve Abroad

Retail sales in the world’s biggest auto market slumped 24% to 1.54 million units, the China Passenger Car Association said Tuesday. Year-to-date sales are down more than a fifth as a persistent real estate crisis weighs on big-ticket spending.

Automakers in the country are looking to grow elsewhere to escape the pain. Their exports jumped 78% to 888,000 vehicles last month, with overseas sales now accounting for 38% of the total, up from a fifth a year ago. (…)

BYD just lifted its target for overseas sales this year to as much as 2 million units, from 1.5 million previously. The maker of the Dolphin sedan was the biggest exporter of new-energy vehicles from China in August, with over 184,000 sales abroad, PCA said. Of the roughly 86,000 fully electric models Tesla Inc. shipped from its Shanghai factory, some 36,000 went overseas. (…)

While on China’s exports:

• China rare earth firms halt some US shipments over geopolitical worries

Some Chinese rare earth suppliers are declining to ship to the U.S. for fear of repercussions from Beijing, three sources said, ​underscoring how access to the materials remains an issue for the U.S. weeks before President Xi Jinping visits Washington.

U.S. officials have repeatedly asked China to stick to commitments made in Busan ‌and Beijing over the past year to ensure the smooth flow of rare earth export licences. The persistence of the problem has put it on the U.S. planning agenda ahead of Xi’s September 24 visit, a source familiar with the work said.

A handful of Chinese suppliers have refused to ship rare earths to U.S. companies since early August when China imposed sanctions on the Responsible Business Alliance (RBA), a U.S. supply chain monitor, a separate source with direct knowledge of the situation said.

With China deploying its own trade ​compliance weapons, the companies were wary of punishment from Beijing for complying with the due diligence framework of the Responsible Minerals Initiative (RMI), a global mineral supply chain audit programme connected with the RBA, the source ​said.

Other Chinese rare earths companies had already stopped shipments to the U.S. to avoid entanglement in geopolitics in recent months, two other sources familiar with the trade said. One ⁠cited four instances where Chinese firms declined to send material for fear it could be resold to banned users.

Exports to the U.S. of yttrium have risen this year but are still only ​about half 2024 levels despite large shipments to other countries, Chinese customs data shows. Some U.S. companies have been waiting more than six months for mineral licences, said two of the sources, declining to identify them. (…)

Beijing said its August decision to sanction the RBA and other U.S. auditing firms was a response to a series of FCC restrictions since December targeting Chinese electronics testing labs, drones, consumer routers, submarine cables, advanced robotics equipment and power inverters.

When U.S. officials have raised the ​rare earths issue in meetings, Chinese officials countered ​by saying the FCC actions were a violation ⁠of the Busan truce, said one of the sources who was briefed on the interaction.

However, after two months without yttrium exports, China sent 27 tons of the material to the U.S. in July, the second-highest monthly shipment since January 2025.

Several U.S. firms also report recently receiving multiple licences after long waits, two sources said, with ​some firms anticipating an increase in approvals around the summit.

Licence approvals are even more limited for Indian and Japanese buyers, two sources familiar with the ​matter said. Chinese suppliers are ⁠overwhelmingly refraining from shipping material to Japanese firms, one of them said.

Japan’s Trade Minister Ryosei Akazawa has previously said Japanese companies have faced delays in permits and prolonged customs inspections for critical minerals including rare earths. (…)

UK and EU Gasoline Is Reaching Russia

Sustained Ukrainian strikes on Russian refining capacity have produced something not seen since the start of the war: Russia importing gasoline and diesel at scale.

Windward’s analysis of shipping data, combined with Vortexa trade-flow data, puts total Russian imports at an estimated 3.85 million barrels across July–August 2026 — roughly 500,000 barrels in July, rising to about 3.4 million in August as the refinery crisis deepened. Gasoline and gasoline-blending components accounted for 3.1 million barrels of that total.

The more consequential finding is where some of that fuel likely originates. The data indicates a meaningful share is UK- and EU-origin product, moved to Russia through blending and storage infrastructure in Morocco.

In parallel, record South Korean volumes are supplying Russia’s east coast, using ship-to-ship (STS) transfers in third-country waters, sanctioned and Russia-flagged tonnage, and opaque terminal blending.

It is the same playbook long used to launder Russian crude and refined product exports, now running in the import direction.

CREDIT CHECKS

• High yield decoupling:

Source:  @Lvieweconomics

• Tech vs Banks: a similar divergence is playing out in Tech vs Bank sector CDS. Credit investors are treating tech borrowers with greater scrutiny, while banks are seen as lower risk than usual. This tells us that there are no systemic issues right now (calm on banks), but again, there are pockets of concern. If tech borrowers did start to default you can bet that will ripple across markets.

Source:  Topdown Charts Pro

• Hyperscaler Hyperspeed Issuance: speaking of tech sector borrowers, the Hyperscalers are issuing so much debt this year they are nearly outborrowing even the most profligate debtor of all — the US government! As Cembalest remarks: “Looking just at the long duration component in 2026, we estimate $310bn in ten year equivalents. That’s 70% (!!) of new Treasury long duration borrowing this year.” (Callum Thomas)

Source:  JP Morgan via Daily Chartbook

The New U.S. Tax on ‘Brilliant People’ An exorbitant fee on H-1B visas may exceed executive authority to tax.

President Trump has largely closed the border to illegal migrants, but immigration restrictionists in the Administration aren’t satisfied. They’re seeking to construct a steep regulatory wall to keep out legal immigrants, recently proposing a $103,265 tax for employers seeking to hire high-skilled foreign workers.

The Department of Homeland Security says this “fee” on H-1B visa applications will fund administration of immigration services. DHS estimates the “fee” would raise $8.8 billion a year, which is significantly more than it costs to administer the program.

The H-1B program lets businesses hire foreign workers with specialized skills if they can’t find Americans for a position. The goal of this tax isn’t to raise revenue as much as to make it much more expensive to hire foreign workers.

H-1B visas by law are capped at 85,000 a year. (…)

Businesses invest heavily in training U.S. workers, but colleges are educating too few graduates with particular skill sets that employers need—e.g., cyber-security and robotics. According to the National Foundation for American Policy, foreigners account for roughly 75% to 80% of full-time graduate students in AI-related fields. (…)

The DHS proposal amounts to a tax on businesses that often bring in brilliant people. It also may exceed executive authority. (…)

Smaller businesses and startups might struggle to afford the tax and would have a harder time competing for foreign talent against Big Tech companies. Many of America’s great companies, including Nvidia, Google, OpenAI and SpaceX, were founded in part by immigrants. Why does the Administration want to keep out the next Elon Musk?