Bond vigilantes, Bessent, FOMC, Warsh, Trump, Kennedy Jr.:
Scott Bessent, the man of all situations (lastly trying to bring oil down saying an “Hormuz deal is imminent” on Aug. 4), is now trying his Treasury Secretary suit to warn bond vigilantes that enough is enough. If this is another war, he’d better get more and better ammo than a couple of $billions.
The same day, the Fed Minutes revealed that “price pressures appeared broad-based”, so much that many said that the Committee “should adopt a more restrictive policy stance”. The minutes showed no appetite for rate cuts, noting that inflation risks remain “skewed to the upside” and that “successive supply shocks have repeatedly delayed the expected return of inflation to 2 percent in recent years.”
Add that participants judged that the economy “continued to expand at a solid pace” thanks to “strong business investment and resilient consumer spending.” AI in particular is seen as “pushing up aggregate demand” affecting investment, labor markets, inflation, and financial stability, for many more years.
Interestingly, while the war with Iran, tariffs, and AI-related demand pressures were cited as causes of inflation’s persistence, the Minutes make zero mention of what’s really bothering the bond vigilantes: the soaring and uncontrolled budget deficit and its impact on overall demand and inflation.
Bessent can talk and tweet all he wants, like his boss in Iran he has weak and limited ammo and no clear plan against a powerful adversary determined to hold its ground.
Announcing the doubling of the amount of LT bonds that the Treasury can buy back (isn’t that monetary policy, like QE or Operation Twist?), he clashes with Kevin Warsh who wants the Fed to shrink its balance sheet.
If this was meant to be only a symbolic warning, it may actually confirm that the Trump administration (as well as Congress) has no plan, let alone any resolve, to address the fiscal cancer everybody is now conscious of. (BTW, the higher buyback limits will begin September 9 and remain in place through the rest of the refunding quarter ending November 4, 2026. The elections are Nov. 3.)
Foreigners and the forex market are taking note, another one after the August 3 joint U.S.-Japan currency intervention when Bessent opted to sell euros and not USD to buy Yens (without prior warning to the ECB).
Speaking of cancer, Moderna yesterday announced that its mRNA-based research for a cancer vaccine has yielded favorable results.
Recall that the Trump administration and Health and Human Services (HHS) Secretary Robert F. Kennedy Jr. shifted heavily against mRNA research in 2025. What Trump once called a “medical miracle” got defunded by $500M after Kennedy’s “comprehensive review” of BARDA (Biomedical Advanced Research and Development Authority) investments concluded that “mRNA technology fails to protect effectively and poses more risks than benefits”.
What a day!
Trump Threatens Iran With ‘Economic D-Day’ As the war nears its six-month point, the president says he would unleash the ‘most crushing economic operation ever taken’
Trump said on Wednesday evening he would launch a major economic campaign against Iran and any entity that does business with the regime. The president said it would be “the MOST CRUSHING ECONOMIC OPERATION EVER TAKEN AGAINST ANY COUNTRY!” Trump didn’t say what specifically the U.S. will do in addition to the heavy sanctions that are already on Tehran.
“I am also announcing that ANY country that allows its financial institutions, businesses, airports, or government entities to provide any type of lifeline to Iran will itself face TREMENDOUS Economic Consequences,” Trump posted on Truth Social. “Oil smuggling, swap lines, cash transfers, exchange houses, ship registries, front companies—It all needs to stop NOW. You know who you are.” The president called on U.S. allies to support his effort to isolate Iran.
China is Iran’s largest trading partner and the Islamic Republic has economic ties with Middle East neighbors, but trade with Europe is small due to years of sanctions and other restrictions. As part of the U.S. strategy to squeeze Iran economically, the United Arab Emirates said late Tuesday that it has suspended financial and economic transactions with Iran, potentially threatening Tehran’s access to a major source of imports and a financial back door to the world. (…)
“We have very draconian sanctions and we’ll see what happens,” Trump told reporters. “It’ll either be extremely good and oil prices will drop like a rock, or we’ll continue doing exactly what we’re doing.” (…)
“Watch this space for more announcements coming next week because we are going to apply measures like have never been seen in the history of the economic isolation of a country,” Bessent said on Newsmax Wednesday. (…)
Senior Trump adviser Jared Kushner said on Monday that talks between the U.S. and Iran through backchannels were “positive and active,” even as Iran denied any communication and Trump said there were no ongoing conversations. (…)
Senior administration officials say Iran’s economic desperation could lead to a breakthrough, and the president has said he believes the U.S. Navy blockade targeting Iranian shipping and ports has been effective. But The Wall Street Journal reported Iran’s hard-line leaders are prepared to dig in their heels for a continuation—and escalation—of the war.
(…) Beyond the economic impact, Trump’s threats risk further straining ties between Washington and Beijing ahead of his planned meeting with Chinese leader Xi Jinping next month.
China does not recognize unilateral sanctions, but its state-owned entities generally stay away from blacklisted oil. Its biggest state banks also have a history of complying with US sanctions against Iran, North Korea and even top officials in Hong Kong, in order to avoid losing access to the US dollar-clearing system.
Washington has already sanctioned some Chinese teapot refineries and firms since the US launched the war against Iran in late February. But so far, the US has stopped short of targeting the major Chinese banks that finance the trade.
In May, China ordered domestic companies not to comply with US sanctions on five refiners, while its biggest banks were caught between Beijing’s directive and the risk of losing access to the US financial system. (…)
“There may be some retaliatory measures, but most likely they will quietly adapt and find a new system, rather than completely give up on doing business in Iran,” said Figueroa.
Over the years, I’ve witnessed at first-hand countries going literally broke under US economic pressure: Iraq, Venezuela and Cuba. The scenes I saw in Baghdad, Caracas and Havana were all very similar. The national currency became worthless, inflation skyrocketed and unemployment spiraled higher. And yet, American economic sanctions alone failed to force political change.
US President Donald Trump is betting he can break Iran economically and, in the process, achieve the political concessions he wants — all in record time. But historical precedent suggests he’s wrong. The Islamic Republic has demonstrated many times before its deep capacity to endure financial suffering, and its pain threshold is likely even higher now that the threat is existential. With Trump and his brother-in-arms, Israel Prime Minister Benjamin Netanyahu, running short of options to end the war they started without much of a plan, the route of economic asphyxiation is probably the least bad plan. Needless to say, “least bad” is far from “good.” (…)
Trump doesn’t need the regime to collapse; he just needs sufficient leverage at the negotiating table, hurting Iran enough for Tehran to soften its demands for ending the conflict.
To work, however, Trump needs to outlast Iran economically — and oil is the key. If the White House can keep crude below $100 a barrel or thereabouts, it has a chance. Right now, West Texas Intermediate, the US oil benchmark, is changing hands at around $85 a barrel. For that to continue, enough barrels need to keep flowing via the Strait of Hormuz. China needs to help too, by keeping its oil imports well below prewar levels. So far in August, both elements are working in Trump’s favor; there’s no guarantee, however, that the situation will persist.
Iran is, undeniably, hurt, but is it “broke” as Trump claims? It surely feels like it. Its economy is on track to suffer the biggest annual contraction since the nadir of the Iran-Iraq War in the mid-1980s. Inflation is running well above 50%, the highest annual rate since records start nearly 70 years ago. Worse, the cost of food and other necessities has already doubled from a year ago. Its currency, the rial, is worthless. In the black market, the exchange rate has collapsed to a record low of about 1.85 million rials to the dollar; five years ago, roughly 50,000 rials were enough to buy a greenback. (…)
But the encirclement isn’t the wall of steel Trump talks about. Geography is a powerful ally of the Islamic Republic. Over 5,500 kilometers (3,418 miles) long and neighboring seven countries — Pakistan, Afghanistan, Turkmenistan, Azerbaijan, Armenia, Turkey and Iraq — the Iranian border significantly exceeds the distance from New York Ciry to Los Angeles, and is too extensive and too porous to be closed completely. Rail links are burgeoning. Via the Caspian Sea, Iran shares a maritime border with Russia and Kazakhstan, too. Moscow has already helped Tehran to stay afloat via that route. (…)
Earlier this week, Mohammad Bagher Ghalibaf, the Iranian parliament speaker and top negotiator, said on social media that while the White House thinks that “squeezing Iran harder” will force concessions, US Treasury Secretary Scott Bessent lacks the competence to succeed: “Stop waiting for the clown crew to pull a rabbit out of their hat.” (…)
Iran is a huge country, with nearly 90 million people who’ve endured decades of hardship. On a per-capita basis, it’s poorer than it was 40 years ago. Unsurprisingly, the population has revolved against its leaders multiple times over the years. The best hope for Trump is that the economic pressure creates fear in Tehran that domestic social unrest is approaching the melting point once again. Hope, though, rarely works as a strategy.
State-run refiners PetroChina Co. and Sinochem Group, along with Unipec — the trading arm of Sinopec Group — and private processor Rongsheng Petrochemical Co., bought a combined 10 million barrels of Arab Medium and Heavy grades in a tender, said traders familiar with the matter. The oil is for prompt loading.
Separately, refiners including Zhenhua Oil Co. have been allocated at least 14 million barrels of crude for loading next month by state-run Saudi Aramco under annual contracts, the traders added, asking not to be identified as they’re not authorized to speak to the media.
The market is keenly watching for any sustained rebound in buying from China, along with a resumption of stockpiling, after the world’s biggest importer cut its crude deliveries and reduced refining to cushion the impact of the Iran war. The pullback has helped to prevent a spike in oil prices. (…)
In the tender, Aramco offered spot supplies of sulfur-rich crude from locations outside of the Strait of Hormuz for loading as soon as this month. The grades are produced within the Persian Gulf, suggesting the kingdom may be finding ways to move more barrels through the waterway. (…)
Pre-war, the Asian nation typically took around 40 million to 50 million barrels a month from Saudi Arabia.
Still, Chinese refiners have shown a growing appetite for Middle Eastern crude. Rongsheng and other buyers have recently purchased Iraqi barrels, while Abu Dhabi National Oil Co. has issued a ninth tender for supplies. Adnoc has been among the most successful producers at keeping oil flowing out of the Persian Gulf during the conflict.
Walmart Posts Sluggish Sales With Slowest US Growth in Years
Walmart Inc.’s quarterly sales fell short of expectations, a rare miss that’s likely to stoke concern about the leading big-box retailer decelerating alongside a slow-growing US economy.
Sales at US stores open at least a year, excluding fuel, rose 2.6% in the second quarter, shy of the lowest analyst estimate compiled by Bloomberg. That rate of growth — hindered in part by pricing pressure in its pharmacy business — is the slowest in more than six years.
Walmart flagged that its pharmacy business weighed on US sales due to federal drug price negotiations that have led to lower prices. Shoppers spent less per trip during the quarter that ended in July compared with a year ago, though the number of transactions stayed at similar levels. E-commerce sales rose.
Despite difficulties in the latest period, Walmart raised its full-year guidance for sales and adjusted operating income. The company began receiving tariff refunds in the second quarter, which management vowed to put toward lowering prices. (…)
How much is AI contributing to US economic growth? We believe AI accounts for a third of economic growth in 2026
From ING:
(…) Not all tech investment spending is on items that are made in the United States. Imports subtract from GDP, and we should take account of that when calculating the ‘true’ contribution of tech/AI investments. Imports of technology-related items have tripled in value over the past two years to $60bn per month.
US exports have also increased, but on a far more modest scale, from $9bn per month to $17bn per month. The result is that the trade deficit in computers, peripherals and semiconductors has risen from $20bn per month to more than $40bn per month.
One mitigation is that prices of chips and semiconductors have surged in recent quarters due to strong demand and limited supply, so we need to deflate the nominal dollar values in order to calculate the ‘real’ growth in imports. We chose to use the PPI measure of ‘electronic components and accessories’.
Net trade $bn – US exports of technology products less imports
Source: Macrobond, ING
We’ve put together a series of charts showing different ways of calculating the contribution to YoY% real GDP growth.
The first shows the broadest measure of ‘tech’ investment – total information processing, data centre and software investment – without subtracting imports. This categorisation has headline investment accounting for 50.2% of YoY GDP growth in second quarter 2026, with 46.6% being the average contribution to YoY GDP growth over the past four quarters.
If we were to take a stricter definition and include only computing, peripheral and software investment, then it follows a very similar trend to the chart below, but the result is a 44% of GDP growth contribution for second quarter 2026 with a 43.3% average over the past four quarters.
Broadest measure: Tech GDP contribution – All information processing, software & data centre construction (YoY% growth)
Source: Macrobond ING
Then if we take that ‘core’ measure and subtract net imports of computers, peripherals and semiconductors, deflated by ‘PPI electronic components & accessories’, then we get a more modest 36%, which is actually slightly lower than the 37% average contribution over the past four quarters. We view this as the fairest measure of tech investment we can currently calculate.
Given the issue surrounding uncertainty over what is truly AI/data centre investment and what is, what we might term, legacy tech investment, we suspect there is some over-estimation in these results. However, given the acceleration in tech capex growth since the release of ChatGPT we would only revise down the contribution marginally. As such, we believe that the overall tech investment rollout accounts for around a third of the current YoY rate of US GDP growth.
Narrowest measure: Tech contribution to GDP – computer, peripheral & software investment, data centers less net imports (YoY% growth)
Source: Macrobond, ING
While AI’s impact on the economy is significant, the impact on the jobs market looks modest currently. The Federal Reserve’s Beige Book, an anecdotal survey on the state of the US economy, suggested in April that “while most Districts indicated that AI had not yet significantly impacted overall staffing levels, some noted that AI-driven productivity improvements had enabled many firms to delay or reduce hiring”.
LinkedIn data suggests entry level hiring for graduates has fallen 17% since 2019, while the Bureau for Labor Statistics reported that the unemployment rate for recent graduates (aged 20-24) was 9.7% in July, versus the unemployment rate for all graduates, which is only 2.7%.
The Challenger, Gray and Christmas report on hiring and layoffs suggests that Artificial Intelligence has been the leading reason for US job lay-offs for the past five consecutive months, cited in 112,713 job cut announcements, or 24% of the total. They suggested that tracking the impact of AI on the jobs market is likely to become increasingly opaque since ‘naming AI in a layoff announcement can win over investors while pushing current and prospective employees away’. They argue that regulatory changes may also make companies more careful in how they frame announcements.
Challenger Report: Cumulative job cuts since April 2025 by reason (000s)
Source: Macrobond, ING
AI enthusiasm is also contributing to GDP growth via consumer spending. Directly through AI token purchases and subscriptions and indirectly via positive wealth effects thanks to the surge in technology company stock prices.
Right now, AI subscriptions account for a tiny proportion of overall consumer spending. Proprietary client spending data from Bank of America and PNC Bank suggest only around 2-3% of American households are spending money on these tools, with a typical monthly spend of $20-30. That is dwarfed by internet, TV and cell phone subscriptions right now, but over coming years that is likely to change, and it will start to make a meaningful contribution.
Instead, it is the wealth effect that is having the largest impact on consumer spending today.
Chat GPT was released on 30 November 2022 and, since then, the NASDAQ stock index has risen 130% while the S&P 500 is up 90%. This has contributed to household holdings of financial assets rising from $109tn to $142tn over that three-and-a-half-year time frame. Ownership is heavily skewed towards the top 20% of households by income, who, according to Federal Reserve data, hold 72% of the wealth of America. The bottom 60% of households by income hold merely 15% of its wealth.
In an environment of weak consumer confidence and flat-lining real household disposable incomes, this AI-driven wealth surge is likely to be a key factor maintaining the K-shaped consumer narrative whereby high-income households are the driving force behind consumer spending today.
Calculating a number for what extra consumer spending is due to AI wealth gains is difficult. A 2025 Federal Reserve paper suggested that because of the increased concentration of wealth towards higher income groups, the propensity to consume out of wealth has dropped markedly.
For the top 20% of households by income, they estimate 0.8 cents of every dollar increase in wealth is spent. For the other 80% of households, who have seen far more modest increases in wealth, that number is closer to 7.5 cents per dollar increase in wealth.
That paper estimates a weighted average of 2.6 cents in the dollar until 2020 versus 3.5% in 1990-2005. But with further concentration of wealth in the top 20% of households by income over the subsequent six years, we strongly suspect the number is below 2 cents today and assume 1.5 cents based on that shift in wealth dynamics.
Therefore, $33tn of extra household equity wealth translates into roughly $500bn of cumulative extra spending since fourth quarter 2022. Simplistically, that is around an extra $36bn of consumer spending per quarter ($144bn annualised), equivalent to around 0.65pp of 2Q 2026 consumer spending and 0.44pp of GDP.
Two other charts courtesy of The Daily Shot:
AI-driven computer and electronics production continues to surge, accounting for roughly half of overall manufacturing output growth, while nearly all remaining gains are concentrated in aerospace and other advanced industries. In contrast, lower-value-added manufacturing has stagnated.
Source: @samueltombs, Pantheon Macroeconomics
Let’s also not forget that the Russia-Ukraine and US/Israel-Iran wars are clearly helping the US economy.
Further, executives’ optimism on earnings calls has brought the percentage of fund managers expecting double-digit earnings growth over the next year to its highest since 2021. This is a powerful brew for equities: (…)
Comparing this to the odds produced by the political nerds trading on prediction markets, it does look as though fund managers haven’t caught up with events. Both Kalshi and Polymarket make a Democratic sweep a 50-50 shot:
As the summer at last winds down and the election campaign comes into focus after Labor Day, there’s plainly a risk that investors will catch up to the threat of a very fractious two years of politics ahead.
Why not?
@realDonaldTrump