The Robust U.S. Economy Powers Through Rate Hikes and Rising Bond Yields AI-driven growth looks resistant to higher borrowing costs, spooking Treasury investors

The U.S. economy keeps powering through inflation, tariffs and higher borrowing costs, defying a run-up in Treasury yields and a Fed rate increase. That has the bond market spooked.

The usual economic brakes aren’t slowing growth, hiring or an AI investment boom that looks to be unstoppable. To some, AI’s potential returns seem so bright that even steep interest rates won’t slow down tech companies’ investments. (…)

Treasurys are facing more competition for investors’ cash from an explosion of bonds issued by companies involved in the AI build-out. Strong economic data are also pushing up yields by stirring speculation that the Fed may have to raise rates even higher than previously expected to cool a potentially overheating economy. (…)

Reinforcing that concern, some economists worry that borrowing costs that continue to climb may do less today to slow the economy than they have in the past, potentially requiring an even bigger Fed response. The AI boom could provide kindling, as more of the benefits could ripple out to other parts of the economy, said Eric Winograd, an economist at AllianceBernstein.

“Everything that gets put into building a data center has to be built somewhere,” Winograd said. “So you get this sort of idea of a filtering through the supply chain, a filtering into other areas of the economy that would broaden the base of expansion.” (…)

On Wednesday, an often overlooked report, S&P’s purchasing-managers’ index, provided the strongest evidence yet the economy could be picking up steam, not merely holding firm.

The report was striking across the board: A gauge of manufacturing activity registered its biggest monthly increase since 2022. A reading of service-sector activity jumped to its highest level since 2021. New orders powered growth in both sectors. (…)

“One-third of U.S. households are headed by someone aged 65 or older,” Yardeni said. “These people aren’t looking for mortgages, they are just enjoying the higher investment returns they’ve been seeing.”

Higher yields don’t only reflect expectations of higher growth. The U.S. government debt burden has soared. Yields have also been closely correlated in recent weeks to oil prices, reflecting worries that higher energy costs could feed into broader inflation.

Investors don’t appear worried the Fed will lose its grip on inflation. The breakeven inflation rate—the bond market’s indicator of the inflation that investors expect—remains modest.

Instead, investors are concerned by just how much the Fed may have to raise interest rates to keep inflation in check—a question compounded by their uncertainty about how its new chairman, Kevin Warsh, will lead the institution. (…)

Predominant bets in interest-rate futures markets show expectations that the Fed may hike rates a full percentage point by the end of 2027.

If inflation is being fueled by a strong economy and not just an energy-supply shock, it could create a big challenge for the Fed, Winograd said.

If you’re the Fed, “you’re really going to have to crush everything that isn’t AI, if AI refuses to slow down,” he said.

You mean, the wealth effect, equity markets?

Greg Ip Tuesday:

An oil-price spike delivers two hits to inflation. The first is quick and obvious: As gasoline and other fuel costs jump, so does total “headline” inflation.

The second is slow and subtle. As costlier fuel works its way into other products and services, “core” inflation, which excludes food and energy, comes under upward pressure.

Those latter “second-round” effects have been largely forgotten about in recent decades because “most of those oil shocks in the last 40 years tended to be fairly short lived,” says Morgan Stanley economist Michael Gapen. For example, roughly 200 days after Russia invaded Ukraine in 2022, oil was $7 below its preinvasion price. When companies don’t expect costlier energy to persist, they don’t try as hard to raise prices.

This spike doesn’t look so short-lived. Roughly 200 days after the U.S. and Israel attacked Iran, oil is $25 above its preinvasion price. With tanker and refinery capacity curtailed, European inventories depleted and the cushion of higher U.S. exports and lower Chinese imports fading, oil prices look vulnerable to more disruptions, Morgan Stanley warns.

PepsiCo to Raise Some Prices After Cuts Failed to Grow Sales

The company is expected to increase the prices on grocery-store-sized bags of chips, including Doritos and Ruffles, which had been cut earlier this year, according to people familiar with the plans. The price increases, which will extend to other brands, including SunChips, are expected to go into effect at the end of this year or early 2027, according to the people, who asked not to be named because they are not authorized to speak publicly.

The prices of certain chips will go up by a low-to-mid single digit percentage, aligned with inflation, a spokesperson for PepsiCo said, adding that the new prices will be lower than where they were prior to the price cut earlier this year. (…)

In February, PepsiCo said it was cutting prices by as much as 15% for key chip brands in a bid to boost sales that had faltered after prices got too high, with some chips topping $7 a bag. But the company saw a 2% decline in revenue in its North American food business and flat volume in its most recent earnings in July. PepsiCo Chief Executive Officer Ramon Laguarta said the consumer was under more strain than expected, due to higher gas prices.

PepsiCo is also raising prices this week on some dips, including extra-large and extra-extra large jars of Tostitos salsa and Fritos canned dips, according to a memo viewed by Bloomberg News. At Dollar General stores, the extra-large Tostitos salsa jars are now priced at $4, up from $3.80, while the extra-extra large jars are now $5.50, up from $4.95. The Fritos canned dips increased to $3.75 from $3.30.

The company is additionally expected to increase prices on some sodas and has warned some retailers of the upcoming price hikes, according to people familiar with the matter. (…)

Other food companies, including Campbell’s Co. and Conagra Brands Inc., have said they are raising prices in the face of a sustained increase in energy and fertilizer costs, as well as tariffs on imports. (…)

EARNINGS WATCH

Analysts Snap Longest Run of US Earnings Upgrades in Five Years

Equity analysts have turned net negative on the outlook for US corporate earnings for the first time in months, reflecting concerns about the effect on profits of inflation and higher interest rates.

More analysts have cut rather than raised their earnings estimates for the first time in 23 weeks, ending what had been the longest run of upgrades since September 2021, according to a Citigroup Inc. index.

“The main drivers of the weakness come from consumers, both staples and discretionaries, materials and financials,” said Stephan Kemper, chief investment officer at BNP Paribas Wealth Management Germany. “I think those revisions can be directly linked to a combination of higher living costs and rising energy prices.” (…)

• Costco’s Quarterly Profit Beats Estimates on Tariff Refunds

The big-box retailer reported earnings of $6.75 per share, excluding some items, in the quarter ended Aug. 30, higher than the average of analyst estimates compiled by Bloomberg. Tariff refunds added 15 cents of earnings per share. (…)

The company got $184 million of tariff refunds in the last quarter and has received roughly the same amount for the ongoing period, executives said. The company has primarily used the proceeds to cut prices of products like meat, produce, beverages and home furnishings.

Adjusted comparable sales rose 6.7% for the quarter, better than expectations. (…)

The cheap new AI model taking aim at OpenAI and Anthropic Start-up TypeSafe AI’s ‘Jev’ model promises faster, more efficient AI for developers

A Silicon Valley start-up that released its first product just last week is drawing investment offers at a multibillion-dollar valuation, with promises that its AI tools are more efficient than OpenAI and Anthropic’s.

Founded by former OpenAI researcher Diogo Almeida, TypeSafe AI is pitching its “decision model” Jev as a cheaper alternative to the large language models that power ChatGPT and Claude, for certain tasks.

Jev, aimed almost exclusively at software developers, has drawn intense interest in the tech industry and gone viral on social media since TypeSafe emerged from so-called stealth mode last week. Its launch video on X generated 40mn views in less than a week. (…)

TypeSafe is betting that many routine tasks now handed to expensive general-purpose models can instead be performed by cheaper, more specialised systems. If the idea gains traction, it could put pressure on the business models of frontier AI companies such as OpenAI and Anthropic. (…)

TypeSafe’s pitch is that LLMs, designed for interacting with human beings, are ill-suited for the sort of programmatic, repetitive and high-volume tasks many global businesses are trying to automate using AI. (…)

Jev does not produce sentences, explanations or images, but instead promises fast, cheap decisions within software applications. The “classifying” tasks it can be used for include, for example, deciding whether to approve, block or review a request, routing a support ticket or underwriting insurance or credit risk. 

The model is designed for developers to build into the back end of their software, and does not have a consumer-facing interface. (…)

The name Jev is a reference to Jevons paradox, the economic observation that making a resource cheaper or more efficient can ultimately increase its total consumption as new uses emerge. While large language models churn through long chains of reasoning that can consume a lot of computing power, TypeSafe says their model quickly selects from a limited range of possible answers based on a probability calculation. (…)

This in turn brings down the number of “tokens” it burns, reducing the cost.

The company claims each query is about a hundred times cheaper and faster to process than LLMs, charging around 4.2 cents per million tokens compared with LLMs that can cost several dollars per million. (…)

Andrej Karpathy, an OpenAI co-founder recently hired by Anthropic, wrote on X that Jev appeared to have tapped into “latent demand” for models that provide simple, cheap and fast decisions, in an area that has been “underinvested into because of a race to higher intelligence” by the frontier AI model companies.  (…)

The AI Build-Out Is Becoming the Biggest Economic Bet in U.S. History

WSJ (via Ritholtz)

Trump’s Fight With the White House Press

(…) the White House press office issued letters to the three outlets, dated Tuesday, accusing them of “trafficking in verifiable falsehoods” and “publishing sensitive or classified information.” One specific article cited was a Politico piece from June, quoting a “senior administration official” pegging the odds of a peace deal with Iran at 80% to 85%.

According to media reports, that unnamed source was Vice President JD Vance. And this wasn’t a leak but an authorized briefing, the Washington Post explains.

“Thank you for joining this press call,” an aide began. “The contents of this call are on background, attributable to a senior administration official.” Oops. Other news outlets, such as the Associated Press, also reported the 80% to 85% estimate. (…)

So, a White House press aide explicitly instructed the attending journalists that the contents of the call were “on background, attributable to a senior administration official,” meaning reporters were barred from using Vance’s actual name.

Despite the call being fully authorized and arranged by the administration, the WH cited the resulting June 12 Politico article as a “threat to national security” and an example of “spreading misinformation” to justify revoking Politico‘s press credentials.

Trump on June 14:

This Great Deal will bring Peace and Security to the whole Region. Many presidents have tried to make Peace with Iran, and all have failed before me. The Leaders of the Region have, for the first time, found a President who can help them achieve real Peace.

Oh, BTW, the price of oil, which closed at $87.71 on June 11, dropped 3.2% to $84.88 on June 12, before sliding further to $76.05 on June 16 all the way down to $68.69 on July 2.

The “Great Deal” collapsed when Trump ended the ceasefire on July 8.

Today, that “Great Deal” could be back, but only in phases (!):

US, Iran Said to Be Exploring Phased Deal to Open Hormuz

US and Iranian negotiators are exploring a phased deal that would see Tehran reopen the Strait of Hormuz and Washington lift its blockade of Iranian ports, according to a person familiar with the discussions.

The two countries — which have both refused to make similar agreements in recent months — were making a push for a breakthrough Thursday on the sidelines of the United Nations General Assembly, the person said, declining to be named discussing private matters. Qatari officials are mediating the negotiations.

A sequenced deal would be similar to the memorandum of understanding that the US and Iran struck in mid-June, which led to a fragile ceasefire that collapsed just weeks later. (…)

Araghchi represented Tehran in the talks and outlined its “firm positions” on reopening Hormuz, according to Iranian state media. Those conditions include the US immediately lifting a naval blockade, unfreezing Iranian assets and ending the war “on all fronts,” according to Iranian reports, an apparent reference to Israel’s campaign against Iran-backed Hezbollah militants in Lebanon.

“We have not closed the Strait of Hormuz,” Pezeshkian said in an interview with Fox News broadcast Thursday evening. “It was open without any legal justification or framework. They attacked us.”

Trump told reporters on Tuesday that US and Iranian officials had spoken in New York amid the flurry of UN meetings. His comments lifted stocks and pushed down oil prices.

The American president has repeatedly said the US and Iran were close to a deal with no results. He’s also threatened Tehran with military escalation multiple times — including a threat to “annihilate” the country earlier this week — without following through. (…)

In the FT:

The Trump administration has said it will not return to the MoU, which was condemned by both Republicans and Democrats, and is instead pushing for a more comprehensive agreement that will cover not only the strait but Tehran’s nuclear programme, according to people familiar with the talks. (…)

Both sides said the conversation was productive, but the Iranians privately said they were not optimistic that the US would stick to any agreement. (…)

Pomp prevails over substance as Donald Trump hosts Xi Jinping

(…) The only news was Xi announcing that China would soon send two giant pandas — named Ping Ping and Fu Shuang — to the Atlanta Zoo, in an example of longstanding panda diplomacy that briefly suffered during the Biden administration when US-China relations plummeted to a four-decade low. (…)

Trump and Xi had a one-on-one meeting before being joined by advisers.

The US president appeared to shorten the meeting to make time to show Xi around the White House, including a tour of his Marine One helicopter and helipad. He also pointed out his new ballroom, which was not finished on time to host the dinner. (…)

At the dinner, Trump presented Xi with a statue of a bald eagle. In his toast, he touted his ballroom again, saying it could host 1,000 people when completed. (…)

“Together, let us write a new chapter in our friendly relations,” said Xi, who was wearing a Mao-era suit for the occasion.

While the outcome of the summit may become clearer on Friday after they spend a final morning together, one of Trump’s biggest accomplishments on Thursday was getting his Chinese guest to laugh. (…)

“For Beijing, the real deliverable of this summit will not be on a factsheet, it is the photos showing the unprecedented pomp and circumstance,” she said.

“There is a real imbalance between the paucity of forward movement on issues the US cares about and the pomp and circumstance . . . Functioning channels of communication between the leaders is a good thing, but this summit mismatch is a lost opportunity for Washington.” (…)

Business growth surges to fastest for over five years and job gains accelerate, but price pressures also intensify amid spike in costs

This is what spooked markets yesterday.

The headline flash S&P Global US PMI Composite Output Index rose from 56.0 in August to 58.4 in September, registering the fastest expansion since July 2021 and an acceleration of growth for a fourth successive month. Growth was driven by the service sector, which reported the steepest rise in output for over five years, but a welcome development in September was an accompanying acceleration of manufacturing output growth to the fastest since April 2022.

New order inflows also gathered pace in both sectors, with growth reaching the highest since March 2022 in the service sector and the highest since April 2022 in manufacturing. In both cases, demand was buoyed principally by the domestic market, as goods export volumes continued to fall and services exports rose only modestly.

Companies’ backlogs of uncompleted orders, a key indicator of capacity utilization and future business growth, rose in September at the sharpest rate since May 2022, having accumulated at increased rates in both manufacturing and services.

The rise in backlogs of work encouraged firms to take on more staff. Employment consequently rose in September at a rate not seen since June 2022 and a pace rarely exceeded since comparable data were first available in 2009. Both service sector and manufacturing payrolls increased, the former at the fastest rate since June 2022 and the latter notably to the greatest extent since February 2021.

Business output expectations for the year ahead were unchanged in September, having regained their pre-war level in recent months. Business expansion plans reflected reports of confidence being buoyed by signs of ongoing demand growth and economic resilience. Manufacturers remained more upbeat than service providers, and factory confidence has more or less returned to its long-run average. In contrast, service providers’ sentiment remained well below trend level amid worries over cost-of-living concerns, higher borrowing costs and political uncertainty.

Price pressures intensified in September. Average input costs measured across both goods and services surged higher, the overall rate of inflation hitting the highest since October 2022. The increase was blamed widely on higher fuel and transport costs, though wage pressures were also noted to have picked up in many cases.

In manufacturing, high raw materials prices were also often linked to supply shortages; suppliers’ delivery times lengthened markedly again in September on average, with the incidence of supply chain delays the most widespread since July 2022. Input cost inflation in manufacturing nonetheless remained below the peaks seen earlier in the year, during the initial months of the war in the Middle East. Service sector input cost inflation hit the highest since November 2022.

Selling price inflation also picked up in September, though was muted by competition in some instances, notably in the service sector. While above that seen in August, September’s overall selling price rise was below the rates seen between March and July.

The S&P Global US Manufacturing PMI jumped from 53.9 in August to 57.0 in September, according to the flash reading, registering the strongest improvement in business conditions since May 2022.

All five components helped boost the PMI. Production growth revived after having waned over the prior three months, reaching its fastest since April 2022, as new orders growth also accelerated to the fastest in nearly four-and-a-half years. Jobs growth hit the highest since February 2021, and inventories rose at an increased rate. Suppliers’ delivery times meanwhile lengthened to the greatest degree since July 2022.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“US business continues to boom, with output growing at the fastest rate for over five years in September.Historical comparisons suggest that the latest survey data point to annualized growth of around 5% with a 4% gain now signalled for the third quarter as a whole.

“To put the growth surge in context, barring the spike in demand following the opening up of the economy after the COVID-19 lockdowns, the latest improvement in business activity is the greatest recorded since early 2015.Business is clearly booming now in both manufacturing and services.

“However, this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history if the pandemic is excluded, with companies also reporting increasing problems finding suitable staff. Backlogs of work are consequently rising sharply. While this accumulation of uncompleted orders bodes well for the further expansion of output and capacity in the coming months, it also indicates that companies are developing more pricing power, and hence is a worry for the inflation outlook.

“Firms’ input costs have meanwhile jumped in September at the steepest rate for four years, with fuel and transport costs spiking higher thanks to the rise in oil prices seen during the month, which will add further to the upward pressure on selling prices and inflation in the coming months.”

The Services PMI has thus jumped from 54.6 in July to 56.5 in August and now to 58.7 in September with strong new orders. The September Manufacturing PMI’s 3.1 points jump to 57.0 with accelerating new orders confirms that “Business is clearly booming now in both manufacturing and services”. Add “the most severe supply chain bottlenecks seen in the near-two-decade survey history” and the ingredients are there for sustained inflation in coming months.

Supply shortages with little prospects for improvements provide strong pricing power, everything feeding on itself.

Last September 4, I suggested that the US was in boomflation mode. US 10Y Ts, then at 4.76%. With the increasing evidence and a clearly hawkish FED, yields jumped to 5.13%, the highest since 2004.

Fed’s Williams Says More Work Needed to Lower US Inflation

Federal Reserve Bank of New York President John Williams said there is still a lot of work to do on inflation given high energy prices and demand driven by investment in artificial intelligence.

Williams said market expectations for another interest-rate hike by the end of the year is a “reasonable way of thinking about it, but we’ll have to see.”

He said the US economy has shown “remarkable resilience despite significant shocks” and the labor market is “solid.” However, he pointed to lingering inflation risks from the ongoing US-Iran war and “pretty strong demand from AI.”

Swap markets now fully reflect three quarter-point hikes over the next year from the Fed, with significant hedging for a fourth.

Ed Yardeni:

The 2-year US Treasury note yield is predicting four rate hikes over the next 12-24 months.

(…) the risks now clearly point to more upside in yields. A relief rally in bond prices would probably require a resolution of the war in the Middle East that would lower oil prices. Another possibility is that US Treasury Secretary Scott Bessent will act to bring bond yields down by buying back more Treasury bonds and issuing more Treasury bills. (…)

So far, the bond yield remains below the growth rate of nominal GDP, which was 6.6% y/y during Q2-2024 and will probably be even higher during Q3-2024 (chart). In the past, especially during the 1980s, the Bond Vigilantes pushed the bond yield above nominal GDP to slow the economy. They haven’t done that so far. The risk is that they will do that if the Fed fails to subdue inflation.

• Iran President Sends US Defiant Message Over Potential Talks

Iranian President Masoud Pezeshkian said his country won’t allow freedom of navigation through the Strait of Hormuz while sanctions and a US blockade remain in place, underscoring the difficulty in reaching a peace deal with Washington despite efforts to revive talks this week.

The Islamic Republic “cannot accept that everyone benefits from the waterway while, at the same time, the historic guardian of that waterway is deprived because of the oppressive sanctions,” he said in an address to the United Nations General Assembly in New York on Wednesday.

Iran is ready to resume talks about ending the near seven-month conflict with the US but will not respond to threats, he added. While the country isn’t seeking to build an atomic weapon, it won’t give up the right to develop nuclear technology for economic purposes, he said.

Pezeshkian’s address laid out a number of conditions before any meaningful talks with the US can resume, undermining tentative signs of diplomatic progress that emerged this week in New York. (…)

“This is what Trump and others that want to bully us have to comprehend: we are ready for dialogue, but they must understand we won’t accept the language of force,” Pezeshkian said.

Iran was represented in talks in New York by Foreign Minister Abbas Araghchi, who outlined Tehran’s “firm positions” on reopening the Strait of Hormuz, according to state media. Those conditions include the US immediately lifting a naval blockade, unfreezing Iranian assets and ending the war “on all fronts,” IRIB News reported, an apparent reference to Israel’s campaign against Iran-backed Hezbollah militants in Lebanon. (…)

• Mortgage Rates at 7% Are Forcing Home Sellers to Slash Prices

(…) Sellers are already feeling the strain. Nearly one in five homes for sale had a price cut in August, the highest share for that month in Redfin data going back to 2020, while 45% of August sales involved a seller concession. The typical home spent 50 days on the market, up from 36 when rates were approaching 8% almost three years ago. And with 1.5 million homes for sale — up 46% from 2023 — buyers have more room to negotiate. (…)

It’s a Good Time to Buy Bonds

An Oped in the WSJ by Burton G. Malkiel, a proponent of the efficient-market hypothesis.

(…) Tax-exempt bonds today offer unusually high returns. AA-rated long-term bonds from high-tax states like New York, New Jersey and California can be purchased at yields of 5%. This yield would be equivalent to a pretax yield of double that amount for an investor in the highest tax bracket. Even if the inflation rate increases, that return should comfortably exceed it. Such a return would compare favorably with the returns from common stocks with far less volatility.

Long-run Treasury Inflation-Protected Securities are also attractively priced. TIPS pay a real rate of interest plus an upward adjustment to the face value of the bond to account for the yearly inflation rate. Today 20-year TIPS have a real yield of about 3%. If the inflation rate remains at 3%, they would provide a total return of 6% a year. If inflation accelerates, investors would be protected with a higher return. The interest on TIPS is subject to federal taxation, including the upward inflation adjustment. But TIPS remove the risk to portfolios of spiraling inflation. They are also exempt from state and local taxes. Both tax-exempt municipal bonds and TIPS are unusually attractive today and deserve a place in investors’ portfolios: municipals for taxable portfolios, TIPS for nontaxable retirement ones.

When considering these investment strategies, however, it is important to consider what could go wrong. The U.S. is saddled with a more than $40 trillion debt and a debt-to-GDP ratio of more than 100%, near the historic high reached in 1946 after World War II. Moreover, we appear to have an intractable annual budget deficit. Higher economic growth spurred by increasing productivity will help, but even under optimistic projections, the ratio of debt to national income will rise in coming years. The risks of increasing inflationary pressures are real. So are the risks of a financial crisis and increasing interest rates. Increasing rates would hurt all bonds. Of course equities might suffer as well. TIPS would probably fare best, particularly if such rate increases were accompanied by rising inflation.

It’s also important to consider how the government might react to a mounting debt crisis. After World War II, the policy response was financial repression. Interest rates on the federal debt were capped at the low rate of 2.5%. Inflation accelerated, and we inflated the debt away. If a similar scenario were to unfold in the coming years, all bonds would do well, especially TIPS. When Treasury Secretary Scott Bessent talks of buying long-term bonds to keep interest rates from rising, one can’t help but consider that the federal government might attempt a financial repression policy.

Another possible scenario is that the federal government gets serious and takes steps to rein in future deficits. Spending could be constrained and revenue increased. Whatever fiscal package one imagines, some part of it would involve higher taxes on corporations and individuals. If Democrats win both Congress and the White House, higher taxes on high-income individuals are virtually assured. In this case, tax-exempt securities would be the biggest beneficiary.

No one knows what the future holds, but under the various likely government responses to our economic problems, bonds should be resilient. What we do know is that high interest rates and continued huge federal deficits aren’t sustainable. Already, we spend more on interest payments to finance the national debt than we spend on national defense. And higher interest rates would have a negative effect on economic activity and the future growth we need to service our debt. A government intervention of some kind appears inevitable—and having an allocation to long-term bonds such as municipals and TIPS is highly likely to improve portfolio performance.

The Fed’s John Williams is right saying “there’s a lot of work to do on inflation”. Problem is, how much?, when the main reasons behind boomflation are his government and AI.

David Rosenberg:

World debt at all levels has soared +$10 trillion in the first half of 2026 to a nosebleed $365 trillion. That is equivalent to 310% of global GDP. You read that right — global debt is more than 3x bigger than the global economy, and financing this extreme liability at a 5% interest rate is a far different place than funding the largesse at 2%.

The last time market interest rates were at today’s level, back in 2007, the level of world debt was $142 trillion and less than a 270% share of the global economy.

The risks are far more acute today from a refinancing-risk perspective, and one really has to wonder how much longer credit spreads will remain at such tight levels, not to mention how it is possible that, in this unstable state, the gold price doesn’t make it back to the early 2026 highs, or blow past those levels, before long. (…)

The fact that the Fed is clearly willing to tighten aggressively into a supply shock as opposed to a demand shock is something we have not seen since the Volcker era of the early 1980s.

This is not 2021-2023, where there was a powerful inflationary demand shock from fiscal stimulus checks hitting just as the economy was reopening and the government was paying people handsome sums not to work. I can’t see how this ends well because getting to the +2% inflation target in this type of shock will require demand contraction.

Treasury Secretary Scott Bessent has intentionally concentrated its fundraising at the front end of the yield curve in 2026. Adam Tooze today:

BofA’s estimate would take the stock of outstanding bills to roughly $8tn, or 24.3 per cent of marketable Treasury debt, by next September. Goldman has the figure reaching 24.3 per cent next year and 24.9 per cent in 2028, putting it close to a recent peak reached during the pandemic.

That is against an official target of “around 20 per cent over time”, set out by the Treasury Borrowing Advisory Committee, a group of market participants who advise the Treasury, as a good trade-off “between interest rate costs and the volatility of debt financing and rollover risk”.

Just when the Fed is launching a blind hike…