The gradual but relentless rise in long term rates continues to drive markets worldwide. The Trump administration is clearly concerned. Treasury Secretary Bessent announced midweek an increase in short-term debt issuance to finance repurchases of long-term debt, but the market was in no mood to be assuaged by tricks, and the pop in bonds was short-lived. In our view, the only solution to rising yields is a serious program of tax increases and spending cuts that significantly reduces the massive volume of debt issuance. Bessent's failure darkened sentiment on the dollar and led to talk of a new leg to the dollar debasement trade. The greenback fell against every single major currency worldwide, except the Japanese Yen, which has a debt problem of its own.
As markets focus more on the march higher of long term rates, the Jackson Hole gathering of the world's major central banks this weekend takes added importance. Investors will be eager to see policymakers' reaction to the bond market's implicit negative verdict on their collective performance.We expect the ECB and the Abk of Japan to validate market expectations of a respective September hike, but Fed chair Warsh will probably keep the suspense regarding the US central bank's decision—though we expect it to hold rates unchanged. Aside from Jackson Hole, US PCE inflation, the Fed's preferred inflation measure, will be released Wednesday.
EUR
An encouraging pick up in manufacturing sentiment buoyed the PMI composite index of business activity for August, confirming that the Eurozone economy maintains modest momentum into the third quarter of 2026. As the fresh increases in energy prices start showing up in the CPI reports, we think the combination of decent activity and higher inflation has sealed the case for an ECB hike in September, and the market agrees. Meanwhile, the Euro is benefiting from the new leg of the dollar debasement trade, as markets put the unsustainable US debt dynamics under an increasingly harsh spotlight.
USD
Second-tier economic data from the US generally confirmed the narrative of moderating demand and inflationary pressures, lifting some of the pressure on the Federal Reserve to hike rates next month. With very limited forward-looking data releases between now and the December meeting, we think the hurdle is very high and expect no change. Pressure from the Trump administration to keep rates low so as to inflate away the growing debt load will also work against the FOMC hawks. Meanwhile, the dollar has resumed its path of least resistance downwards, with little sign that it has found a floor as yet.
GBP
The UK August PMI indices showed a nice pick up in business activity, led by the services sector. However, labor market and inflation reports gave somewhat conflicting signals. The former showed that the UK job market remains somewhat loose, while the latter suggested a modest pick up in inflation pressures.Market consensus remains that the Bank of England will stand pat at its September meeting, in spite of the pick up in CPI inflation, and we do not disagree.
