Jackson Hole, Nvidia, and Iran

MACRO FRAME

Fiscal dominance has returned to the market, though underlying concerns over the deficit and debt burden are driving investors to demand more risk premium in an environment with persistent inflation. Meanwhile, yields have broadly taken a backseat to equity market performance as corporate earnings growth and expectations have set up bullish conditions to continue through the remainder of the year.

STOCK INDEX FUTURES

Equity index futures were lower overnight as markets face a three-way test: further economic escalation against Iran, high long-end Treasury yields ahead of Jackson Hole, and Nvidia’s earnings as the next key verdict on the AI trade. The US is preparing a major sanctions program aimed not only at Iran but also at its trade partners and the broader infrastructure supporting Iran-related commerce; Bessent has described it as the “greatest financial offensive ever.” Pakistan’s army chief, Asim Munir, is in Tehran to continue Islamabad’s mediation effort between the US and Iran. Pakistan says the objective is to promote regional peace and stability; Munir is expected to meet senior officials close to Iran’s supreme leader. Trump reportedly called Munir last week, with Pakistan’s role centered on bringing Tehran back to negotiations. Long-term yields remain under stress. The 30-year yield near 19-year highs despite support from the Treasury. The 10-year holds near 4.7%, high enough to pressure long-duration growth equities. Investors are focused on Chair Warsh’s Jackson Hole speech for guidance on how the Fed views the oil shock and its opinion on the Treasury’s buyback program.  Still, it is unlikely that Warsh will do much to tip his hand. Nvidia reports later this week and remains the key bellwether for AI capex, data-center demand, and semiconductor valuations. Bloomberg reported that Nvidia’s largest customers have been told prices for some AI-chip servers could rise by more than 15% for systems shipped early next year, driven by higher memory costs. This could prove negative for hyperscaler capex budgets.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, though a September rate hike remains a near-term risk.

CURRENCIES

US DOLLAR: The USD index moved higher overnight to 98.93 ahead of the US’s economic D-day plans for Tehran. Debasement fears continue to broadly pressure the dollar after the Treasury’s move to artificially lower rates and risk premium at the long end of the curve. Investors are likely to continue to diversify away from the dollar and other major currencies amid persistent worries over government deficits, reflected through elevated long-term yields. The Treasury’s move to lower yields its means that the dollar is likely to be under pressures because if bond prices cannot move lower naturally, the foreign exchange price of owning US debt will price it out via currency depreciation in the dollar. Additionally, the move to increase buybacks highlights that the administration is unlikely to address the underlying problem, being the large deficit and rising debt. Investors will await the Jackson Hole Symposium for further clues on Fed policy, though Warsh is unlikely to tip his hand. Still, any opinion on the Treasury’s move that could restore confidence in the Fed could boost the dollar.

Watch point: The market remains doubtful over a September hike, though the risk of a move upwards in policy should not be discounted given the current inflationary backdrop.

EURO: The euro is little changed at $1.1670. Regional CPI data will be in focus this week in the eurozone. Recent increases in natural gas prices have reinforced expectations that European Central Bank policy will move upwards this year, and outpace any action from the Fed. Money markets are pricing an 98% chance of a hike in September against 40% for the Fed. Traders are pricing around 43 bps of further ECB tightening this year. This dynamic has offered a strong tailwind for the euro in recent weeks and as such, an unwinding of these expectations risks a pullback in the euro. The US Treasury’s buyback announcement has offered the euro support as the market adjusts to the “cap” on bond prices by depreciating the dollar, while the broader message feeds into a lack of confidence in the US Treasury and administration’s making any progress on the deficit and national debt.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is little changed at $1.3640, a six-month high. Investors await further details on the US’s economic D-day plan against Iran. Recent economic data has argued against the opinion that the UK’s economy is sluggish, keeping market expectations of at lease one Bank of England rate hike in place. Labor data pointed to a broad cooling in hiring and wage pressure. Markets are priced for 29 of tightening by year-end. For the BoE, the central question is whether energy costs create durable second-round effects in wages and services pricing. Elsewhere, the Burnham government’s October budget is coming into focus and will be key for fiscal confidence in the UK, as concerns over elevated sovereign debt levels have rattled bond markets across major DMs.

JAPANESE YEN: The yen is little changed at 159.06 yen per dollar. Bank of Japan Deputy Governor Ryozo Himino will speak on Thursday, his speech will be closely watched for signals if he pushes back on a shift in market pricing of a faster rate of hikes from the BoJ. Stronger expectations of a September hike from the BoJ have been keeping the yen from sliding as fast as it had been earlier in the summer, though existing fundamental pressures remain. Mounting unease over Japan’s fiscal outlook has kept JGB yields elevated without offering the yen support, highlighting market worries over the debt-load. Failure to hike at the September meeting could pressure the yen back toward the 160 area. Markets are pricing a 64% chance of a September hike after the July meeting revealed a more hawkish debate, but a failure to validate those expectations could renew pressure on the currency.

Watch point: Failure to raise rates at the Bank of Japan’s meeting could see the yen drop toward the 160 level.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.7165. Weak labor data (employment fell by 15,800 in June vs. forecasts of a gain of 15,000) suggested softness in the labor market, which was likely welcomed by the Reserve Bank of Australia, which could offer some relief on inflationary pressures. Still, the data is unlikely to weaken the RBA’s tightening bias, as Q3 inflation figures will serve an outsized role in determining whether or not the ban raises rates this after. Markets imply only a 17% chance of a hike in September.

Watch point: June’s hiring figures have offered some relief on inflationary pressures, though ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields moved higher at the front end and lower at the long end, as traders continue to adjust portfolio’s following the Treasury’s announcement. The 30-Year yield is at 5.24%, 6 bps below its post GFC high reached last Monday. Traders are likely to continue to pushback against like-style moves from the administration without any efforts to address the underlying problems of a rising deficit and massive debt load. In the near-term, investors are likely to continue to demand more risk premium in Treasuries and compounded by the rising supply of corporate bonds and persistent inflationary worries set up conditions for yields to resume their uptrend. Markets are pricing a 40% chance of a hike next month and see 27 bps of total tightening by year end.  Warsh’s speech at Jackson Hole symposium this week, will see traders look for guidance over the recent climb in yields and for reassurance of Fed policy from the Trump administration. Failure to address near-term issues without any material plans from the Fed is likely to add to bond market unease.

Watch point: For Fed policy, without any forward guidance, the September decision will likely remain a close call.

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