US in focus as our summer break winds up

It’s all quiet on the home front as we head towards the inevitable wet August bank holiday weekend. Not so across the pond, however, as the summer’s busy news flow continues.

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Bonds remain in focus

The bond market’s woes continue to be front and centre for investors as Treasury Secretary Scott Bessent’s attempts to tame the fixed income vigilantes struggle for traction. Last week he vowed to double purchases of long-dated Treasuries, in a bid to cap the long bond yield. As with his Japanese currency intervention a couple of weeks ago, the initial impact soon ran out of steam.

Investors are taking the view that if there is going to be a battle between the Treasury and the market, it will most likely be the market that emerges on top. The 30-year Treasury bond yields 5.25%, up from about 4.5% last autumn.

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Bond investors will have plenty to watch this week. First up will be inflation data on Wednesday, when the Personal Consumption Expenditures index is forecast to rise by 0.1% month on month and by 3.6% year on year. That’s well ahead of the Fed’s 2% target.

Higher inflation is likely to be more influential than supportive commentary from the Treasury and the cost of borrowing now sits at an 18-year high. The yield on the 30-year government bond has not been higher since 2007, and the post-financial-crisis era of rock bottom interest rates and bond yields is well and truly over.

Fears about the health of the US balance sheet increased last week as the national debt exceeded $40trn for the first time. Two decades ago, it was just $6trn and, as a proportion of GDP, debt is forecast to exceed the Second World War peak by the end of the decade.

That’s the backdrop to new Fed chair Kevin Warsh’s first appearance at the Jackson Hole economic summit in Wyoming. His first job will be to reassure markets, made skittish by the Fed’s new tight-lipped approach to forward guidance.

• Read: The bond market rout is painful, but opportunity is coming

Trade back on the radar

As if the bond market was not enough to worry about, trade and foreign policy are back in the spotlight this week.

The failure of trade talks with Canada at the weekend mean the US started charging new tariffs on $20bn of Canadian goods from Saturday.

Mark Carney, the Canadian Prime Minister, did not hold back in his description of his country’s deteriorating relationship with its southern neighbour. He called the tariffs an ‘economic war’ and vowed retaliation.

For consumers, the new tariffs mean higher prices and fewer jobs. On both sides of the border that’s bad news but the impact could be felt hardest in America, a risky place for the US President to find himself three months ahead of mid-term elections.

Meanwhile, America’s actual war with Iran shifted its focus to the financial and economic front, as Scott Bessent promised an ‘economic D Day’ for the Islamic republic.

Late AI spotlight

There’s little on the corporate front this week. But the one big result there is could hardly be more consequential. Nvidia’s late second quarter results announcement will provide a further insight into the AI ‘boom or bubble’ question.

As questions remain on the extent to which sky-high investment in AI infrastructure will be justified by future revenues, share prices in the sector have stalled. Nvidia’s shares trade at roughly the same level as last November.

Diversification benefits

Meanwhile, two investments which have largely been passed over during the market rally so far this year - gold and bitcoin - have enjoyed a ‘safe haven’ resurgence. Gold has risen 15% in August alone to $4,600. Bitcoin is up from $60,000 to $77,000 since the start of July.

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• Read: The bond market rout is painful, but opportunity is coming

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