• US conducts fresh strikes in the Strait of Hormuz, Trump vows stronger strikes on retaliation
• SpaceX shakes up data centre leadership after aggressive build-out
• Bessent touts bond market as 10-year Treasury yield spikes; gilts lead sell-off
• Bank of Canada seen on hold as external risks offset firmer domestic backdrop

USD posted gains as Treasury yields broke higher, but notably the greenback hasn’t added to the upside advance after Warsh’s Jackson Hole speech. The odds of a September Fed rate hike have nearly doubled since early Friday, to around 68%. It seems markets are wary of Bessent activism and potentially more Treasury intervention, which is in turn feeding the debasement trade. We talked about this in the August monthly review. Prices may initially be capped by the 100-day SMA at 99.72, with the 50-day some way above at 100.34. It’s the first week of the month so NFP looms large, though the FOMC are squarely focused on inflation and price pressures. Oil prices moved closer to August high just below $95 as Middle East tensions ramped up with more US military strikes. ISM disappointed while JOLTS slid and printed below expectations.  

EUR softened but outperformed most of its peers. That’s likely because eurozone headline inflation hit its highest reading since the start of the Gulf conflict at 3.3%. That said, core printed at 2.4%, the same level as in February pre-conflict, so no major pass-through of higher energy costs. Going forward, a pick up in wage growth, higher energy and solid economic data could all help to lift prices.

GBP steadied as it found initial support around last week’s low at 1.3526. UK shop price inflation hit a two year high in August as the impact of higher energy, input and commodity costs began to filter through into prices. The BRC warned that the months ahead look challenging for households, citing rising bills that would put further pressure on budgets. BoE’s Mann stated it is better for interest rates to be a little bit too high and then correct if necessary.

JPY underperformed mildly as the major hit levels last seen in late July. Prices are still struggling to beat the long-term upward trendline from the April 2025 lows. Focus was on the 10-year Japanese government bond yield as it rose to 3% for the first time since 1996, following comments from US Treasury Secretary Scott Bessent suggesting the Bank of Japan should raise rates more aggressively. The September BoJ meeting is near nailed for a rate hike.

US stocks: The S&P 500 lost 0.71% to close at 7,632. The Nasdaq closed down 1.29% at 29,077. The Dow Jones settled lower by 0.79% at 5`2,772. There was mixed sector performance with Energy leading by some distance as crude jumped 4%, with Utilities, Healthcare and Consumer Staples also in the green. Consumer Discretionary, Industrials, Materials and Technology were all down 1% or more. Dell reported after the close and lifted forecasts again as AI demand powered record results and explosive forward guidance. The stock popped more than 8% after hours. Palo Alto rose modestly after also reporting after hours, as it beat on earnings on AI security demand. Broadcom reports after the close today with investors watching whether demand for networking chips and cloud infrastructure remains as strong as recent results from Nvidia. AVGO is down 25% from its record highs seen in early June.

Asian Stocks: Futures are red. APAC stocks traded lower with eyes on rising bond yields and oil prices. The ASX 200 saw some strength in commodities offset by weak tech and consumer sectors. The Nikkei 225 traded mixed with higher energy prices and yields holding back buyers. The Hang Seng and Shanghai Comp were also mixed as Hong Kong underperformed amid weakness in some big platform names and property stocks, while sentiment was also not helped by a weak debut for fast fashion retailer Shein. The mainland was helped by stronger than expected manufacturing PMI data.

Gold slid for a third day after Monday’s brief pause. The sharp fall on Friday was due to Fed Chair Warsh’s hawkish speech focused on inflation concerns, and ultimately reasons not to hike, which were then summarily dismissed. Odds on a rate hike in a few weeks have virtually doubled since before Warsh’s Jackson Hole appearance.  

Day ahead – RBNZ, Bank of Canada Meetings

The Reserve Bank of New Zealand is widely expected to raise rates to 2.75%, as renewed inflation pressures keep policymakers on guard. Annual inflation accelerated to a 2½-year high in the second quarter, driven largely by higher fuel prices. With conflict in the Middle East continuing, energy costs may remain elevated. Core inflation also edged higher, although it remains within the upper half of the RBNZ’s 1 to 3% target range. The economy is gradually recovering, with labour demand improving in Q2. Having delivered a hike in July alongside a tightening bias, the RBNZ is expected to maintain its hawkish tone. Markets are pricing rates at 3.0% by December and 3.5% next year as policy shifts from stimulative towards neutral.

The Bank of Canada is expected to leave rates unchanged at 2.25% later on Wednesday. Inflation remains broadly contained, but escalating trade tensions with the US have clouded the economic outlook.With no new forecasts due, attention will turn to Governor’s Council’s assessment of tariff risks and the resilience of Q2 growth. A weaker-than-expected GDP reading or a strong focus on downside risks could trigger dovish repricing. Otherwise, markets may continue to price the risk of rates staying higher for longer.

Chart of the Day – NZD/USD on channel support

Much of the impact on the kiwi will depend on guidance from the RBNZ and the fresh economic and rate projections. Markets price in nearly four quarter point hikes by June 2027. Is that too much? Forecasts would need to be ramped much higher as they currently only signal one more move for the next three quarters. Chart wise, the major has moved higher off the late June low at 0.5626 in a bull channel through long-term SMAs. But prices hit resistance at the May highs just below 0.60 and have turned down, to the lower part of the channel support line. The midpoint of this year’s high to low sits at 0.5859, with the 200-day SMA at 0.5848.