Stocks bid, bond yields elevated and the Yen in focus

Chips lift Asia-Pac stocks

Chip stocks bolstered Asian markets overnight, pushing South Korea’s KOSPI to levels not seen since late July and Japan’s Nikkei 225 to highs not seen since earlier this month. However, the picture across the region was not entirely rosy, with Hong Kong's Hang Seng Index slipping nearly 1% and mainland China's CSI 300 Index edging lower.

Stateside, it was green across the board, pushing the S&P 500 to a fresh all-time high of 7,816 after breaking out above a textbook bullish pennant between 7,793 and 7,698. Sector performance saw communication services (XLC) leading the pack, followed closely by real estate (XLRE), consumer staples (XLP), and technology (XLK).

Inflationary pressures cool but the Fed remains divided

The mood was also lifted by easing inflation pressures following the US July PPI report, with the YY headline cooling to 4.7% from 5.5% in June, and the core print cooling from 4.7% to 4.2%. The OIS curve saw a modest dovish repricing, but 18 bps of tightening remain implied by year-end, and 40 bps are priced in by mid-2027 (nearly two rate hikes).

In recent Fed commentary, Cleveland Fed President Beth Hammack reiterated calls for immediate policy tightening to bring inflation back to target – note that Hammack was one of the three officials who dissented at the July meeting. However, Richmond Fed President Tom Barkin highlighted uncertainty about whether the Fed will need to raise the target rate, echoing the Fed's mixed tone despite hawkish market pricing.

Heightened Middle East tensions

Developments in the Middle East suggest that the US is resorting to economic pressure on Iran. US Treasury Secretary Scott Bessent told reporters overnight that Washington will roll out new economic measures against Iran next week. Frankly, it is difficult to predict what this means, as Iran is one of the most heavily sanctioned countries.

The deal between Oman and Iran to exert control over the Strait of Hormuz remains in its final stages. According to reports, Oman is ready to proceed; the delay may stem from leadership issues in Iran – who exactly gets to sign off on the deal? As you can see, we head into another weekend of uncertainty, with oil benchmarks remaining above US$80/barrel.

30-year auction at the highest rate since 2001

For bonds, US Treasury yields are higher across the curve this morning, with the main focus on the 30-year bond auction. The US Government auctioned 30-year bonds at the highest rate since 2001, with yields as high as 5.22%, second only to the 5.52% paid in August of that year. That is the scale of investor unease we are talking about: demand for compensation to fund US borrowing that we have not seen in a generation.

The 10-year auction on Wednesday told a similar – if slightly less dramatic – story, clearing at its highest yield since the 2007 financial crisis. Together, the two sales are being read as a warning shot about the growing US deficit, even though demand held up reasonably well on the day.

Yen flirting with intervention territory

In the FX space, the yen is once more in focus, still hovering just south of ¥160 against the USD – very much the ‘intervention zone’. Carry traders came in around ¥155 in early August, despite the Japanese PM saying he supports BoJ tightening. The BoJ is expected to step in at September’s meeting (markets are pricing in a 65% chance of a rate hike), but, importantly, investors will be watching whether it also signals a faster pace of tightening.

However, hiking rates into an energy crisis with little growth is problematic, as it could further weigh on domestic demand. It may, therefore, take more than this to notably persuade carry traders that it is not worth it – something like incentivising domestic asset investment.

Day ahead: US Retail Sales and consumer sentiment on deck

The day ahead includes US July retail sales, expected to rise 0.1% MM, with the ex-autos measure forecast to bounce back 0.2% (from -0.2% in June), providing the clearest read yet on whether US consumers are still spending amid higher rates and sticky prices.

Alongside that, the August University of Michigan preliminary consumer sentiment reading is expected to slip to 54.5 from 55.2 in July, ending a recent run of gains. It is worth watching the inflation expectations components, with the year-ahead measure seen holding at 4.2% and the longer-run gauge at 3.3%.