Category: Economy

Analysis of the global economy

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Warsh Hikes While Trump Fumes

Key Points

  • The FOMC voted unanimously to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.
  • President Trump criticized the FOMC decision, demanding that the Fed slash interest rates to “1% or less” on Truth Social.
  • Backing a rate hike was a politically brave move by the new Fed Chair, Kevin Warsh, as it will likely sour his relationship with the President.
  • The Fed hike likely avoided a sharp spike in long-term Treasury yields as the bond market was growing restless over loose monetary and fiscal policy.

Fed Chair Kevin Warsh cemented his reputation as an inflation hawk, voting in support of a unanimous FOMC decision to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.

President Trump condemned the move, demanding on Truth Social that the Fed slash interest rates to “1% or less.”

“We are ‘carrying’ almost every country in the World, and that cannot go on any longer,” Trump wrote in a Truth Social post.

“LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” he wrote. (CNBC)

Updated dot plot projections show a strong majority of Fed officials expect another rate hike this year. Warsh did not submit a projection, but 16 of 18 participants expected at least one more rate hike in 2026, of which 4 projected 2 hikes.

FOMC Dot Plot

The 2-year Treasury yield climbed to 4.73%, pricing in 3 further rate hikes.

2-Year Treasury Yield (CNBC)

10-year Treasury yields held firm at 5.0%.

10-Year Treasury Yield

A failure of the Fed to act would likely have caused a bond sell-off, with the 10-year yield spiking upwards, reflecting bond market disappointment with perceived lax monetary and fiscal policy.

Long-term yields will likely still rise, but at a more measured pace than if the Fed’s commitment to stable prices were in doubt.

The Fed Chair gave three factors that are driving long-term yields higher:

  1. The economy is strengthening and at close to full employment;
  2. Increased competition for capital as AI hyperscalers seek to fund capital spending; and
  3. Geopolitical instability.

He did not mention lax fiscal policy, with $40 trillion of federal debt and annual deficits approaching $2 trillion a year, which we consider a fourth factor driving higher yields.

Conclusion

We may have misread the new Fed Chair as a “political animal.” He has delivered on his commitment to fight inflation despite opposition from President Trump. In doing so, he has likely placated the bond market, which was driving long-term yields higher. We still expect long-term rates to rise, but at a more measured pace.

“The era of free money is definitely over,” Kim Crawford, fixed-income portfolio manager at JPMorgan Asset Management, told the Financial Times today. “The bond market is looking for discipline.”

We expect further rate hikes if the economy continues to grow faster than existing capacity allows, fueling increased inflationary pressure.

Credit growth above 4.0% is not consistent with low inflation. A 4.0% target would be consistent with the 2.3% projected real GDP growth and 1.7% inflation (below the Fed’s 2.0% target).

Bank Credit Growth

Acknowledgments

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US Diesel Hits a Record High

Key Points

  • Core CPI ticked lower to an annual rate of 2.4% in August, while headline CPI edged up to 3.4%.
  • However, rising producer prices warn of strong margin pressure that corporations will likely pass on to consumers through price hikes.
  • Energy prices are driving higher inflation, with diesel rising to a record $6 per gallon.
  • Houthi attacks on Saudi Arabia’s East-West Pipeline are expected to drive crude oil prices higher next week.
  • 10-year Treasury yields are testing resistance at 5.0%, while Gold softened to $4,350 per ounce.

Headline CPI edged up to an annual rate of 3.4% in August, while core CPI ticked lower to 2.4%.

CPI & Core CPI - Annual

For the month of August, headline CPI increased 0.40%, in line with expectations, while core CPI’s increase of 0.29% was higher than the expected 0.20%.

CPI & Core CPI - Monthly

CPI remains above the Fed’s target inflation rate of 2.0% but gives little warning of the expected inflation shock ahead.

Producer prices have risen 5.4% over the 12 months to August, warning of strong margin pressure that corporations will likely pass on to consumers through price hikes.

Producer Price Index (PPI)

Finished goods PPI reacts faster to higher energy prices, reaching an annual rate of 6.6% in August. While slower to react, Services PPI is also rising at 4.5%.

Producer Price Index (PPI): Goods & Services

Strong producer price rises are reflected in the ISM Non-Manufacturing (Services) survey. The Prices index climbed to 72.6%, the highest reading since July 2022, and the 21st consecutive month above 60%.

ISM Services Prices

Services Prices tend to lead US CPI inflation by 2 to 6 months, as shown in the longer-term chart below. The current divergence between ISM Non-Manufacturing Prices (blue) and CPI (red) warns of a sharp rise in CPI ahead.

ISM Services Prices

Energy prices are the primary driver of the current CPI spike, as in 2022 when energy prices soared 40% after Russia’s full-scale invasion of Ukraine, followed by a rise in CPI to 9.0%.

CPI & CPI Energy - Annual

Average US gasoline prices rose to $4.16 per gallon in September as crude prices climbed.

EIA US Gasoline Prices

However, distillates are taking the brunt, with average diesel prices rising to a record high of $6.00 per gallon.

EIA US Gasoline Prices

NEW YORK, Sept 10 (Reuters) – The U.S. national average price of diesel on Thursday surpassed $6 a ​gallon for the first time ever, according to price tracker GasBuddy, as the U.S.-Israeli war on Iran and Ukrainian attacks on Russia’s refineries have squeezed supply….

“Every truck, every delivery, every package, every grocery run just got more expensive,” GasBuddy analyst Patrick De Haan said ​on social media site X.

“Record diesel prices will impact every cargo, shipment, every delivery Americans are taking, and are likely to reignite inflation up and down the supply chain,” ​he said.

“In a span of five months, we’ve seen diesel prices more than double. It has rocked our cash flows,” said Alex Ryan, energy director at Kansas-based fuel supplier Oasis Energy. “There’s gotta be a tipping point, I just don’t know when or where it’s going to be,” he said….

U.S. diesel inventories stand ​13% below their five-year ⁠average, the Energy Information Administration said, at 106.3 million barrels. Stocks rose last week as refiners ran plants at full tilt to capture strong margins.

The U.S. diesel crack spread , a measure of refining margins, surged to a record high of $112.17 a barrel on Thursday, LSEG data showed.

U.S. distillate inventories are near multi-decade lows for this time of year, even with refiners operating ⁠at high ​utilization rates, said Linda Giesecke, director of refined products at Rapidan Energy. It will likely be difficult ​to rebuild stockpiles over the next two months as seasonal refinery maintenance gets underway.

Brent crude futures rose to $107 per barrel last week, before retracing late Friday to $104.60, testing new support at $100 per barrel.

Brent Crude Futures (ICE November'26)

Talk of new peace talks is meaningless, but the Trump administration is still able to manipulate oil futures by spamming the media. Iran is likely to increase its attacks on oil transit routes in the Middle East ahead of the November midterms. From Reuters:

“Some headlines of possible new talks in the Middle East are weighing ​moderately on oil prices today,” said UBS energy analyst Giovanni Staunovo. “I keep seeing near-term risks to the upside for oil prices, but we should expect ongoing high price volatility ​too.”

In a further development for Riyadh, satellite imagery showed smoke on Thursday in the vicinity of Saudi Arabia’s East-West Pipeline, vital for the kingdom to divert its crude exports away from Hormuz.

As more reporting said a pumping station on the pipeline had been damaged by Iran-affiliated militants, prices stayed lower.

“It’s surprising the oil market remains down in light of reporting that Houthi rebels attacked the East-West Pipeline, which ​would impact 7 million barrels of crude,” said Andrew Lipow, president of Lipow Oil Associates.

“Repairing a pumping station would require a lot more than repairing a break in the ​pipeline,” Lipow said.

Stocks, Treasuries & Gold

The S&P 500 continues to test short-term support at 7600. A breach would signal a secondary correction to test support at 7000.

S&P 500

The bond market is voting with its feet. 10-year Treasury yields are testing resistance at 5.0% ahead of next week’s FOMC meeting. Many pundits are projecting a rate hike on September 16 because of inflationary pressure. Still, the new Fed Chair Kevin Warsh would have to be really dumb to risk offending President Trump with a rate hike ahead of the midterms.

10-Year Treasury Yield

We expect the Fed to hold off on another rate hike at least until December, but that is likely to cause a strong backlash from the bond market, with the 10-year rising strongly above 5.0%.

We expect Gold to soften as the war in the Persian Gulf continues, testing support at $4,000 per ounce, but remain long-term bullish on its prospects.

Spot Gold

Conclusion

We expect rising energy prices to drive higher inflation over the next six months.

Rising long-term Treasury yields will likely be bearish for stocks.

Gold is expected to soften for another test of support at $4,000 per ounce as the war in the Middle East and crude oil shortages intensify. However, we remain long-term bullish on Gold due to rising fiscal deficits by G7 economies, coupled with strong Gold buying by central banks and private investors, especially in China, as the fiscal outlook deteriorates.

Acknowledgments

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Fed’s Warsh Hawkish But Won’t Hike

Key Points

  • Fed Chair Kevin Warsh’s keynote speech at Jackson Hole had a distinct hawkish tone.
  • Financial markets responded with a sharp jump in the 2-year Treasury yield to 4.36%.
  • However, Warsh’s hands are tied by political considerations, and no rate hike is likely.

We are convinced that the FOMC will not hike rates at its September meeting despite the Fed Chair’s hawkish speech at Jackson Hole on Friday, August 28.

The new Fed Chair set a hawkish tone in his keynote address to the Fed’s Jackson Hole economic symposium in Wyoming.

“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, ‌we have work to do. That’s our job … our mandate … and our charge to keep,” Warsh said.

….”The Fed’s predominant focus right now should be on prices.”

The 2-year Treasury yield jumped by 9 basis points within 20 minutes of Warsh’s speech and ended Friday up 13 basis points at 4.36%, more than 60 basis points above the Fed’s current target range of 3.5-3.75%.

2-Year Treasury Yield (CNBC)

However, Warsh is unlikely to support a rate hike before the November midterms because of the political implications.

Warsh has strong Republican credentials, having served in President George W. Bush’s White House and as the youngest board member in the Federal Reserve’s history. He has also spoken about the importance of free trade, the Fed’s political independence, and a strong Dollar — views that could lead to conflict with the current President. However, he has close links with Treasury Secretary Scott Bessent, having worked as partners at Stan Druckenmiller’s Duquesne Capital. He also has strong MAGA ties through his father-in-law, Ronald Lauder, son of Estee Lauder, who is a decades-long friend and ally of Donald Trump.

One of Warsh’s two appointees at the Fed is Paul Winfree, who authored the chapter on the Federal Reserve in the Project 2025 blueprint. The other is Daniel Heil, a fellow at Stanford’s conservative Hoover Institution, where Warsh served before joining the Fed.

Warsh enjoys the trust of President Trump, who regularly consults him on economic matters. A far stretch from the strained relationship with his predecessor, Jerome Powell, whom Trump did his best to undermine, including having him investigated by the Justice Department.

President Trump has a long history of turning on his political allies if they do not do his bidding. He repeatedly criticized his earlier appointee, Fed Chair Powell, for not lowering interest rates, going so far as to suggest that Powell was a bigger threat to the United States than Chinese President Xi Jinping. Powell insisted that the Fed made decisions based on data without regard to politics, but that did not seem to placate the President. The Fed then cut rates in September 2024, two months before the last presidential election, which seems to have convinced Trump that Powell was politically motivated.

We believe that Kevin Warsh is politically astute, having won nomination as Fed Chair despite his old-school Republican values. As a recent Trump appointee, presiding over a Fed that hikes rates two months before the upcoming midterm elections would likely be taken by the President as a betrayal of his trust. It would invite similar persecution to what his predecessor faced. That would be politically stupid.

Conclusion

The new Fed Chair is unlikely to convince President Trump of the need to hike rates ahead of the November midterm, and is unlikely to support such a move without his assent.

The President will not want to upset his predominantly blue-collar MAGA base, especially after the Iran debacle, when he needs a strong turnout in the November midterms. Your typical MAGA voter is not that sophisticated and is unlikely to be persuaded by arguments that higher interest rates will reduce inflation in 12 months’ time, but will instead be incensed by an increase in interest payments on their car loan and credit card.

This is kitchen table economics. That is what is driving Fed monetary policy.

Acknowledgments

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Australian CPI Sticky But No Rate Hike

Key Points

  • Australian CPI remains stubbornly high, with a 1.0% monthly increase in July.
  • Trimmed mean CPI was unchanged at 3.6% on a year-on-year basis.
  • However, the unemployment rate rose to 4.5% in July, suggesting the RBA is unlikely to raise rates.

Australian CPI remains stubbornly high, with the Trimmed Mean, the RBA’s favored measure, holding firm at 3.6% for the 12 months to July.

Australian CPI & Trimmed Mean CPI

Headline CPI eased to 3.5% for the 12 months, but that reflects base effects from the 1.3% increase in July last year compared to a jump of 1.0% in July 2026.

Australian CPI - Monthly & Annual

Strong CPI in July increases the motivation for another RBA rate hike, but Justin Smirk at Westpac points out that the labor market is softening.

Unemployment rose to 4.5% in July, up from 4.4% in June.

Australia: Unemployment

Monthly hours worked declined by 12.5 million hours in July to 1,998 million hours in seasonally adjusted terms, a monthly fall of 0.6%.

Australia: Aggregate Monthly Hours Worked

Conclusion

We agree with Westpac that the RBA is unlikely to raise rates:

Market services inflation is above target but a softer than expected labour market and wage outcomes reduce the likelihood of a November rate hike. We believe the RBA is likely to remain on hold for the remainder of this year.

However, credit is growing at an annual rate of 8.5% and broad money supply at 8.0%. Real GDP growth of 2.5% for the 12 months to March 2026 suggests that underlying inflation is between 5.5% and 6.0% (the spread between the two measures and growth in output/GDP).

Australia: Credit and Broad Money Growth

Our calculation of underlying inflation is more than 1.0% higher than the RBA’s current cash rate target of 4.35%.

We will likely be stuck with high inflation for a while.

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ~ Milton Friedman

Acknowledgments

Notes

  1. Credit and money supply represent two sides of the same coin: bank lending and bank deposits. They only tend to diverge when the RBA injects liquidity to rescue the economy from a deflationary spiral, as in 2008, 2010-2013, and 2020.
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Prepare for China Shock 2.0 and its Gold Impact

Key Points

  • China’s first deflationary shock flooded the global economy with cheap labor in the early 2000s and hollowed out low-tech manufacturing industry in developed economies.
  • A credit-fueled boom followed, with huge investment in infrastructure and real estate to sustain economic growth.
  • A massive speculative real estate bubble developed, forcing Beijing to intervene.
  • The real estate bubble collapsed in a controlled implosion after banking regulators restricted credit to the sector.
  • Plunging real estate prices destroyed household wealth, setting off a deflationary spiral in China’s domestic economy.
  • The government channeled investment into high-tech manufacturing to offset collapsing demand.
  • Weak local demand forced manufacturers to focus on export markets.
  • Booming Chinese exports of electric vehicles and other high-tech products threaten to hollow out high-tech industries in developed economies.
  • However, export markets aren’t large enough to absorb China’s demand shock, and pushback from trading partners will likely trigger a major contraction.

Last week we focused on the slowdown of China’s economy. This week, we examine the root cause of the problem. Credit.

China experienced a credit-fueled boom in the early 2000s. This went into overdrive with massive government stimulus during the 2008 global financial crisis.

Unrestrained lending led to a massive speculative bubble in the real estate sector. Alarmed by the rate of credit expansion, Beijing put the brakes on, restricting sector access to credit in 2022.

The collapsing real estate bubble has destroyed household wealth.

China: House Price Index

Consumer Confidence collapsed in 2022 and has not recovered.

China: Consumer Confidence

Household Debt, which had grown rapidly as a percentage of GDP, plateaued until 2024, and has now started to decline.

China: Household Debt Percentage of GDP

Property Investment has contracted since 2022, and is now shrinking at an annual rate of 18%.

China: Property Investment

Loan growth from financial institutions has rapidly decelerated to a low of 5.2% in June 2026.

China: Outstanding Loan Growth

Credit is the lifeblood of an economy, and rapid deceleration in credit growth triggers a domino effect of demand contraction across the economy.

Manufacturers turned to export markets to offset declining domestic demand, with exports peaking at $412 billion in June 2026.

China: Exports

China’s trade surplus jumped to $126 billion in June, falling back to $113 billion in July.

China: Trade Surplus

The People’s Bank of China (PBOC) has steadily expanded its balance sheet, employing QE to suppress long-term interest rates and stimulate the economy.

China: PBOC Balance Sheet

The Chinese government is also running deficits to support the economy, with government debt rapidly expanding to 99.2% of GDP in 2025.

China: Government Debt to GDP

Overall debt in the economy shows a similarly steep growth path despite slowing household credit growth.

China: Government Debt to GDP

Developed economies are not much better off (below), with average total debt at 260% of GDP and government debt at 100% of GDP. However, the difference lies in the growth rate: developed economies are no higher than in 2010, while China has almost doubled.

Developed Markets: Government Debt to GDP

Conclusion

China has enjoyed a debt-fueled boom for more than 20 years, but is now sliding into a deflationary contraction. The Chinese economy is addicted to credit, and regulators’ attempts to rein in the speculative real estate boom have triggered a deflationary spiral. Falling real estate prices have destroyed household wealth, leading to a contraction in domestic demand. Beijing boosted investment in high-tech industry to sustain economic growth, leading to a massive trade surplus as manufacturers turned to export markets to offset shrinking domestic demand.

However, export markets are not large enough to absorb China’s deflationary surge without themselves suffering a domestic contraction. We expect trade surpluses to fall as trading partners push back with tariffs, import quotas, and other trade barriers.

China will then face a stark choice between a collapsing economy and debasing the Yuan through high inflation. We believe that Beijing has chosen the latter option, as the lesser of two evils, and will rapidly expand credit in the economy to that end while the PBOC expands its balance sheet to suppress long-term interest rates.

China’s debasement of the Yuan has fueled a rapid growth in domestic demand for Gold as a store of value, leading to a close correlation between Gold and the PBOC’s balance sheet.

China: PBOC Balance Sheet

Acknowledgments

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Weak Dollar Boosts Gold & Copper

Key Points

  • Gold is testing resistance at $4,250 per ounce.
  • Copper (COMEX September futures) jumped to $6.72/lb.
  • US Treasury intervention in the Japanese Yen has rattled bond market investors.
  • The ISM Services PMI signals expansion, but signals weak job growth and strong inflationary pressures.

Gold rallied to test resistance at $4,250 per ounce. A breakout would signal another test of $5,000.

Spot Gold

Copper jumped to $6.72/lb on the COMEX futures exchange (Sep’26), continuing its long-term uptrend.

CNBC: Copper

The Dollar softened after last week’s joint intervention by Japan’s Ministry of Finance (MoF) and the US Treasury to support the Yen. Bond market traders are questioning why the US Treasury was involved and not the G7. Coordinated action by G7 central banks has supported past interventions. This time, the G7 were not involved, and the conclusion is that the US Treasury was acting to protect its Treasury market. The US Treasury repo operations circumvented the MoF being forced to sell US Treasuries to support the Yen, a move that would have driven up yields. (Reuters)

Dollar Index

Stocks & Financial Markets

Bitcoin1 continues to consolidate in a narrow range above 60000, a bearish sign in a downtrend. A breakout above 65000 would signal that financial market risk aversion is easing, while a break below 60000 would warn of a major liquidity contraction.

Bitcoin (BTC)

Dow Jones Industrial Average broke out above 53000, and is headed for a test of 55000. Trend Index troughs above the zero line confirm buying pressure.

Dow Jones Industrial Average

ISM Services

The ISM Services PMI increased to 54.1% for July, signaling a broad economic expansion.

ISM Services PMI

However, the Employment index fell to 47.4%, warning of weak job growth ahead.

ISM Services Employment

Services Prices also increased to 70.3%, a level similar to Manufacturing, signaling strong inflationary pressures.

ISM Services Prices

Conclusion

US Treasury operations to assist Japan’s intervention in support of the Yen underscore the fragility of US Treasury markets. The move fueled a rally in Gold and Copper, as well as the Dow, as confidence in US Treasury markets was shaken.

The ISM Services PMI signals continued expansion, but warns of weak job growth and strong inflationary pressures.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
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4 Key Takeaways for the Week

Key Points

  • Long-term Treasury yields climbed after the Fed kept rates unchanged.
  • The Japanese Yen is weakening as the Bank of Japan slow walks rate hikes.
  • Gold absorbs selling pressure as long-term rates rise.
  • China’s economy is slowing.

Treasury Market

The bond market has been anticipating a rate hike. This has been signaled since the 2-year Treasury yield broke above the Fed funds target range in March 2026.

2-Year Treasury Yield & Fed Funds Target (Upper Limit)

The FOMC voted to keep the Fed funds rate unchanged, with a target range of 3.5% to 3.75%. There were 3 dissenting votes, calling for a rate hike. The new Fed Chair, Kevin Warsh, is encouraging opposing views, and we can expect more dissent in the future. Warsh has also avoided forward guidance, which is likely to increase volatility in the bond market and consequently the term premium.

10-year Treasury yields climbed to 4.745% on Friday, reflecting market concern that the FOMC is not taking a more hawkish stance on inflation.

10-Year Treasury Yield

GDP grew at 6.5% over the 12 months to June, suggesting that the 10-year yield needs to rise by at least 175 basis points if the Fed is serious about containing inflation. Long-term interest rates below nominal GDP growth (the rate of return on new capital investment) encourage rapid credit growth, with demand expanding faster than output.

10-Year Treasury Yield & Nominal GDP Growth

Japan & the Sovereign Bond Market

Japan’s GDP grew by 3.6% over the 12 months to March 2026. The 10-year JGB yield is 2.8%, indicating that monetary policy remains stimulative, but less so than the US.

10-Year Treasury Yield & Nominal GDP Growth

The Bank of Japan kept its policy rate at 1.0% at last week’s meeting despite an upturn in CPI to 1.7%. The weakening Yen drives higher inflation.

Japanese CPI Inflation

The low BOJ policy rate and ongoing bond purchases aimed at suppressing long-term JGB yields undermine the currency. The Yen has steadily weakened, breaking above 160 against the Dollar in June 2026 to reach its highest level in 39 years. Japan’s Ministry of Finance intervened on Thursday to support the Yen, driving the exchange rate to 157 against the Dollar. However, the effect of these MoF interventions is short-lived because of BoJ policy.

Japanese Yen

Rising long-term yields in sovereign bond markets reflect growing concern over sovereign debt levels and the risk of fiscal dominance. When central bank policy is dominated by government bond markets’ need for support, with lower interest rates prioritized above containing inflation, the currency’s purchasing power is eroded, as in Japan.

The US 30-year Treasury yield has climbed to 5.275%, reflecting concerns over currency debasement.

30-Year Treasury Yield

The Japanese JGB yield is lower at 3.98%, but this reflects sizable ongoing QE by the Bank of Japan aimed at suppressing long-term rates.

30-Year JGB Yield

The Bank of Japan has higher debt levels relative to GDP than the UK and should theoretically trade at a higher yield. The difference in the 30-year Gilt yield lies in central bank monetary policy: the Bank of England is steadily shrinking its balance sheet, while the BoJ is actively buying JGBs in the secondary market to suppress yields.

30-Year UK Gilts Yield

Dollar & Gold

Rising short-term yields are strengthening the Dollar, with the 1-Year Treasury yield gaining more than 50 basis points in the last 6 months.

1-Year Treasury Yield (CNBC)

Gold has softened considerably from its peak of $5,500 per ounce and has been testing primary support at $4,000 over the past 8 weeks.

Spot Gold

Gold ETF inflows slowed in the first half of 2026 but remained positive, driven by continued inflows into Asian funds. North America experienced an outflow of $7.7 billion, European inflows slowed to $3.2 billion, while Asia recorded a strong inflow of $12 billion.

Gold ETF Flows

Average daily trading volumes surged to a record $488 billion in the first half of 2026.

Gold Average Daily Trading Volumes

OTC trading, led by the LBMA, averaged US$249bn/day, substantially above 2025 levels and underscoring the depth of institutional participation. Exchange-traded volumes also jumped, reaching US$227bn/day – 22% higher than the 2025 average – supported by elevated investor activity. Meanwhile, global Gold ETF trading averaged US$12bn/day – up 73% from 2025 – fueled primarily by robust trading in US funds as investors increasingly turned to Gold amid heightened macroeconomic and geopolitical uncertainty.

Comex futures net longs increased to 538 tonnes, up 16% since May, and the highest month-end level since January despite a weakening gold price. A closer look shows retail participation (non-reportable net longs declined in June, while other reportables, which capture large trades outside the managed money category, were up 16% from May. Managed money net longs remained broadly stable, declining by just 43 tonnes year-to-date. Again, H1 investor behavior differed: retail positioning largely tracked short-term price movements while larger traders’ positions have, in general, stayed stable since mid-March. (WGC)

Comex contracts standing for delivery jumped to 13,123 in July from 8,838 in May, and a 9.0% increase over July last year.

Spot Gold

China

The Chinese NBS Manufacturing PMI fell to 49.2 in July, down sharply from 50.3 in June. Values below 50 indicate a contraction in the manufacturing sector.

China: NBS Manufacturing PMI

The OECD Composite Leading Indicator for China fell to 98.6 in June, below its long-term average of 100, signaling a contraction.

OECD: China Composite Leading Indicator

The RBA’s activity indicators for China show industrial production is holding up, boosted by record exports. However, real retail sales growth has stalled, while fixed asset investment has contracted sharply following Trump’s tariff blitz last year.

OECD: China Activity Indicators

Household credit growth (purple below) has also stalled. Business credit has taken up the slack, but government credit growth is also contracting.

OECD: China Total Social Financing

Conclusion

10-year US Treasury yields jumped to 4.745% after the Fed kept its funds target range at 3.5%-3.75%, reflecting bond market concerns over inflation.

The new Fed Chair’s strategy is to keep short-term rates low and allow long-term rates to rise, to slow the rate of demand growth in the economy and curb inflation. However, nominal GDP is growing at an annual rate of 6.5%, which means that 10-year Treasury yields would need to rise by 175 basis points to keep inflation in check. An increase to 6.5% would likely cause a sharp contraction in stocks.

Japan’s Ministry of Finance has intervened to support the Yen. However, the effects will likely be short-lived, as the Bank of Japan continues to maintain stimulative monetary policy, which fuels inflation and undermines the currency.

Rising long-term sovereign debt yields reflect bond market concerns over rising sovereign debt and the risk of fiscal dominance, as in Japan, where the central bank has prioritized maintaining an orderly bond market above price stability. Erosion of the currency purchasing power is the inevitable outcome.

Gold has found strong support at $4,000 per ounce, with long-term investors prepared to wait out the turmoil in the Middle East. Demand from Asian investors has been particularly strong, but could be undermined if China goes into recession.

China’s economy shows increasing signs of contraction, precipitated by a decline in business investment following President Trump’s 2025 tariff attack. Household credit and real retail sales have stalled, and the NBS Manufacturing PMI fell to 49.2, signaling a contraction. Higher fuel prices would be an added headwind that could tip the economy into recession.

Acknowledgments

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The Foundations of Australia’s Housing Boom are Being Tested | Robert Burrows

by Robert Burrows
21 July 2026

For years, Australian residential property has been viewed as a one-way bet. Mention the possibility of falling house prices and you’re often met with disbelief. Population growth, constrained housing supply and a deeply ingrained belief that property always goes up have combined to create one of the most expensive housing markets in the developed world.

But markets are ultimately driven by fundamentals, and those fundamentals are becoming increasingly difficult to ignore….

Read more at Bond Vigilantes

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Bank of Japan a Leading Indicator?

Bank of Japan

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Brent Flat, Bitcoin & Gold Sink Again

Key Points

  • Brent Crude tests support at $70 per barrel.
  • Gold tests support at $4,000 per ounce.
  • The Dow closes at a new high.
  • Bitcoin breaches support at 60,000, signaling risk-off across financial markets.

Brent Crude prices remain flat at close to $70 per barrel despite on-again/off-again peace talks.

Brent Crude

We are entering the summer driving season in the US, when demand for gasoline peaks. Gasoline prices will likely remain high as refiners enjoy wide profit margins, with the 3-2-1 crack spread2 above $60 per barrel for the first time since Russia’s invasion of Ukraine in 2022.

Energy Channel: 3-2-1 Crack Spread

Bitcoin1 broke primary support at 60,000. Expect retracement to test the new resistance level, but respect will likely confirm another decline. Falling Bitcoin prices signal a market-wide shift to risk-off.

Bitcoin (BTC)

However, the Dow Jones Industrial Average closed at a new high. The replacement of Verizon (VZ) in the Average with Alphabet (GOOGL) on June 29 may have something to do with this.

Dow Jones Industrial Average

The S&P 500 also rallied, testing resistance at 7500. A follow-through above the recent high would offer a target of 8000.

S&P 500

Dollar & Gold

The Dollar retreated slightly, but all eyes are on the Japanese Yen, which weakened to its lowest point against the Dollar in more than 40 years. Expected intervention by Japan’s Ministry of Finance would temporarily strengthen the Yen but would be self-defeating, as it would increase selling pressure in Japan’s bond market. Rising bond yields force the Bank of Japan to intervene by buying bonds. That weakens the Yen and negates the MOF’s earlier move.

Japanese Yen

This is a difficult trap to escape from. If the BOJ raised its policy rate from the current low of 1.0%, it would strengthen the Yen but increase upward pressure on bond yields, forcing the Bank to buy more bonds, thereby weakening the Yen.

Gold is testing primary support at $4,000 per ounce again, with declining Trend Index peaks warning of secondary selling pressure.

Spot Gold

Plunging open interest on Comex Gold futures indicates that speculators are losing interest in the precious metal.

Gold Futures Open Interest

However, one major player is buying the dip. Bloomberg reports:

Imports were around 163 tons last month, the highest since March 2024, according to customs data released on Saturday. Volumes for the first five months of 2026 were about 692 tons, up by about 76% from a year earlier.

China: Nonmonetary Gold Imports

Conclusion

We expect Brent Crude to remain around $70 per barrel, provided there is no interruption to shipping in the Strait of Hormuz. This eases inflation expectations, but existing pressures persist and prevent the Fed from cutting rates.

Stocks remain bullish, but Bitcoin warns of rising risk aversion.

Gold will likely remain under pressure while negotiations with Iran continue, but China has increased its imports of nonmonetary Gold, buying the dip. We expect the uptrend in Gold to continue for decades, interspersed with regular sell-offs like the present, curbing speculators’ enthusiasm and enabling long-term players to build their positions.

Acknowledgments

Notes

    1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
    2. The 3-2-1 crack spread is calculated on the theoretical refining margin if a barrel of oil is split 2:1 between gasoline and diesel. A spread of $60 indicates that refiners’ margins would have tripled from $20 in January 2026.
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