And the latter comes as the new Federal Reserve (Fed) Chair, Kevin Warsh, chose – in his much-awaited Jackson Hole speech on Friday – to emphasize that the US economy remains strong, the jobs leg of the economy has been resilient, while inflation remains high, and that if it doesn’t slow meaningfully, the Fed will have ‘more work to do’. He didn’t say whether he would back a Fed hike in September and didn’t respond to the Treasury’s efforts to tame the longer end of the yield curve by buying back bonds.

I wouldn’t say Warsh fully regained his credibility. He must walk the talk – and, at times, do things that would displease the White House.

But after the Jackson Hole speech, expectations for a 25bp rate hike in September jumped from below 40% to above 60%. The US dollar gained sharply on hawkish comments from Warsh, which narrowed the gap between the Fed and other major central bank outlooks. The US 2-year yield, which best captures Fed expectations, advanced 15bp in the session, flirting with July-high levels, and equities fell on Friday. Asian indices and US/European futures are under pressure this Monday morning.

Elsewhere, the data continued calling for policy action too.

On Friday, the latest CPI updates from some major euro area economies failed to enchant. French and Spanish inflation accelerated in August – moving away from the European Central Bank’s (ECB) 2% inflation target. In France, CPI now stands near 2.4%, while in Spain, we are talking about a number between 4.3% and 4.5%, depending on which metric you look at.

Today, euro traders will watch the German CPI and, on Tuesday, the euro area aggregate numbers are expected to print steady core inflation near 2.5%, while headline inflation may have returned above the 3% mark, mostly due to renewed upside pressure on energy prices. European gas futures, for example, spiked by more than 30% compared with the August 6 dip, and the latter helps explain what’s going wrong with euro area inflation – and with globally rising inflation levels.

For the ECB, the inflation level – and more importantly, the direction of travel – is becoming increasingly uncomfortable. A 25bp hike at the September meeting is almost fully baked in. And depending on how the Middle East/Ukraine situation impacts energy prices, we could see one more hike before this year ends, or one by early 2027 (the latter being the best-case scenario, giving room for further hawkish pricing).

Today, the EURUSD remains around 2% above the July dip. The ECB’s determination to fight inflation with higher rates versus the Fed’s unclear signals continues to favour a positive EURUSD outlook in the medium run. Yet, the pricing of a more hawkish Fed in the short run and rapidly rising energy prices could pressure the EURUSD toward the 1.1555/1.1575 area (38.2% Fib retracement of the July rebound / 100-DMA).

Elsewhere, the Reserve Bank of New Zealand (RBNZ) and the Bank of Canada (BoC) will announce their latest rate decisions this week: the RBNZ is expected to hike by 25bp, while the BoC will likely hold.

And throughout the week, we will gradually receive and digest the latest US jobs data to see whether the labour market remains as resilient as Warsh says it is. Last month’s NFP figure shocked investors, remember, with 23K job losses during the month of July. According to the consensus of analyst estimates on Bloomberg, the US economy may have added 58K new nonfarm jobs in August – in line with the past 12-month average of around 57K monthly job additions. Wage growth may have accelerated slightly.

From a market perspective, stronger-than-expected figures should continue to back the Fed hawks, pressure short-term yields higher and weigh on equity appetite, while softer-than-expected jobs data, especially on the wages front, could tame part of the latest hawkishness, help ease the short end of the US yield curve and support equity valuations.

Earnings menu

On the individual front, Q2 earnings from Broadcom and Dell will give investors another read on AI infrastructure demand. There is no doubt whatsoever regarding how strong AI demand is, and how thoroughly Big Tech will continue throwing money into building AI infrastructure.

The real question is: how do investors feel about financing that spending, knowing that over the past three years, Big Tech companies have moved from a cash-rich/capital-light investment model toward a low/negative-cash, capital-intensive model? Big Tech – the big buyers of chips and equipment – are putting more leverage on their shoulders to continue spending.

And the big bond issuance needed to do so is ‘crowding out’ the bond space, adding additional pressure on longer-term US yields that compete with Big Tech bonds today. Fundamentally, a terrible fiscal management and an increasingly interventionist – and potentially more opaque – US Treasury play strongly in favour of structurally higher yields.

The US just announced that some journalists couldn’t attend Bessent’s G20 speech. Oh, that smells bad.

Higher borrowing costs should weigh on profit expectations. And that pressure is higher when the Fed expectations get tougher.

That, to me, means more volatility ahead!