News of the week was the unusual intervention in the bond market by the US Treasury on Wednesday, as they announced at least a doubling of “liquidity support buyback operations” in long-dated bonds. Long bond yields had reached new cycle highs at the beginning of the week as a cocktail of higher oil prices, debt concerns and falling credibility in the Fed had weakened long-end demand for US bonds and pushed up yields. The action marks yet another intervention by the US Treasury not long after intervention in the FX market supporting the yen. However, it leaves the impression of lack of control and can backfire, eroding US credibility further. The USD dropped immediately on the announcement and precious metals and bitcoin moved higher; normally a sign of weakening confidence in US governance. Bond yields stayed lower for about a day but then moved back up erasing the decline in 10-year and 30-year yields. Treasury Secretary Scott Bessent said Thursday that the government would soon announce an “increased focus on fiscal consolidation”. We continue to look for US 10-year yields to reach 5% in 12 months from the current level around 4.70%.
Oil and European gas prices moved higher again during the week as tensions between US and Iran increased again after Trump declared economic war against Iran and announced that any country doing business with Iran would feel “tremendous” consequences. Brent oil moved from USD88 to USD94 during the week and the TTF European gas price leaped to a new cycle high of EUR66/mwh. We expect the ebbs and flows in the oil market to continue in the coming months.
European Flash PMI data for August showed further improvement with manufacturing PMI rising from 51.9 to 52.8, the highest level since 2022. The global AI investment boom is spilling over to European manufacturing as many companies are sub-suppliers, for example to the chip industry, cooling systems and materials. Service PMI was unchanged at 52.7.
Taiwan export orders stayed at high levels in July and are up 61.9% compared to July last year. Still, there are signs of easing momentum with a decline in the 6-month growth rate. Taiwan’s order data is a key indicator for the global AI investment cycle, which in turn is driving the global manufacturing cycle. Taiwan is home to TSMC, the leading producer of advanced AI chips.
Chinese data for July showed a continued two-speed economy with weak consumer demand and continued housing crisis amid surging exports and high-tech investments. Retail sales grew only 0.6% y/y while export data released last week showed growth of just below 25%. Chinese leaders hinted at more forceful stimulus in the second half at their Politburo meeting in late July.
Next week is fairly quiet with the main data releases being the German ifo business confidence index, US core PCE and personal spending and US durable goods orders. The latter is a key investment indicator and gives insight to the AI investment boom.
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