Weak July labor data, with 23,000 jobs lost and major downward revisions to previous months, boosted U.S. stocks, including the Dow Jones index, on hopes the Fed won’t raise rates.
That confidence grew as CPI fell to 3.4% year over year in July from 3.5% in June, Core CPI fell to 2.5% from 2.6%, and PPI came in below expectations, flat monthly versus +0.2% expected and down to 4.7% year over year from 5.5% in June.
And yet, the U.S. 30-year Treasury yield hit 5.216% at auction, its highest since 2001. Why?
Investors are still worried inflation could stay sticky as the situation in the Middle East remains unresolved, while the U.S. faces a huge deficit and rising debt. Meanwhile, USDJPY has climbed back above 159 despite joint U.S.-Japanese intervention, fueling fears that Japan could sell Treasuries to support the yen.
The problem is that higher Treasury yields can quickly push up mortgage rates, car loans, etc., putting more pressure on the economy and ultimately financial markets.
Adding to the pressure, an El Niño that could be one of the strongest on record may cause major losses, alongside the growing U.S.-China AI competition. If Z.ai’s GLM-5.3 outperforms GPT, Claude, and Gemini, it could put further pressure on chip stocks.
As for what could move markets this week, Wednesday is the deadline for a temporary CUSMA/USMCA deal. Without an agreement, the U.S. could impose 50% tariffs on around $20 billion of Canadian exports.
Washington could also push Iran into unprecedented economic isolation, with China and India potentially caught in the crossfire for buying and transporting Iranian oil, adding more pressure to an already tense geopolitical situation.
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