The latter comes on top of unexpectedly strong jobs numbers from the US. Friday’s data showed that the US economy added 162K new nonfarm jobs in August, last month’s -23K reading was revised to a 21K gain, wages grew faster than pencilled in, while the participation rate rose.

All the numbers came to support the idea that the Federal Reserve (Fed) could raise interest rates if the inflation side of the equation doesn’t show signs of easing. And looking at energy prices, it doesn’t.

At some point on Friday, the US 2-year yield, which best captures Fed rate expectations, spiked to 4.42% — the highest level since January 2025 (and the highest since Trump returned to the White House).

Funnily enough, the US President and Vice President called for rate cuts — which is not a good idea, of course, because lower rates are supposed to boost economic activity, and the latter tends to fuel inflation: something you don’t want as a central banker when inflation has been running above target for years (in Kevin Warsh’s own words!).

So, all eyes are on the latest US inflation update later this week. Due Friday, US core CPI could show a slight easing to 2.4% y-o-y from 2.5% printed a month earlier (this figure excludes volatile food and energy prices to see through the dust), but it won’t change the fact that energy, fertilizer prices are mounting on the Middle East and Ukraine wars, extreme weather is impacting crops (hence food prices), and exploding electronic component costs are adding fuel to the fire.

Activity on Fed funds futures assesses nearly a 60% chance of a 25bp hike from the Fed in September. The more important question is whether Warsh could dare raise rates despite very strong pushback from the White House.

Treasury buybacks

Mohamed El-Erian wrote in his latest report that the ‘political pressure to contain borrowing costs is more likely to apply to the Treasury than the Fed’. This week, the Treasury’s bigger long-end bond buybacks take effect from September 9, with the first upsized long-end operation scheduled for September 10.

Investors will be closely watching whether bigger buybacks will tame the pressure on the long end of the US yield curve — knowing that a successful operation could also add to inflationary pressures in the US by decreasing borrowing costs for households and companies!

So far, the US 30-year yield has retraced more than half of the post-Treasury announcement retreat. If the market doesn’t play along, I am afraid Bessent will keep putting more firepower on the table until something works in the short run.

In the longer run, some of the biggest US Treasury investors are pulling back. In latest news, Norway’s sovereign wealth fund, for example, is now willing to reduce the size of its sovereign bond allocation from 70% to 50% to invest in riskier assets and reshuffle its exposure. That could see its US Treasury holdings fall by around $75–80bn, while its JGB holdings could increase by around $17–20bn.

Japan has a similar story brewing. The government has been encouraging the giant $1.8tn Government Pension Investment Fund (GPIF) to invest more domestically, now that yields have risen enough to become interesting. The fund currently holds roughly $930bn in foreign assets — including more than $230bn in US Treasuries — raising the prospect that some of that capital could eventually be repatriated.

In short, Bessent is not only fighting inflation expectations and spiralling US debt that spook investors, but also an external battle as rising Japanese yields make domestic assets more attractive to Japanese investors and risk spilling over into US borrowing costs, and broader risky assets, globally (the so-called reverse carry trade).

Tech appetite returns

Friday’s strong jobs data pushed yields higher and weighed on most stock valuations. The Dow Jones retreated 0.50%, the S&P 500 fell 0.38%, while the tech-heavy Nasdaq 100 eked out a 0.21% gain, helped by a rally in chipmakers and renewed AI enthusiasm after OpenAI unveiled GPT-6 Astra, its most advanced model yet, trained on more than 100,000 GPUs. OpenAI President Greg Brockman described it as a potential milestone toward the AGI era.

Unsurprisingly, Asian tech-heavy indices are following US tech stocks higher this Monday morning, with Japan’s SoftBank — one of OpenAI’s biggest backers — up around 10% following a nearly 12% jump on Friday. MediaTek — a Taiwanese chip designer that is pushing increasingly into AI — is up 8.50%, while Korea’s Kospi index jumps nearly 4%, boosted by a rally in Samsung and SK Hynix.

In China, news of a huge capital injection into its banks and insurers is also pushing capital into China’s tech sector. The STAR 50 index, which includes 50 of China’s biggest tech names, rebounds 1.50% this Monday, just near its 200-DMA and the major 38.2% retracement of the Sep ’24 to Jul ’26 rally. Whether the news will help attract more capital to Chinese mainland markets remains to be seen.

The Week Ahead

Besides US inflation and Treasury bond buybacks, investors will also watch Oracle and Adobe’s latest quarterly earnings. Oracle sits on the infrastructure/provider side of the AI story, while Adobe sits on the software side.

The latest earnings season showed that AI spending remains strong, but investors are becoming increasingly demanding about the returns on that investment. Their results should therefore give us a good sense of whether the AI boom continues to translate into stronger demand — which it will — but, importantly, into stronger revenues and profits beyond the chipmakers.

Adobe, in particular, will offer a useful test of whether generative AI is becoming a meaningful revenue driver for software companies, rather than simply a costly feature to develop — or, worse, a competitive threat. Note that the iShares Expanded Tech-Software Sector ETF has recovered most of its September-to-April slump, triggered by fears that AI would push software companies out of business. Now investors seem to realise that AI will first help them boost their revenues before pushing them out of business.

On the macro front, the European Central Bank (ECB) is expected to raise rates by 25bp, as inflation remains uncomfortably high for European policymakers.