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On AI At Jackson Hole, Trump’s Bromance With Li’l Kim & Great NERIs
Stablecoins and AI captured central bankers’ attention during this year’s Jackson Hole symposium, Melissa reports. Presenters discussed how stablecoins could help the dollar retain its dominance and how AI agents could trade central bankers’ communications. ... William examines how the “very special bond” between President Trump and North Korea’s Kim Jong Un could unsettle South Korean markets. ... And: analysts’ earnings revisions are decidedly more positive than negative, Joe calculates. That bodes well for future S&P 500 earnings strength.
Beware: September Is Back Again
I. A Month of Opportunities "The Waste Land" is a poem by T.S. Eliot. It opens with the line, "April is the cruelest month." Apparently, Eliot never managed a stock portfolio. Everyone in the stock market knows that September is the cruelest month for stocks (chart). But when it is a bad month, it tends to create buying opportunities for a year-end rally that often starts in October. What could possibly go wrong in September? Investors are already freaking out about rising bond yields worldwide (chart). The fear is that the Bond Vigilantes are on the loose and driving yields higher in protest over large government deficits, mounting government debt, and rapidly rising government interest costs. In addition, oil prices remain elevated and are fueling inflation. This is all putting pressure on the major central banks to raise their official policy rates. We share the Bond Vigilantes' concerns, but we aren't convinced bond yields are, or will soon be, prohibitively high. True, they are back to levels seen before the Great Financial Crisis (GFC). But that's because they are normalizing after a long period of abnormally low bond yields following the GFC, when central banks were rigging bond markets. Since the lows of the Great Virus Crisis, yields in the major overseas government bond markets have mostly recovered and converged to their respective national nominal GDP growth rates (chart). As we've recently observed, in the US, nominal GDP rose 6.6% y/y during Q2-2026, while the 10-year Treasury yield is 4.80% this evening. If it hits 5.00%, we expect strong demand for the bond, including from Treasury Secretary Scott Bessent. He'll issue more Treasury bills to buy back bonds if necessary to avert a selling panic. II. JOLTS The July JOLTS report reinforces our view that the labor market remains stable at full employment. Job openings rose to 7.27 million in July from a downwardly revised 7.18 million in June, while layoffs declined (chart). Quits and hiring edged lower, but both remained within their recent ranges. The framework introduced by former Fed Chair Jerome Powell continues to indicate a well-balanced labor market (chart). Labor demand, measured as household employment plus job openings, remains slightly above labor supply. The gap between labor demand and supply remained close to zero, indicating little slack or excess demand in the labor market (chart). The job-openings-to-unemployed ratio also remained near 1.0 in July, suggesting labor demand and supply remain roughly aligned. Encouragingly, job openings continue to rise in several cyclical sectors. Retail job openings reached their highest level since May 2023, while manufacturing and construction openings climbed to their highest levels since 2023 and August 2024, respectively, likely driven by the AI buildout (chart). III. Retail Sales Redbook same-store retail sales rose 8.7% y/y in the week of August 28, up from 8.3% in July and well above the 2025 average of 5.8% (chart). The pickup confirms that consumer spending remains robust despite the fading of temporary boosts from World Cup spending, Amazon Prime Day-related promotions, and OBBBA tax refunds. IV. M-PMI The manufacturing sector remained in expansion for an eighth consecutive month in August, the longest streak since 2022. Growth was broad-based, with new orders, production, employment, exports, and backlogs all above 50.0 (chart). Meanwhile, customers' inventories remained lean, supporting the outlook for further production gains. While several M-PMI components eased from July, the underlying trend remained constructive. New orders, production, and employment all stayed in expansion territory, while production extended its expansion streak to 10 months (chart). Overall, the report points to a manufacturing sector that continues to recover from the doldrums of the past few years. The M-PMI's prices-paid index remained elevated at 71.1, marking 23 straight months of rising input costs (chart). Respondents continued to cite tariffs, higher metals prices, Middle East-related energy costs, and AI-related supply constraints as sources of persistent price pressures. V. Construction Total construction spending fell 0.5% m/m in July and was down 3.8% y/y, extending its streak of annual declines to 12 months (chart). Residential construction fell 1.3% m/m, led by a 3.2% decline in single-family building, while private nonresidential construction rose 0.4% m/m for a third straight monthly gain. The AI infrastructure buildout continues to support nonresidential construction. Data center construction surged 6.2% m/m and 57.2% y/y in July, extending its powerful multi-year uptrend (chart). We expect this trend to continue supporting construction activity and employment. VI. GDPNow Today, the Atlanta Fed's GDPNow tracking model shows real GDP rising a whopping 4.8% (saar) during Q3-2026, up from its 4.4% estimate on August 27. Could bond yields be reflecting the strength of the US economy? We think so.
On Latest US & Canada Tiff & Latin America’s Warsh Woes
The inability of President Donald Trump and Canada’s Prime Minister Mark Carney to play nicely resulted in the US placing 50% tariffs on certain Canadian imports. The move risks exacerbating US inflation, making Fed Chair Warsh’s job tougher, William writes. It also won’t help Canada solve its productivity problem. … Fed Chair Warsh’s hawkish Jackson Hole speech triggered selling in Latin American currencies. Higher US interest rates and a stronger dollar pressure nations with heavy dollar-denominated debt loads and commodity imports. William lists Latin American countries to watch. … And: the EM Latin America MSCI index may have a low earnings multiple, but analysts are very optimistic about future earnings growth. Toby examines the discrepancy.
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