this morning, maintaining a data-dependent approach as it assesses whether higher energy prices from the renewed Middle East conflict will create more persistent inflation. While policymakers acknowledged that uncertainty remains elevated and the full impact of the energy shock has yet to develop, markets continue to expect another rate hike in September if inflation pressures continue.
China’s fiscal revenue grew 4.7% in the first half of the year, helped by stronger tax collections, while government spending also picked up as officials looked to support investment and consumption. However, the country’s ongoing property downturn continues to weigh on public finances, with revenue from land sales falling more than 31% as local governments remain under pressure. Authorities said they will strengthen local government debt management and continue deploying special bond issuance to support the economy. While the government has mentioned broad support, there are signs that policymakers may prioritize targeted support for strategic industries instead, including semiconductors, AI, and advanced manufacturing. This comes as the country looks to compete against the U.S. in the AI race.
Low stock-market correlation is masking growing systemic risk from the AI investment boom, as major tech companies issue debt to finance massive capital expenditures. Looking specifically at the Nasdaq, which remains near record levels, we can see that underlying market breadth has weakened, with fewer stocks participating in the rally. While reduced correlation has kept volatility measures such as the VIX relatively low, the buildup in leverage leaves the market vulnerable to a sudden rise in volatility if sentiment deteriorates or borrowing costs increase. Strategists are noting that the current market calm may underestimate underlying risks, warning that any repricing of AI expectations or credit conditions could trigger an increase in both correlation and market volatility.
Should I stay or should I go hike? Markets appear divided ahead of next week’s Fed meeting, with interest-rate swaps implying roughly a 34% chance of a rate hike despite most economists expecting policymakers to leave rates unchanged. The uncertainty reflects Kevin Warsh’s decision to abandon forward guidance, making policy decisions more data-dependent, and reducing the market’s ability to anticipate the Fed’s next move. While recent softer inflation data (briefly) eased expectations for tighter policy, that all changed after renewed geopolitical tensions and higher oil prices revived inflation concerns, leading markets to fully price in at least one rate hike by September and more than two increases by March of next year. The shift points to greater policy uncertainty and increased market volatility under the Fed’s new communication (or lack thereof) approach.
Inflation in the UK slowed more than expected to 2.6% in June, helped by lower fuel and food prices following a temporary easing in Middle East tensions, but economists expect the decline to be short-lived as energy price begin to pick up once again. While the softer reading provides some relief for Andy Burnham’s new government, underlying inflation remains elevated, with services inflation and core inflation suggesting continuing price pressures. For now, markets expect the Bank of England to keep interest rates unchanged in the near term, with the possibility of one or two additional rate hikes before the end of the year if inflation rebounds.
The Japanese yen weakened beyond ¥163 per US dollar for the first time since 1986, as rising U.S. Treasury yields and renewed geopolitical tensions in the Middle East strengthened the USD. The move comes despite Japanese authorities having spent nearly ¥12 trillion earlier this year to support the currency, with officials again warning they are prepared to intervene if volatility continues. A weaker yen continues to benefit Japan’s export-oriented companies by improving overseas earnings, but it also raises import costs, particularly for energy, adding to inflationary pressures on consumers and businesses. With interest rate differentials still heavily favouring the U.S. and oil prices moving higher, markets remain focused on whether Japanese authorities will step in to stabilize the currency.
An odyssey to The Odyssey. Christopher Nolan’s latest film has become a destination event for moviegoers, with fans spending hundreds of dollars to travel and secure tickets for one of only 41 theaters worldwide capable of showing the film in IMAX 70mm, the first feature ever shot entirely using IMAX film cameras. Demand has well exceeded expectations, with many screenings selling out weeks in advance, prompting resale activity and overnight showings as audiences seek what they consider the best way to experience the film. The enthusiasm also reflects a growing trend at the box office, where audiences are rewarding films that emphasize practical filmmaking, real locations, and ambitious production techniques over CGI-heavy franchise releases. While it remains too early to call it a lasting shift, the success of The Odyssey suggests there is still a strong appetite for theatrical experiences during the streaming era which we have found ourselves in.
Diversion: Extreme unicycle
