Stock futures are moving lower this morning after a relatively flat session yesterday, while Treasuries are ticking lower. At the long end, U.S. Treasury Secretary Scott Bessent’s latest intervention helped push the 30-year yield down 9 bps, its largest one-day decline this year, providing some relief after long-term yields climbed to their highest levels since before the Global Financial Crisis. Concerns over government debt and deficits, geopolitical uncertainty and massive capital spending to fund the AI infrastructure buildout have all contributed to the rise in yields. Bessent has signalled a willingness to adjust Treasury issuance to ease pressure on the long end of the curve, but analysts caution that engineering a sustained decline in borrowing costs will be difficult without addressing the underlying fiscal picture. The U.S. budget deficit is expected to reach roughly 7.5% of GDP this year, the largest among major developed economies and a level historically associated with recessions rather than an expanding economy. Bessent has been doing a fair bit of market fiddling lately, including last month’s efforts to support the yen. More on his latest manoeuvre in Fixed Income below.
Canada and the U.S. are said to be nearing a trade agreement that would provide tariff relief for key Canadian industries while also avoiding threatened 50% duties on a range of Canadian goods. Under the tentative terms, U.S. tariffs on Canadian steel and aluminum would fall to 25% from 50%, while duties on the non-U.S. content of Canadian-made vehicles would decline to 15% from 25%, although exclusions and different rates for some metal products remain under discussion. The agreement would give Canada preferential treatment comparable to deals secured by the UK, Japan, and South Korea, but would still leave tariffs well above the low levels seen in recent years. The U.S. is also looking to end provincial restrictions on American wine and spirits, so if you’ve been missing bourbon or California wine, you may not have to wait much longer. Markets responded positively to the prospect of a deal, with the loonie strengthening and shares of Algoma Steel rising following the announcement.
Rate debate. Minutes from the Fed’s July meeting showed a divided Fed, with several officials favouring an immediate rate increase while others indicated further tightening would be necessary only if inflation fails to ease. The FOMC ultimately voted 9-3 to hold the federal funds rate at 3.5%–3.75%, as policymakers balanced inflation risks and uncertainty surrounding the Iran war. Officials, for the most part, expect inflation to moderate as tariff and earlier energy effects fade, but some remain concerned that price pressures could prove to be more sticky. Since the meeting, weaker employment, retail sales, and moderating core inflation data have reduced expectations for near-term tightening, with markets pricing a roughly 36% probability of a September hike versus +70% at the end of July. The minutes show the Fed’s willingness to raise rates, although the actual path remains dependent on incoming economic data.
Yield awakening. Japanese government bond yields are nearing levels not seen in three decades, with the 10-year JGB yield reaching 2.945% as investors price in inflation, fiscal risks, and faster Bank of Japan tightening. Expectations for a BOJ rate hike as soon as September have also pushed shorter-term yields higher, as policymakers face pressure from elevated inflation and a yen near four-decade lows. While some investors view a 3% 10-year yield as a potential buying point rather than evidence of a fiscal crisis, others warn it could further erode confidence in Japan’s fiscal outlook. Higher domestic yields could extend beyond Japan by encouraging Japanese investors to repatriate capital historically invested in U.S. and European bonds, potentially adding to the upward pressure already affecting global long-term yields.
Good earnings, tough crowd. Earnings expectations in Europe improved for a ninth consecutive week, with the recovery broadening beyond the energy sector into more cyclical industries. STOXX 600 companies are now expected to post 24.1% earnings growth, up from 23.4% last week, with nearly 60% of the 282 companies that have reported beating analyst estimates. Energy remains the standout, with profits expected to rally 138.6% amid oil-market disruptions from the Iran war, although industrials and basic materials are beginning to contribute more, with industrial earnings forecast to rise 18.1%. Excluding energy, earnings are expected to grow 13.1%, although projected revenue growth is more moderate at 11.2%. Despite the strong earnings season, European equities remain under pressure due to rising bond yields, inflation concerns, and uncertainty over whether Europe can rebuild gas inventories ahead of winter.
Picking AI winners is becoming more complicated as political and regulatory opposition to data centers begins to shape companies’ growth prospects. Analysts are now incorporating local elections, permitting rules, and grid restrictions into their plans. While many still believe the broader AI investment boom remains intact, there is resistance as communities worry about electricity costs, water consumption, surveillance, and environmental effects, with some provinces in Canada and states in the U.S. restricting data-center development. All of this points to a new phase of the AI trade where infrastructure demand remains strong, but political, regulatory, and power constraints factor more heavily into which companies ultimately benefit.
Some Canadian homeowners approaching mortgage renewals are concerned about higher payments, with 38% expecting an increase and over 75% of that group anticipating pressure on household finances. Anxiety is higher among borrowers who renewed in 2021 or 2022, when interest rates were much lower, and among homeowners in higher cost of living areas like Toronto and Vancouver, where larger mortgages consume more disposable income. Despite the higher payments, 71% do not plan to change their living arrangements, instead opting to reduce discretionary spending, travel, and home renovations if necessary. Financial stress also appears relatively contained with mortgage delinquencies remaining below pre-pandemic levels, while rising wages and a resilient labour market have helped borrowers absorb higher payments. With five-year fixed mortgage rates around 4%, experts have even argued that the final wave of pandemic-era borrowers is in better financial shape than previously thought, making widespread defaults unlikely.
Strategists appear neutral on Chinese equities, saying that attractive valuations and diversification benefits are offset by weak overall earnings support. China’s equity market is becoming more divided, with domestically listed CSI 300 tech companies benefiting from the AI boom, while other areas of the market lag. Manufacturing profitability remains lacklustre, with aggregate profits range-bound for five years despite ongoing economic growth, suggesting companies are struggling to translate GDP expansion into stronger earnings. Banks are a brighter spot, helped by improving earnings, attractive dividends, and stronger capital-markets activity. While Chinese equities offer better valuations than emerging- and developed-market peers, the opportunities appear specific to only a handful or stocks and sectors.
Grade expectations. The University of Michigan is giving first-year students a semester-long break from letter grades. Beginning in fall 2027, freshmen in its College of Literature, Science, and the Arts will see only “pass” or “no credit” on their transcripts during their first semester, although professors will still assign grades internally. The idea is to ease the transition to university, reduce academic pressure, and encourage students to take tougher courses without worrying that one rough semester will hurt their GPA. Michigan isn’t alone, with MIT and Caltech having similar approaches. Critics wonder whether taking grades off the table removes the incentive to perform, especially when universities are already dealing with grade inflation. Michigan’s own student body president supports the policy but admits he probably wouldn’t have worked as hard under pass/fail. So, for parents with first year uni students heading off this fall, what do you think, does this change mean less pressure or less motivation?
Diversion: Chain reaction
