*It seems that market participants like to do two things - to over complicate simple things, and to always think that what has happened is what is likely to keep happening. Of course - when conditions do not “change” - this can make sense for a period. But we are seeing meaningful changes in the markets expectations of US growth, continued earnings growth, a Trump “TACO” in every situation, and rising yields that don’t impact the cost of capital. Trump has engineered 3 supply shocks in WH 2.0 - Trade, labour, and now energy. The issue is he wants an off ramp over Iran, but Iran knows it can escalate and Trump gets more “stuck”. The US is now reactive to events in the gulf - they clearly want it to be over with a “win” ahead of the mid terms, but this is harder to do than to say. The risk in the near term is more strikes, more escalation and higher oil prices.

*The recent bout of dollar strength has the same people who last week were shouting it was going lower - to say that they knew all along it was going higher! We are now seeing this playing out in Japan - the Yen is fundamentally weak and can not rally. But hang on - the BOJ gets more hawkish by the day, with Takata suggesting rate hikes faster than a 25bp increments! The Government is saying the weak Yen is causing more harm than good now, and they have already sold thick end of USD 100bio to put a top in it. But apparently - they are not serious. Really? They look like they are deathly serious - and they don’t have a PnL like investors do.

*So this market’s hubris and sense of superiority looks locally misplaced - chasing its tail. We see the next 2 weeks in to the Xi - Trump meetings as a period where risk can be tested, and vol can rise. Below some charts to watch!

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*The Kevin Warsh speech and Jackson Hole did not disappoint last week. He duly delivered a strong speech laying out in detail his thoughts – he used the word hike 3 times at the start of the speech, which we did wonder was to get the “hawkish algos” firing. He was clear that Core PCE remains the key measure, it need to be moving back towards 2% at speed, and it isn’t. He stressed that the economy is doing well from his perspective, but did say that 50% of business investment is coming from AI spending and we do not know yet whether this will be inflationary or not. He stressed his monetarist bonafides, and reiterated that forward guidance sets market expectations which in turn the Fed uses as inputs, creating a “hall of mirrors” effect. All in all this felt like the Warsh of the confirmation hearings, stressing independence, reformist plans and being an inflation hawk.

*The question now rolls into the current situation of increasing isolation of Iran, ti for tat kinetic strikes by both sides, pressure applied to China to isolate too which is likely to be rejected. Russia and Ukraine are both escalating too, and with a contentious G20 underway, and Xi due to visit Trump in the coming weeks, the market is being reminded that in fact not has been resolved, and that the conflict is ongoing.

*Markets are reflecting risk off vibes once again - oil is breaking hjgher - Diesel prices have never really dropped back, and there remains a shortage of product that has never been properly addressed. the reaction is to see higher yields globally in the longer end, and locally as this extends - equities look vulnerable. In that scenario positioning can be drawn down with consensus strongly short dollars, short vol, long carry and long risk. We are very much in the window here.

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*The last few days continue to show a similar pattern - major news flow that is not reflected in market pricing. The collapse in realised volatility remains - maybe - the single biggest theme of markets at a time when uncertainty is rising so rapidly. The issue now for investors will remain timing - and how this play outs into the midterm elections. but let is be clear - the market has - since the GFC - always believed that policy makers have the will, and have the CAPACITY - to intervene in markets to generate the outcomes they want - which is rising asset prices, controlled interest rates in the longer dates, and investors that will accept rising inflation that borrows consumption form the future. The elections in the US join the local election in Germany in early September and lead up tot he French Presidential election in 2027. With rising geopolitical tensions, and now a trade war starting again between the US and its closest neighbour and ally, Canada, the idea that the status quo will remain in force over time is one we feel has rapidly falling possibility of playing out.

*In the near term the NVDA earnings have continued to provide fuel for the AI trade, but lets us also note that in this market, both the spenders of CAPEX, and the receivers of that money, are being rewarded. Also note - that much of the hyperscaler earnings beat is down to the unrealized gains on investments involving Anthropic, upon which the market is applying a multiple! As we show below - there are two charts we think are very important to watch both now and as we enter the new phase as the summer markets come to an end.

*We have the Jackson Hole symposium in the next 2 days and after the Bessent actions of last week, and the criticism of Bessent by their former mentor Stan Druckenmillar, Kevin Warsh is expected to say not just that he is an inflation hawk, but how this will play out as a plan. The risk is that he is more hawkish in other ways, balance sheet use for instance, but not about raising the policy rate, which is a far more hawkish position for the market to take.

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*We have been highlighting the rise in long end yields - and lo and behold! A surprise move from Treasury — doubling the buyback caps on longer-dated Treasuries, an extra $14bn ahead of the 4 November QRA. The dollar amount itself is small, but the timing is the story: doing this just 14 days after the last QRA is a political signal, not a technical one. This forces again more reliance on the front end for financing, they are clearly worried about the cost of money rising as the cost of energy and goods inflation rise too. Trump polling is weakest it has ever been as President.

*With the Iran conflict likely to run on, bringing yields lower from here will be genuinely hard — and the market is starting to treat the dollar as the weak link instead. The debasement trade is back in focus: the Trump administration is trying to control yields without controlling the borrowing that’s driving them up in the first place. With the economic war building in Iran, this is likely to persist for some time too. The decision to attack Iran could well prove to be a huge miscalculation by the Trump admin.

*What happens beyond the midterms depends on the results, but the deeper issue doesn’t wait for that. The war is now six months old, and increased pressure on Iran could just as easily raise the risk of renewed military escalation as force any kind of capitulation — if Iran feels it has no room left to maneuver, that cuts the other way. The US is now in a very tough spot - it is trying to manipulate markets - but as someone said this morning - Bessent can twist the yield curve, but he cannot turn crude into Diesel!

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*The summer lull of low volatility is coming to an end as expectations of market participants that it will be “Goldilocks” are being challenged. The MOU has run out between US and Iran. Iran is now threatening to widen the conflict, and oil is responding — diesel prices are pushing to records even as crude itself stays comparatively contained, extending the refined-product divergence we flagged earlier this week. Trump is caught in a genuine bind: midterms are approaching, and there’s real political cost to looking like he’s “losing” this — which makes de-escalation harder just as the economic case for it (diesel-driven input costs into winter) gets stronger.

*China’s data came in very weak, and the export engine is the only thing keeping the economy afloat right now. The mechanism matters: China is effectively exporting deflation through goods dumping, which props up its own headline numbers while quietly killing manufacturing overseas. A global growth-negative undertone layering on top of the softness already showing in US labour and consumer data. The market still talks about “stimulus” but has not idea what that is! Fact is - Chinese yields are falling while globally they are rising. This is pricing in a deflationary bust a la Japan in the late 1980s.

*Long-end yields are rising globally, ex-China — and it’s not one driver, it’s three converging at once: the unknown duration of the Iran conflict, persistent fiscal deficits, and rising borrowing demand to finance AI capex. That last point ties directly to the GDP-concentration thread we’ve flagged — a narrow AI-capex engine that’s both propping up growth and now competing for the same borrowing capacity as the deficit itself. At some point this will tighten conditions. This has been offset to an extent by the scale of the short funding of the US Government via bills, but that can only last for so long. As we lay out below, there are signs of local difficulty building.

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*The Iran situation continues to reshape energy markets in a way headline crude prices don't fully capture — refined products are diverging sharply from crude itself, with diesel and other distillates rising even as crude stays comparatively contained. That's the real transmission channel into growth: it's not the WTI print that matters, it's what diesel does to shipping, agriculture, and industrial costs heading into the northern winter. This is exactly the underpriced growth risk we flagged Monday — the market keeps framing this as a central-bank inflation question when it's really a supply-side cost shock hitting the real economy directly.

*July CPI landed a touch soft — headline rose just 0.07% month-on-month, below both our and consensus estimates (0.11%), pulling the year-on-year rate down to 3.36% from May's 4.25% peak. Core told the same story: up 0.22% on the month, with the year-on-year rate now at 2.46% — matching the post-pandemic low and barely above where it sat just before the pandemic began. This is the clean confirmation of the labour-data-argues-for-hold case we've been building all week, against the Musalem/Warsh-hawkish-rumour narrative. One caveat: gasoline's drag is fading (-2.9% versus -9.5% last month), and August gas data already points the other way, so the disinflation path from here likely gets bumpier rather than smoother.

*BOJ and Fed pricing are now moving in visibly opposite directions. September BOJ hike odds sit around 66% with three hikes priced over the coming year — a shift from a six-month to a four-month hiking cadence — while the Fed narrative remains genuinely contested rather than clearly hawkish, caught between Warsh's balance-sheet-focused framework and this week's data test. That divergence is the cleanest read on the Yen story: it's not just intervention or momentum, it's a real and widening policy gap.

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*Oil is breaking higher as markets continue to wrestle with the reality that Iran has no real incentive to push for a deal The Trump admin is being forced to pivot to exerting economic pain which the Iranians can resist, away from a military response which is clearly not viable. This was and always has been the issue of the US escalation of this conflict. Meanwhile, the SPR has drained to critical levels, weakening the US’s own buffer, and Bessent’s line that the Strait will be “irrelevant in two years” misses the point entirely — the strain on global supply chains is a today problem, not a two-year one. Markets are underpricing the growth risks of higher input prices into the northern winter, focusing solely on central bank responses to higher inflation. As we have said before - what EXACTLY does the policy rate do?

*After the softer employment data and continued weaker US housing data, we run into a genuinely data-heavy week ahead. US inflation prints midweek and is the real test of the tension we’ve been flagging — hawkish rhetoric from Musalem and the FT’s Warsh rumours versus data that’s actually argued the other way (soft ADP, weak household employment survey, productivity revised up, unit labour costs revised down). A hot CPI print would let the hawks claim vindication and risks the front end repricing a September hike outright; a soft one would confirm what the labour data’s already been signalling and hand relief to duration and rate-sensitive sectors. Retail sales follows, testing whether the “soft but not broken” consumer read still holds after ADP’s miss. We continue to note the Mcdonald’s miss last week as a sign of lower consumer being stretched. Treasury auctions run through the week against a backdrop where supply is already a live issue — Q3 borrowing needs came in $87bn above expectations and the Treasury remains meaningfully short-funded versus target, so weak auction demand here would compound the inflation risk rather than sit apart from it.

*6 weeks ago the AUD was rallying on the back of expectations of a far more hawkish RBA. This has been taken out in the coming weeks as the data has softened, and now the RBA turned more dovish overnight. But - as the chart below shows - rate repricing has not been met with fx repricing too across both AUDUSD and AUD crosses. The open question: is AUD actually being propped up by the gold breakout rather than anything rate-related? Gold is now testing key resistance at 4400, and if that move pauses, AUD weakness may reassert itself in a way the rate story alone hasn’t delivered.

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*Warsh delivered exactly what he’d signalled — a short statement, no forward guidance, three dissents — and the market fixated on what he didn’t say rather than what he did. What he did say was the real message: balance sheet focus, letting markets do the work, deliberately removing the Fed as the market’s reaction function. Participants are struggling to parse it, calling him either a poor communicator or a Trump loyalist — but the curve steepened aggressively, fewer near-term hikes priced, more pain loaded into the long end. That twist steepening tightened conditions exactly as Warsh intended — this was the plan working, not a surprise.

*This confirms what we flagged Tuesday — the Warsh Fed isn’t offering markets a put by suppressing term premium, and this is a major catalyst, not a footnote. Warsh also stressed that inflation and employment don’t have to trade off — you don’t need to run the economy hot to protect against unemployment. They can run together, but only if the economy is in balance, and that means normalisation of term premium and a repricing in asset valuations. Meta’s earnings compounded the unease — weak results, excess capex, feeding directly into the hyperscaler-sustainability concern we’ve been tracking all week.

*The market is very vulnerable here — it still doesn’t appreciate how much is changing under Warsh. True to form, participants blame him for not being clear, and journalists were clearly unhappy. This is a genuine break from the pre-GFC playbook of some 20 years, and people are calling him “reckless.” He isn’t — he’s merely changing the conditions. Charts below show just how vulnerable risk is at this point.

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*Consumer confidence just confirmed what growth bulls have been ignoring. The Conference Board’s index fell to 90.8 in July — the third straight monthly decline, missing the 92.4 estimate. Present Situation dropped 3.6 points to 114.9, while Expectations sat flat at 74.7 — still below the 80 threshold that’s historically flagged elevated recession risk, a level it’s held since early 2025. Asia is trading this weakness openly where the US hasn’t: equities lower across the board overnight, extending the fragility we’ve flagged all week.

*This is starting to look like a momentum crash, not a pullback — hedge fund pain is building as the summer’s crowded trades (long momentum, short vol, long carry) unwind together rather than rotating. SPX 7400 and NDX 28200 (broken Tuesday) are the critical supports now in play. What’s remarkable is vol remains calm through all of this — exactly the complacency we’ve been calling out, and exactly the setup that tends to snap rather than fade.

*Fed preview: expect a hold. Weak June CPI/PPI, soft housing, no visible wage pressure and inflation breakevens well below trend give Warsh cover — though a dissent or two is likely from members who’d argue a Taylor rule already supports hikes. Longer term, Warsh wants balance sheet reform over rate moves as the real lever, but he’s boxed in — task force analysis won’t land before January, and neither he nor Bessent will want term premium rising into the midterms. The market is pricing two 25bps hikes by March 2027, with the 2yr yield at 4.29% — the highest since early 2025 — and the risk is the Fed is seen as behind the curve. Add today’s earnings slate on top and it’s a genuinely two-sided day: a hold that reads dovish could spark the vol unwind everyone’s positioned against; a hawkish surprise confirms the “behind the curve” fear directly.

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*We have felt a little like shouting in the darkness recently - seeing many of our key catalysts starting to become more activated. Every day this seems to accelerate a little more. Now circular financing concerns in AI are hitting credit, not just equity — hyperscaler credit spreads have blown out overnight, and Asia has taken it hardest: Nikkei -4%, Kospi -10.8%. This is exactly the fragility we flagged yesterday in the index-vol/single-name-vol compression — the move higher in index vol has arrived, and it arrived fast. NDX has broken and closed below 28200 (chart below) — that old support now flips to pivotal resistance in the short term.

*The summer’s consensus trades — long momentum, short vol, long carry — are being tested together, not one at a time. AUD is breaking lower even with RBA’s Bullock still hawkish, which is the tell: this isn’t a rates story, it’s carry unwinding as risk comes off. Same dynamic we’ve been flagging in AUDNZD for weeks — hawkish central banks don’t save a carry trade once risk sentiment turns.

*Conditions keep tightening, but yields are lagging the move — down only slightly despite Brent’s pullback to $91 (Tuesday), which would normally argue for lower yields, not just flat ones. A WSJ piece on heated internal Fed debate over the task forces adds a new thread: the idea of a unified Fed backstopping risk assets looks increasingly fanciful. Our Fed hold call from Tuesday stands, but “hold” and “unified” are not the same thing — dissent risk is rising alongside the market moves.

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*The escalation in the Gulf region and - it should not be forgotten - in the Russia - Ukraine conflict - is increasing daily it the Houthis now attacking ships in the Red sea and the US stating that any attacks on ships or US assets in the region will be met with attacks on power installations within Iran. Trump is mulling a “massive” attack on Iran, as patience continue to drop. In turn - tariffs have returned on 60 countries - using “forced labour” as a reason - often at odds with signed trade deals.

*The break higher in oil has been a driver again of yields across the curve - central banks may now feel they have no choice but to tighten policy and next week’s central banks will be most interesting. The ECB played for time yesterday - but the narrative remains - we will tighten if we have to. Next week dissents are likely at the Both the Fed and BOE meetings. But potentially the most interesting could be the BOJ Friday. Yen at decade lows, conditions continue to loosen and imported inflation remains an issue as the PMI showed today. We have said for some time now that the BOJ could pivot hawkish at the most inopportune time!

*Hyperscalers are weakening as we run into the huge earnings week next week - Alphabet sold off 10% after reporting solid numbers but rising capex - at a time when the competition for AI is growing markedly. Our view on this we have laid out for some time now - expectations are far too high relative to potential outcomes, as demand for capital rises. Next week is huge - Wednesday MSFT, META, QualCOMM and SK Hynix; Thursday AAPL, AMZN and Samsung.

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*As large bank earnings continued to be strong, it was noticeable that Regional Bank earnings were at best tepid. This continues to reflect the bifurcated nature of the US economy and as we have said before, the average looks solid, the median far less so. But it is a noticeable theme now that growth expectations of the economy as a whole are rising, not falling. The impact of the Iran escalation is being discounted, rising oil is seen as transitory and rising yields are part of a positive growth narrative rather than potential elevated input costs.

*This - again - feeds into earnings expectations where UBS are calling for 25% EPS growth this year and a fair value P/E for SPX at 24X. This is lavishly high to say the least and for that to happen AI Capex must stay robust. Amazon reports today and first of the hyperscalers and this will be closely watched.

*This week is the “shoulder” week before central banks next week and earnings pick up - but markets are at extremes - USDJPY at decade highs, yields at lows and TLT (20yr + bond ETF) at lows too. Oil rising, and yet equities continue to trade as though everything is fine. Market structure remains very weak in our minds….

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*Whilst Fed Chair Warsh was entirely predictable in his testimonies to the Senate and House in terms of the commitment to change at the Fed, both US CPI and PPI were much softer than expected driven by a fall in oil prices primarily. The question we ask is whether there is any sign of falling inflation due to falling demand, and retail sales today will be interesting in that context. The issue is the World Cup i n the US may flatter, but the Fed’s Beige Book continues to show signs of faltering growth whilst credit card debt continues to rise.

*The early earnings from the Bank have been extremely good, especially in equities where the IPO activity and sizeable margin lending supported bonanza earnings. BUT - expectations are so extreme that are they sustainable. Recent Fund Manager Survey shows investors are holding multi lows in cash balances, and hard landing probabilities (slow down / recession) have fallen to all time lows. The market is all in on the Fed cuts, productivity miracle of AI and the ultimate “soft landing”.

*Possibly the most important data this week was the softness in Q2 in the Chinese economy, where rapidly rising exports are offsetting very weak domestic demand. Meanwhile, rising crack spreads and falling refining capacity coupled with very low storage levels of fuel mean that re escalation in the Gulf - if sustained - risks a major fuel supply crisis later in the year. Another story that the market is glossing over, but risks are rising under the surface.

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*Our note Thursday last week stated that the time had arrived when the market’s pricing of risk premium was simply too low relative to the potential for a pick up in volatility. Extreme sentiment and positioning in long carry, short volatility trades is a classic sign of that, and our risk and volatility gauges all show that the risk reward of owning volatility was now looking far more attractive on a probability weighted basis.

*In all of our core catalysts, we saw further signs of “triggering” and since then that has continued as we run into a huge week of data, earnings and central banks speak. Severe escalation in the Gulf with the MOU deal looking dead in the water, Central Banks warning of inflation risks that may have to be met with rate hikes. Fed Waller - a thought leader and a supposed “dove” suddenly sounds far more hawkish. In Japan, Fin Min Katayama is floating the idea of domestic holdings of Japanese assets should rise across pension funds. This is JGB yield negative (good for bonds) and good for the Yen too given the savings and investment position. Again - this is a CHANGE in market expectations. US housing data remains very weak. the weakness in the Kospi is highlighting a repricing in AI trade that US tech has yet to really show.

*US equity volumes are weak, but expectations are breathtakingly high for earnings. The financials kick off this week, and whilst earnings will be good, the question will be the sustainability of the fee windfall from the Hyperscalers and their debt and equity issuance. Meanwhile - buybacks are falling behind expectations. There is more supply of assets that demand. Risk asset bulls will reject this, stating that earnings will drive “growth”. This is increasingly unlikely. Saying again - sharp rises in volatility and position reduction is driven by unrealistic expectations are challenged in a low risk premium environment . We are there.

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*For some time we have been focusing on being patient as we wait for conditions to reach a point where the market expectations can be ascribed such a probability that they are more likely to NOT happen, rather than play. Typically this is when market consensus, positioning and sentiment is at extremes. As we have laid out, market conditions drive changes and whilst ex-post exogenous catalysts are often blamed, the reality is that the conditions are such that the catalyst is less important than the instability inherent in market pricing. Simply put, the match that lights the fire is far less important that the bone-dry wood and accelerant that just needed a spark.

*Reviewing key catalysts: extreme sentiment over AI and the driving into passive equity holdings, the scale of leverage generated by banks to finance positioning (at extremes), geopolitical uncertainty, potential for central banks to act in a way against market expectations, risks of rising inflation and falling growth (still). All are seeing continued signs of changing market expectations. Much of this will come through equities - as the most mis-priced asset class in our work.

*Next week US earnings season starts in earnest, beginning with the financials in the US. BUT we also get ASML on Wednesday 15th, and TSMC on Thursday 16th. These will set the tone for the hyperscaler and chip results to come - at a time when expectations remains extremely high - lets remember that NDX100 (which is now 101 stocks with SpaceX joining and no one leaving!) has a price to sales of 6.12!

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*This is a week of reduced high quality data but asset markets are telling us a lot. This is a “pause” week - post 4th July holiday, before the earnings season in the US starts, and looking forward to the central bank meetings at the end of July. But the AI narrative continues to weaken - Alex Karp of Palantir laid his out last week in terms of the broken models of LLMs which CEO themselves are increasingly concerned about. Overnight Samsung showed higher operating profits but the issue remains of sustainability of earnings. A chart we have looked at is the break down in hyperscalers (buyers) relative to Semis (sellers of picks and shovels) - it highlights the risk that capex expectations are too high. Semis remains extremely vulnerable.

*Meanwhile investor sentiment continues to get “hotter” - index correlations continue to collapse, JPY shorts are at 20 year highs, and vol selling / index dispersion plays are all the range. Own carry, sell vol, have a summer off. We have heard this before….

*Our view was that first 2 weeks of July would see a push on these plays of risk on - and that is playing out. BUT - vulnerabilities are rising across our core themes - and as for waiting for data - well often the best source of news is market price action itself.

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*There are some notable changes afoot that are changing financial conditions rapidly but which investors - desperate to not miss the right hand tail in equities - are missing. The first is the hedging over AI tech spend, led by Meta hedging its best on compute spend by potentially seeking to sell its “excess compute”. Second is the increasing sense that token spending has been mis used with little actual productivity benefit. Third is the growing concern from CEOs that providing too much IP to Large Language Models is a material concern for business security. We have long said that control of data will be key. The idea that these LLM businesses - will be able to charge what they want makes no sense. So picks and shovels become the play - chips - but these will - like all commodities - see excess supply at high prices.

*At Sintra Warsh remains hawkish on inflation, and positive on reform. Notable was that ECB Chair Lagarde ALSO pushed back on forward guidance as a tool. Warsh’s point is - if the Fed over guides, then the market hangs on its every word and NOT on the actual data for the economy. If the data is poor and the models inefficient, the Fed is over communicating on poor inputs. He wants to reverse this. The market CONTINUES to not recognize this. He is NOT in the asset support business.

*NFP today ahead of a long weekend for 4th July - we have no reason to think it will not be good, but under the hood data is weakening especially in housing. Early July is typically a bullish period for stocks, but conditions have tightened and we continue to think - as we have long said - that H2 will be most interesting!

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