Swissquote: Hot, handle with care

August 14, 2026

On Wednesday, the consumer price index showed a retreat in headline and core CPI to 3.4% and 2.5% y-o-y, respectively, while Thursday’s producer price index showed that headline PPI fell sharply to 4.7% y-o-y in July, down from 5.5% a month earlier and lower than the 4.9% pencilled in by analysts. Core PPI came in at 4.2%.

I see two issues with the numbers. First, they remain consistent with inflation running comfortably above the Federal Reserve’s (Fed) official 2% target. No one knows if the Fed under its new Governor Warsh will continue to look at the traditional metrics to gauge where rates are going, but at current levels, US inflation remains too high to ignore.

Kevin Warsh himself had expressed concern about US inflation running persistently above target for half a decade in his first press conference (although I reckon that things may have changed since then!)

And two, the easing in price pressures was clearly driven by a sharp retreat in oil prices on Middle East hopes that month. Since then, tensions have flared up, pushing oil prices higher.

As such, this week’s optimism looks somewhat disconnected from reality. If the reason we see the market rally is that US inflation eased in July, optimism could fade away quickly. (Good news is that inflation is not the only reason! Keep reading).

Nonetheless, Fed rate hike expectations for September are fading like snow under the sun. Last week, activity on Fed funds futures was assessing more than a 60% chance of a September hike.

Today, after soft jobs and inflation figures, that probability stands at only 32%. The US 2-year yield, which captures Fed rate expectations, has eased 25bp since its July peak, and the US dollar has come under fresh pressure since the Fed’s July decision – where Kevin Warsh went from being unwilling to make forecasts in a crazy geopolitical environment (which was fine) to clouding the Fed’s reaction function to inflation (which is not fine).

Today, we don’t even know if the Fed’s priority is to tame inflation, or just make the market absorb lower rates as smoothly as it possibly can, hoping to help ease the weight of growing interest payments on exploding US debt at a time when the confidence crisis in the US government (the deepening Middle East war, the exploding debt, the government’s push for more spending and clouded Fed policy) is structurally pressuring the longer end of the US yield curve higher.

Even with robust AI-led growth, robust government spending and efforts to narrow the trade deficit, the US debt-to-GDP ratio has returned to its highest levels since the pandemic. And the latter is having a serious impact on US longer-term borrowing costs.

Not helping: Sanae Takaichi – the Japanese PM who is famous for her explicit preference for softer interest rates and robust government spending – is facing the ugly reality that interest rates in Japan must be lifted to ease the persistent selling pressure on the Japanese yen which, in turn, is probably hurting the Japanese economy more than higher rates would!

The latest news suggests that the Japanese government is now turning ‘supportive’ of a near-term rate hike. The Japanese 10-year yield is pushing above the 2.85% level today – we are more than a full percentage point above the levels that investors thought would trigger a reverse carry trade.

One big scare is that the more appealing Japanese yields will, at some point (potentially in the near future), trigger a reverse carry trade and pull the rug from under the feet of US sovereign bonds at the worst possible time – when the Fed is under pressure to keep rates lower!

As such, after a US 10-year bond sale printed the highest yield since 2007, yesterday’s 30-year auction drew the highest rate in 25 years: the yield came in at more than 5.20%. That is to say, the Fed can’t lower borrowing costs alone (many external factors, like geopolitical tensions, cross-border asset flows and sovereign debt trends impact borrowing costs), but it could have a say on yields by acting on interest rates.

Yet, the Fed can’t lower interest rates if the data doesn’t justify it (I mean, it could lower interest rates, but yields wouldn’t come down if investors thought that was not the right thing to do). But the early hawkishness from the Fed – which had triggered a broad bond selloff – is being retraced today on soft data, and the latter is echoing positively across the major US and European indices, along with strong earnings.

Main Street may be grappling with rising price pressures, but Wall Street is thriving despite the Middle East war, energy crisis and trade frictions. In fact, S&P 500 companies’ earnings are growing faster than their stock prices: the war and the energy crisis helped energy companies have a great quarter, the AI craze is boosting revenue at Big Tech’s cloud units, and their investment is having a massive positive impact on AI enablers and construction companies benefiting to many businesses outside the tech.

So many companies are getting their fair share of the current energy crisis and AI themes. Not being invested scares investors more than a few downside corrections down the road.

On the geopolitical front, the lack of progress in US/Iran talks and news that Iran is now shifting towards a more ‘offensive’ stance didn’t trigger a proportional reaction. US crude topped out near $85pb and has been coming lower since then, despite the lack of further progress.

The latter could be a ticking bomb. Indeed, we see that the European Stoxx 600 is feeling increasingly uncomfortable with the recent rebound in energy prices. European equities could again enter a period of extra caution, as higher yields also increase the chances of a European Central Bank (ECB) action, likely weighing on stock valuations near their record-high levels.