Investors turned their attention to the bond market this week as yields on long-dated U.S. Treasury bonds hit multi-year highs. The government needed to step in to curb what looked like a rout in both stocks and bonds.

 

Mid-week, the 30-year Treasury bond, as well as the benchmark 10-year, fell in price as yields hit 5.24 percent and 4.74 percent. To stem the fall in bond prices, U.S. Secretary Scott Bessent announced Wednesday morning before the open that he would double Treasury bond purchases beginning in September.

 

Both bonds and stocks rallied on the news, but by Thursday, bond yields rose again, and stocks fell as traders doubted the impact of Bessent's new measures. Aside from reducing the pace of higher yields (which it did), they figured that buying back some bonds would not do much to stem the fundamental reasons for the climb in interest rate yields.

 

Higher oil prices, higher inflation, higher deficits, higher debt (now $40 trillion), and no end to government spending made the move's impact no more than a pimple on an elephant's derriere. But the announcement did force the dollar lower (as intended). So far this quarter, the dollar has declined 2.5 percent; that's a large move in the currency world.

 

What it did do was convince investors that with this attempt to force interest rates down, inflation could be here to stay at least for the foreseeable future. That caused a spike in the prices of inflation hedges like gold, bitcoin, and most other commodities. Right now, the negative correlation (one goes up, the other goes down) between the U.S. greenback and gold is above 90 percent, while bitcoin's correlation is roughly 83 percent.

 

Gold gained more than 4 percent on the dollar move, while gold mining stocks posted high single- and double-digit gains. Bitcoin climbed much more than that, although some of the gains were attributed to the president's attempt to jawbone Congress to pass the much-delayed crypto Clarity Act legislation. What Trump didn't say was that the delay is largely due to concern that passing the legislation (as is) would allow politicians to benefit from their existing crypto investments. Read the president and his family and friends.

 

In another TACO moment, the president's tariff tantrums against Canada have come to naught (surprise, surprise). As for the Middle East, markets have tuned out the meaningless stream of assurances on Truth Social just like they have on the tariff diatribes. Oil moved higher this week as investors realized that there will be no grand Hormuz openings. That adds to the inflation story, which fuels the rise in long-term bond yields and is a large reason why we are seeing gold, other precious metals, and commodities in general come back to life.

 

Gold has broken out of its range and is now above $4,500. Energy has quietly become the strongest performing sector so far this year, substantially beating technology with far less attention. Keep your eye on those soft commodities as well. The combination of less fertilizer flowing out of the Middle East, climate change, and my prediction of a Super El Niño beginning next month ( see my column "El Niño Is Flashing Red Light for the World") is boosting prices in wheat, corn, sugar, etc.

 

As for equity markets overall, August is off to a positive start, but stocks are beginning to wobble. This week the S&P 500 lost 1.5 percent while Nasdaq fell almost 2.35 percent. In the coming week, we have Nvidia's earnings, and the Jackson Hole boondoggle — the Economic Policy Symposium of central bankers on Aug. 28. Investors are hoping the keynote speaker, Fed Chairman Kevin Warsch, will share his view on long-term bond yields and the move by his fellow former hedge fund manager, Scott Bessent.

 

A big reason I have been cautious on the markets in August and September is the upcoming midterm elections. Consider this: in the last three midterm election years, the stock market has declined by at least 10 percent beginning on Sept. 19, 2014, Sept. 20, 2018, and Aug. 16, 2022. Coincidence? Possibly, but three in a row does make a trend. History is only a guide, but in this case, I'm listening to how it rhymes with the past.

 

It wasn't difficult to predict that this week's July inflation data would be cooler. Last month, oil declined on the unfounded hopes of peace in the Middle East. That showed up in the numbers, but what about next month and beyond?

 

Oil is trading at $80-$82 a barrel. That is up more than $4 from July 1, 2026, or almost 5.5 percent. As such, I expect the August Consumer Price Index and the Producer Price Index to be higher than the results reported for July. And what happens if the Straits remain closed? Could we see $85, $90, or higher for a barrel of West Texas crude?

 

Nothing the Trump administration has tried has succeeded in unlocking the stalemate over the Straits of Hormuz. Intelligence assessments over the last few weeks indicate that without boots on the ground, the Navy could not open the Straits on its own. A land invasion would be difficult, if not impossible, and the severe loss of life unacceptable.

 

So, both sides are now playing a waiting game. The U.S. is applying continued economic pressure to Iran, hoping to force the hardline leadership to cave. The Iranians, long accustomed to economic pressure from the West, seem undeterred and have developed ways to grow their economy despite sanctions.

 

The regime has also become more entrenched thanks to the invasion. Rather than accede, they are content to use delaying tactics at the negotiating table while demonstrating their ability to strike militarily whenever they want. They know that the longer oil prices remain where they are or higher, the more likely it is that winning the mid-term elections will be difficult for Trump and the Republican Party. That could lead Congress to force an end to the war.

 

Given this background, why haven't we seen even higher oil prices? One reason is that oil demand is declining according to both OPEC and the International Energy Agency. The other reason could be that more oil is making its way out of the region than is reported. By some estimates, as much as 16 million barrels per day is making its way either through the Straits or through regional pipelines. That compares with approximately 20 million bbl. per day before the conflict.

 

Understandably, the U.S. financial markets have lost faith with constant U.S. assurances that a deal is right around the corner. We are in the ‘show me or shut up' stage of the war. Until there is a definitive opening of the Straits with tankers traveling through the passage at a pace like before the U.S. attack, the oil price will remain higher. How high that risk premium will go is at this point up to the Iranians.

 

The new CPI reading of 2.5 percent, higher than the inflation rate last year at this time but only a monthly gain of 0.2 percent from June's number, was in line with my forecasts. It seems clear to me that Wednesday's numbers were leaked. All the asset classes that would benefit from a weaker CPI number were up substantially well before the 8:30 a.m. data release.

 

The Producer Price Index was unchanged from June. From here, inflation moves higher in my opinion. As for the string of good inflation numbers we have had lately, I suspect the data will not sway the Fed members from their watch-and-wait stance.

 

Kevin Warsh, the new chairman of the central bank, has already said, "I do not find the current Fed policy of ‘data dependence' of much real value. We should care little about two numbers to the right of the decimal point in the latest government release." However, the June data should put to rest any fears that we will see a rate hike at the next meeting in September.

 

On a side note, readers who agree with my misgivings about the accuracy and leaking of government data should note that U.S. jobs numbers have been revised lower in 21 of the last 30 months by a total of minus-1.05 million jobs. This means an average of minus-35,067 jobs have been revised out of previously reported data each month over this period. June and May jobs numbers alone were revised down by a total of minus-103,000, the largest two-month downward revision since July 2025. It makes me doubt the trustworthiness of government data.

 

Stocks continued to climb higher on the back of the inflation data. As bets on an interest rate hike fall well below 50 percent, animal spirits are revving up, and many Wall Street strategists are talking about 8.000 as the next stop on the S&P 500 Index. Next week we could see some further consolidation before another run higher. I would buy the dip if we had a more substantial sell-off.

 

The U.S. economy shed 23,000 jobs in July. The forecasts were for a gain of 80,000. Some workers appeared despondent while investors were ebullient as the weaker data signaled less reason for the Fed to hike interest rates.

 

Employment figures for May and June were also revised lower, with a combined 103,000 job losses more than previously reported. Readers who have read my two-part columns on government data have been forewarned to take government numbers with a grain of salt.

 

It was a somewhat dismal report where the participation rate fell to 61.4 percent; it's the lowest since September 2021. The labor force participation rate measures the percentage of the civilian population age 16 and older that is either actively working or actively looking for work.

 

It is one of the best measures of the economy's labor supply. From the data, it appears clear that the labor pool is shrinking. In which case, employers must compete harder for workers, wages rise, and that can keep wage inflation elevated.

 

In any case, the 50+ percent expectations of an interest rate hike in September in the betting markets dropped immediately with the data release. Bond yields fell, along with the dollar, and guess what skyrocketed? Precious metals.

 

That's right, gold and silver are back from the dead! This week, gold rose 7.7  percent while silver notched an 11.6 percentgain. For the most part, gold has been trading in a range for months. As oil prices gained, gold lost value. Silver fared even worse. Add in the rise in interest rates and the dollar (both kryptonite for precious metals), and it was close to a perfect storm for that asset class.

 

Now we seem to be reversing those trends, at least in the short-term. The Fed is on hold or appears to be for now, given that the last two Consumer Price Index CPI) reports have been benign. A third CPI report next Wednesday, August 12th, looks to be weaker as well. Weaker inflation numbers and now weaker job data put rate hikes on hold and may even push yields and the dollar even lower.

 

In addition, Mainland China is hoping to establish Hong Kong as a major trading market for gold among other metals. Remember, gold is entirely outside the global credit system. It cannot be frozen, sanctioned, or inflated away by another government's choices. Russia knew that and amassed its own holdings before it invaded Ukraine.

 

The People's Bank of China has been building up physical gold inventories in Hong Kong over the past several months after launching its Precious Metals Central Clearing Company. In June, they added 14.93 tons of gold. That's their single largest purchase since 2023.

 

I suspect this is adding upward pressure to the price of precious metals. They have slowly been moving their own substantial gold holdings (2,346 tons) from where it is kept in the London Metals Exchange back home to support their efforts in Hong Kong. Bottom line, Beijing is stocking the exchange it built rather than deepening the one its geopolitical rivals dominate.

 

My fears that August would turn out to be a month to be cautious seem ill-advised as we close out the first week. My caution has and will continue to be dependent on the conflict in the Middle East. In the meantime, the rotation back into technology continues. However, it is not at the expense of other areas.

 

The three major averages had healthy gains to finish the week, with the NASDAQ the winner, up 4.90 percent. The S&P 500 and small-cap Russell indexes each gained more than 3 percent while the Dow finished just shy of that.

 

Earnings results were the lynchpin of these moves. It also helped that we have seen a 9 percent decline in the price of oil. The hope that the U.S. will somehow negotiate a successful opening of the Straits of Hormuz was the flavor of the week. This could change next week; otherwise, the S&P 500 Index seems destined to make a record high.

 

Late in the week after a further drubbing, the technology sector staged a rebound from a deeply oversold position. How long it lasts and how far it will go is debatable. In the meantime, long-dated yields in the bond world continue to rise.

 

You can blame the Fed for the continued backup in interest rates. Kevin Warsh's second FOMC meeting has come and gone with a big nothing done when it came to interest rate policy. He argued that the financial markets are doing the heavy lifting right now, and that is all right with him.

 

I could have entitled this column "Bond Vigilantes Ride Again" because that is exactly what the Fed chair is counting on. Readers haven't heard me mention these fixed income traders recently. This is the name markets give those who buy and sell bonds based on their forecasts for economic growth, inflation and geopolitics. Under the last Fed chair, Jerome Powell, the central bank bent over backward to inform the markets of what it was thinking and doing before it did it.

 

Those days are over. Chairman Warsh is determined to pull back on communication. Instead, he prefers to keep his cards close and watch how markets digest the ongoing data. Right now, the vigilantes are convinced that, thanks to the Iran war, tariffs, and government spending, inflation, after a month or two of reprieve, is set to rise again.

 

If that's the verdict, why then did the Fed not simply raise interest rates at this meeting? For one thing, if the once-again spike in oil prices is fueling higher inflation expectations, how would raising interest rates change that? It wouldn't, nor would higher rates reduce the impact of Trump tariffs. Those are supply issues. In inflationary times, the Fed is focused on reducing demand for money by making borrowing costs higher via hikes in interest rates.

 

Remember, too, the Fed's bailiwick is the Fed funds rate, that is a short-term debt instrument. Raising that rate might impact the yields on short-term borrowing costs. It has little impact on longer-term maturities where all the corporate, mortgage, and auto loans occur. That's where the private sector comes in.

 

By the end of the FOMC Q&A session, the markets were left with uncertainty. There was no hint at a September hike, no guidance on what the FOMC members are thinking, only the assurance that inflation was too high. If you think about it, the Fed has been on hold for five meetings in a row and yet bond yields have risen substantially without them.

 

Markets were miffed with the outcome. While Warsh asserted the Fed's commitment in pursuing its 2 percent inflation target, he repeatedly declined to connect that commitment to any concrete action. As a result, traders took the indexes down hard and bond yields higher. To be fair, some of the sell-off at the end of the day on Wednesday was due to one fund manager who was forced to liquidate his holdings in many AI stocks after suffering steep losses over the last few weeks.

 

On the macroeconomic front, the first reading of second quarter GDP growth came in at 1.5 percent below the forecast of 2 percent. Weak, yes, but with the questionable accuracy of government data, traders ignored the result, preferring to wait for further revisions. The Fed's favorite inflation index, the Personal Consumer Expenditures Index (PCE) for June, was cooler. That was thanks to the decline in oil prices, but with oil back up, investors ignored that data point, expecting higher numbers this month and next.

 

Second-quarter earnings continue to separate the wheat from the chaff. Microsoft gave an upside surprise, while Meta did the opposite. Apple disappointed. Amazon gained 15 percent on its results. I did warn that investors would become more discriminating based on individual company results. That is what is happening.

 

As I counseled readers last week, August should see further volatility in the markets. We are already seeing that. Wednesday, the S&P 500 Index fell almost 1.5 percent; Thursday it gained back more than that. Friday it failed to follow through to the upside. While the week was volatile, the index ended essentially flat. The same could be said for the Nasdaq, although volatility was more than twice that of the other indexes.

 

Last week I wrote that I was watching two levels: "the first stop on the S&P would be 7,300 (testing a double bottom). If that fails to hold, we are looking at 7,200 (cycle lows). Technology would have an even bigger decline." The low this week was 7,313. From there it bounced, and we are once again back above 7,400.

 

I also explained there was a second alternative. "The S&P 500 Index, supported by the rotation I have discussed previously (that is out of tech and into sectors like healthcare, utilities, industrials, etc.), could remain at this 7,400 level." We did that as well. All in one week!  

 

Oil spiked higher this week, regaining $90 a barrel as the dollar rose and U.S. Treasury bonds sold off. It is not hard to guess what the stock market did as a result. 

 

Down.

 

I'm sure you are just as tired as I am watching this Kabuki show unfold in the Middle East. Not only is the Straits of Hormuz shut in, but now Iran's proxy, the Houthis, have opened a second front along the Red Sea. They have already attacked two Saudi oil tankers and have vowed to close that oil avenue off from any further shipment of oil from Saudi Arabia.

 

Brent crude is up more than 40 percent in three weeks. Readers only need to fill up at the pump this week to realize the cost of this ongoing travesty. The Ten-year U.S. Treasury bond is now yielding 4.67 percent. Traders are dumping U.S. Treasuries as well as stocks in anticipation that by August the inflation data will be rebounding substantially. That would put an interest rate hike back on the table by September by the Federal Reserve Bank.

 

It is a tangled web this administration has woven. There were reports on Friday that Pakistan, with support from China, was seeking to revive negotiations between the two adversaries. That dropped oil prices by 5 percent to around $88 a barrel. Hope springs eternal I guess when  dealing with this war.

 

Oh, in case I forget, the president has just slapped a whole host of new tariffs (10-12 percent) on world trade, manufacturing a new excuse (forced labor in 80 countries) as justification. This adds yet another layer of price increases consumers will be receiving in the months ahead since we now know you and I are paying most of these tariff costs.

 

All the goals of this administration's economic policies, touted by U.S. Treasury Secretary Scott Bessent — reduce budget deficits, boost growth and increase energy production — have remained pipe dreams. Instead, interest rates are reaching new highs, spending and deficits are off the charts, and oil, rather than declining, is skyrocketing.

 

The AI trade has faltered as well. The recurring worry that the large mega-cap tech companies are spending too much money plagues the markets. The fate of this area hinges on the outlook for 2027 capital expenditures growth from the hyperscalers like Google, Meta, Amazon, and Microsoft. Currently, Wall Street analysts are expecting capex to grow by 28 percent next year. That's up from 23 percent two weeks ago and before Google's second quarter earnings announcement on Wednesday night.

 

Google once again raised its estimate of how much more it is planning to spend on AI this year, from $190 billion to a range of $195 billion to $205 billion. The stock cratered on the news despite a blockbuster revenue growth of $119.8 billion, up 24 percent from a year earlier. And what Google is doing, its competitors will do too. By the end of the earnings period, we could see that number increase to 37 percent.

 

Given that all these companies have whittled down their cash due to this monumental spending, investors expect that the only way to increase spending further will be for these companies to sell more stock and raise debt, thereby diluting existing holders. Even if they succeed, there is still no guarantee anytime soon that these companies will see the kind of payoff that is necessary to the bottom line given the amount of money involved.

 

Tesla was another dud. Auto sales are falling, and capex in all his tomorrow ventures, including AI, is exploding higher. Combined with the 50 percent decline in the price of SpaceX, Elon Musk is keeping a low profile lately.

 

Regular readers know that I entered the July-August period rather cautiously. I believe we are in a normal mid-summer consolidation in a mid-term election year. It appears as if Donald Trump is working overtime to ensure Democrats win that contest. That adds even more uncertainty to an equation already burdened by the possibility of a "massive attack" in Iran and therefore further spikes in energy prices. So far, second-quarter earnings have been on target for the most part. Next week, Microsoft, Meta, Apple and Amazon report on Wednesday and Thursday. Their announcements will largely dictate which way technology goes in the short term.

 

I see two possible outcomes for the markets over the remainder of the summer. Both would bring with them high volatility. The first is that we chop around here. Since technology is leading this pullback, I see it trading in a range of a little above and below 680 as reflected in the main Technology ETF (QQQ).

 

The S&P 500 Index, supported by the rotation I have discussed previously (that is out of tech and into sectors like healthcare, utilities, industrials, etc.), could remain at this 7,400 level. Once again, you could still see 50-point swings weekly or even daily in the index.

 

If, on the other hand, Trump allows his emotions to play out with few in the White House willing to talk him down, a sudden escalation in the war might occur. Oil prices spike much higher as a result. In that case, the first stop on the S&P would be 7,300 (testing a double bottom). If that fails to hold, we are looking at 7,200 (cycle lows). Technology would have an even bigger decline.