The more important development was the inflation outlook. June PCE data remained constructive, with headline inflation falling 0.1% MoM and core PCE rising just 0.1%<\/strong>, but annual rates remained elevated at 3.7%<\/strong> and 3.3%, respectively. More importantly, these data largely preceded the latest tariff measures and renewed Middle East energy disruption. The inflation narrative therefore shifted from demand moderation towards a renewed supply-side shock<\/strong>, reducing the scope for near-term monetary easing.<\/p>\n\n\n\n Trade policy reinforced that shift. The US imposed new Section 301 tariffs of 10% or 12.5% on imports from 60 economies, covering nearly all US imports while exempting selected energy, food and critical commodities. Unlike previous emergency measures, the new framework rests on Section 301 authority, making it potentially more durable despite ongoing legal challenges. The macro impact is inherently stagflationary<\/strong>: higher import costs lift inflation while simultaneously compressing corporate margins<\/strong>, reducing real household income and weighing on investment.<\/p>\n\n\n\n AI investment remained the principal offset to cyclical slowing<\/strong>. Spending on data centres, semiconductors, electrical equipment and software continued to support business investment, manufacturing and construction, helping to explain why aggregate GDP has softened while domestic demand remains resilient. At the same time, macro growth is becoming increasingly dependent on a concentrated group of hyperscalers<\/strong>, leaving business investment more vulnerable should AI capital expenditure moderate.<\/p>\n\n\n\n Consumer spending also became increasingly uneven. Higher-income households continued to benefit from asset appreciation and higher interest income, supporting discretionary spending, while lower-income consumers remained under pressure<\/strong> from housing, food, fuel and borrowing costs. Corporate commentary increasingly reflected this divergence, suggesting companies are approaching the limits of pricing power and may increasingly face a trade-off between margin compression and weaker volumes.<\/p>\n\n\n\n Externally, the principal macro risks remained energy and China. Oil prices stayed highly sensitive to developments around the Strait of Hormuz, with Brent retracing from its brief move above $100 but remaining vulnerable to renewed supply disruptions<\/strong>. Meanwhile, China’s slowdown broadened as both manufacturing and non-manufacturing PMIs fell below 50, reinforcing concerns that domestic demand remains insufficient to offset weaker exports and ongoing weakness in the property sector.<\/p>\n\n\n\n Across major economies, central banks faced an increasingly similar challenge: slowing real activity alongside renewed risks of supply-driven inflation. The Bank of Japan maintained rates at 1.0% while acknowledging stronger inflationary pressures<\/strong>, and the Bank of England continued to warn that higher energy prices could become embedded in wages and inflation expectations. For the Federal Reserve, resilient demand combined with tariffs and energy risks argues for continued policy caution.<\/p>\n\n\n\n Overall, the macro backdrop continues to favour a late-cycle, below-trend expansion<\/strong> rather than recession. Consumer demand, AI investment and labour markets remain sufficiently resilient to prevent a material contraction, while tariffs, energy prices and persistent fiscal deficits increase the probability of another inflation impulse. The dominant macro risk therefore remains stagflation rather than recession: slower real growth without sufficient disinflation to justify aggressive monetary easing.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n US Treasuries experienced a significant bear steepening<\/strong> during the week as investors reassessed the Federal Reserve’s inflation credibility rather than its policy path alone. The Fed left the funds target unchanged at 3.50%\u20133.75%<\/strong>, despite three FOMC members dissenting in favour of a 25 bps hike. Chair Kevin Warsh reaffirmed the Fed’s commitment to a 2% inflation target but provided little guidance on the conditions or timing of further tightening, effectively adopting what some market participants described as a policy of “benign neglect”<\/strong>, leaving markets to determine financial conditions with minimal forward guidance.<\/p>\n\n\n\n The market response was unusually asymmetric. While the 2-year Treasury yield fell 4.2 bps<\/strong> to 4.29%<\/strong>, reflecting the absence of an immediate signal of an immediate hike, longer maturities sold off sharply as investors demanded greater compensation for inflation, fiscal, and policy uncertainty. The 10-year yield rose 5.8 bps<\/strong> to 4.74%<\/strong>, while the 30-year climbed 11.5 bps<\/strong> to 5.28%, its highest level since 2007<\/strong>. Consequently, the 2s10s curve steepened by 10 bps<\/strong> to 44 bps<\/strong>, and the 5s30s curve widened by 9.2 bps<\/strong>, highlighting that the selloff was driven primarily by higher term premium rather than expectations of more aggressive near-term Fed tightening. The underlying drivers reinforced this interpretation. The increase in the 10-year Treasury yield was split between a 3.9 bps rise in inflation breakevens and a 1.9 bps increase in real yields, indicating that renewed inflation concerns, fuelled by higher oil prices, tariffs and fiscal risks, were the dominant catalyst, while higher real yields reflected a growing expectation that policy may remain restrictive for longer. Stronger-than-expected Employment Cost Index, Chicago PMI and University of Michigan Sentiment releases offset the softer Core PCE reading of 0.1% MoM, leaving markets increasingly focused on the Fed’s reaction function rather than a single inflation print. Markets continued to price roughly one additional 25 bps hike by year-end, while JPMorgan brought forward its expected next rate increase to December 2026.<\/p>\n\n\n\n The rise in Treasury yields increasingly spilt over into the broader fixed income market. The New York Fed’s investment-grade Corporate Bond Market Distress Index climbed to its highest level since late 2023, high-yield borrowing costs moved to four-month highs, and several issuers delayed planned bond sales following the FOMC meeting. The selloff also spread across global sovereign bond markets, with higher yields observed in Germany, the UK, Japan and Australia as investors repriced inflation and term-premium risks globally<\/strong>.<\/p>\n\n\n\n The week’s price action leaves the curve offering increasingly differentiated opportunities. The front end remains vulnerable to additional hawkish repricing should inflation reaccelerate, while intermediate maturities continue to provide attractive real yields with less exposure to long-end term-premium risk. Although the 30-year sector now offers historically attractive carry, it remains sensitive to persistent fiscal borrowing, elevated Treasury and corporate issuance, energy-driven inflation risks and continued uncertainty surrounding the Fed’s communication framework. Overall, the defining message of the week was that financial conditions tightened despite no change in the policy rate<\/strong>, as bond investors increasingly required higher compensation for inflation, duration and policy uncertainty.<\/p>\n\n\n\n Elsewhere, the Bank of England left the Bank Rate unchanged at 3.75% in a 6\u20133 decision, while the Bank of Japan also maintained its policy rate at 1.00%. Both central banks continue to balance persistent inflation pressures against weakening growth dynamics, reinforcing a global environment in which long-term bond yields are increasingly driven by inflation expectations, fiscal policy, and term-premium repricing rather than by changes in overnight policy rates.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n Credit markets remained fully open during the week, but the tone shifted from abundant, inexpensive financing toward heavier supply, more selective capital allocation and higher all-in borrowing costs<\/strong>. The defining theme was the transformation of AI investment from an equity story into a credit-market story, as hyperscalers, infrastructure funds and data-centre vehicles<\/strong> increasingly turned to debt markets to finance unprecedented capital expenditure. Investors were not questioning the credit quality of the largest technology borrowers; rather, they demanded greater compensation for sector concentration, accelerating issuance and increasingly complex financing structures.<\/p>\n\n\n\n July ended with record US investment-grade issuance, confirming that capital remains readily available for high-quality borrowers. However, market discipline is beginning to return. The clearest signal came from a BlackRock-led financing linked to a Texas data-centre project associated with Meta, which priced at a 7.53% yield<\/strong>. Despite attracting almost $20 billion of demand, the deal was only around 1.6x oversubscribed, one of the weakest order books for a large US high-grade transaction this year. Investors increasingly differentiated not only between sponsors but also project construction risk, power availability, refinancing risk, collateral quality and the long-term economics of AI infrastructure.<\/p>\n\n\n\n Unlike a traditional credit cycle, higher borrowing costs are not yet restraining issuance. Large AI investors continue to prioritise access to capital over financing costs, viewing an additional 50\u2013100 bps <\/strong>of borrowing expense as immaterial relative to the expected long-term returns from compute infrastructure<\/strong>. This has weakened the normal market mechanism through which wider spreads discourage issuance, leaving investors to absorb a sustained pipeline of AI-related supply. The principal risk is one of differentiation rather than default. Hyperscalers continue to benefit from fortress balance sheets, strong cash generation and ample financial flexibility. The weaker links lie further down the AI ecosystem, including leveraged suppliers, single-project developers<\/strong> and companies dependent on continued external financing or a limited customer base. Credit selection within AI is therefore becoming increasingly important as financing conditions tighten.<\/p>\n\n\n\n Issuance also broadened geographically. AT&T sold $5.3 billion of reverse-Yankee debt, joining Amazon and Alphabet in accessing euro-denominated funding, highlighting how large US issuers are diversifying funding sources<\/strong> and tapping global investor demand.<\/p>\n\n\n\n Rising Treasury yields further improved the relative value of high-quality fixed income. With the 30-year Treasury yielding above 5%, investors can once again earn attractive income without assuming corporate credit risk, increasing the concession required for long-duration corporate issuance. As a result, short-duration Treasuries and investment-grade credit continue to offer the most attractive risk-adjusted opportunities, while tight spreads still provide limited compensation<\/strong> for lower-quality issuers.<\/p>\n\n\n\n Municipal credit remained supported by infrastructure financing. The proposed $20 billion expansion of Washington Dulles International Airport is expected to rely primarily on the municipal bond market, while S&P downgraded Swarthmore College from AAA to AA+ following higher debt associated with campus investment. The downgrade is unlikely to materially affect market access given the institution’s strong demand profile and nearly $3 billion endowment.<\/p>\n\n\n\n The market remains fundamentally healthy, but the marginal price of capital is rising<\/strong>. Strong issuers continue to enjoy broad market access, while investors are demanding greater compensation for concentration risk, increasingly complex financing structures and an unprecedented pipeline of AI-related issuance. The market has entered a phase of greater credit differentiation rather than broad credit deterioration.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n US equities advanced as mega-cap growth regained leadership, reversing part of the previous week\u2019s rotation into cyclicals and defensive sectors. The Nasdaq gained 1.59%<\/strong>, followed by the S&P 500 at 1.05%<\/strong> and the Dow at 1.04%<\/strong>, while the Russell 2000 rose only 0.05%. The equal-weight S&P 500 increased 0.63%<\/strong>, trailing the cap-weighted index by 42 bps and confirming that the advance remained concentrated in the largest companies rather than representing a broad market rally.<\/p>\n\n\n\n Consumer Discretionary surged 8.30%<\/strong>, and Communication Services gained 5.37%<\/strong>, driven by strong reactions to selected mega-cap earnings. Consumer Staples rose 1.15%, and Financials added 1.05%. Health Care, Information Technology and Energy were broadly unchanged, while Industrials fell 1.59%<\/strong>, Materials declined 1.72%<\/strong>, and Utilities dropped 4.24%<\/strong>. The combination of mega-cap outperformance, limited small-cap participation and pronounced weakness in Utilities was consistent with a rotation away from defensive exposure, but not yet a comprehensive broadening of risk appetite. Performance dispersion at the stock level was equally pronounced. Garmin (+21.2%), Microsoft (+19.4%)<\/strong>, Cognizant (+17.6%) and Amazon (+17.4%)<\/strong> led the S&P 500 following strong earnings, while Regeneron (+14.3%), DexCom (+13.7%) and Huntington Ingalls (+13.3%) also posted double-digit gains. At the other end of the spectrum, Lennox International (-24.0%)<\/strong>, Vertiv (-16.0%)<\/strong>, C.H. Robinson (-15.3%)<\/strong>, NXP Semiconductors (-14.4%), GoDaddy (-14.2%) and Qualcomm (-13.2%) were among the week’s weakest performers, highlighting the increasingly company-specific nature of post-earnings price reactions.<\/p>\n\n\n\n The defining theme of the week remained increasing dispersion within the AI trade. Investors rewarded companies demonstrating tangible monetisation of AI investment, while becoming considerably less tolerant of businesses in which capital expenditure continues to outpace visible earnings or cash flow generation.<\/p>\n\n\n\n Amazon (+17.4%)<\/strong> was the clearest beneficiary. Shares recorded their strongest weekly advance since 2012 after AWS revenue increased 37% YoY to $42.2bn<\/strong>, extending accelerating cloud growth into a fifth consecutive quarter and directly addressing investor concerns about AI returns on investment. Microsoft similarly emerged as one of the week’s strongest performers, with the two companies accounting for much of the S&P 500’s recovery into Friday’s close.<\/p>\n\n\n\n By contrast, Apple (-7.24%)<\/strong> on Friday suffered its largest one-day decline in 16 months (-7.35%) after guiding fiscal fourth-quarter revenue growth of 9-11%, below expectations<\/strong> of more than 12%, citing shortages of memory chips and processors<\/strong>. Roblox fell 27% in its largest one-day decline on record, demonstrating how aggressively investors punished companies failing to meet elevated expectations.<\/p>\n\n\n\n Semiconductors remained volatile<\/strong> throughout the week. SK Hynix (US ADR -7.01%<\/strong>)<\/strong> reported a 557% increase in quarterly profit<\/strong> but still missed exceptionally high market expectations<\/strong>, even as it announced a record annual capital expenditure of at least $31bn, reinforcing concerns that AI infrastructure investment may be approaching diminishing marginal returns. Kioxia’s weaker-than-expected outlook added further evidence that memory pricing momentum may be moderating. Earlier weakness across the semiconductor complex was compounded by reports of continued progress in Chinese advanced chip manufacturing, heightening concerns about future competitive dynamics and the sustainability of current AI infrastructure spending.<\/p>\n\n\n\n Outside technology, earnings remained broadly constructive. Ford (+2.16%)<\/strong> raised full-year adjusted EBIT guidance to as much as $11bn from a previous range of $8.5-10.5bn after reporting adjusted EPS of $0.42 versus $0.36 expected. Visa (+2.92%)<\/strong> delivered adjusted EPS of $3.32 compared with consensus estimates of $3.23 while announcing approximately 2,600 job reductions and a $563m restructuring charge. Coca-Cola (+6.49%)<\/strong> raised both its organic revenue growth target to 5% and full-year EPS growth guidance. In energy, ExxonMobil (-0.96%)<\/strong> and Chevron (+1.05%)<\/strong> more than doubled their quarterly net income as higher oil prices boosted profitability, although both prioritised debt reduction over materially larger buybacks, signalling management caution about the durability of conflict-driven oil prices.<\/p>\n\n\n\n Q2 earnings season continued to exceed expectations. With 386 of 503 S&P 500 companies (76.7%) having reported, 65.5% exceeded EPS estimates and 79.0% beat revenue expectations. Average EPS surprises reached 14.9%<\/strong>, while average revenue surprises were 2.5%. Earnings quality remained strongest across Hardware & Semiconductors (14-0 EPS beats), Financial Services (20-0), Health Care (29-1) and Industrial Services (17-1). However, forward revisions remain balanced, with 159 EPS upgrades versus 161 downgrades over the past month, indicating that positive earnings surprises have yet to translate into a broad-based earnings upgrade cycle.<\/p>\n\n\n\n Investor positioning reinforced the return to mega-cap leadership<\/strong>. Nasdaq-100 ETF (QQQ) attracted approximately $2.0bn in inflows during the week, while SPY recorded $1.2bn in outflows and the Russell 2000 ETF (IWM) lost $363m, indicating that investors continued to rotate towards large-cap technolog<\/strong>y rather than increasing overall equity exposure. Growth outperformed Value by 250 bps, while Large Caps outperformed Small Caps by 165 bps. Interestingly, both Momentum (-0.91%) and High Beta (-0.99%) underperformed despite the broader market advancing, illustrating the violent intra-week unwinding of crowded positions before earnings-driven buying re-emerged into Friday’s close. Goldman Sachs also estimated CTAs were positioned to sell approximately $7.5bn of global equities during the week, including roughly $4.4bn of S&P 500 futures, providing an additional source of mechanical selling pressure during the mid-week drawdown.<\/p>\n\n\n\n Performance across AI-related investment baskets further highlighted the market’s growing selectivity<\/strong>. Enterprise software materially outperformed as investors increasingly favoured companies demonstrating immediate AI monetisation<\/strong> through productivity and workflow software. Hyperscalers were led by Microsoft and Amazon following exceptional cloud results, while AI compute infrastructure lagged as semiconductor companies remained under pressure from mixed earnings, elevated capital spending and intensifying competitive concerns. Physical infrastructure also diverged sharply, with power equipment outperforming while data-centre infrastructure and cooling names, including Vertiv, came under significant pressure.<\/p>\n\n\n\n Corporate activity remained supportive despite elevated market valuations. ICE announced the $6bn acquisition of MarketAxess at a 33% premium, while Alimentation Couche-Tard agreed to acquire Poland’s \u017babka Group for approximately $8.7bn. Reports also emerged that KKR was considering a take-private transaction for Integer Holdings, while NXP Semiconductors explored a potential acquisition of Ambarella to strengthen its edge AI capabilities. Capital returns remained healthy, with several financial institutions announcing dividend increases and additional share repurchase authorisations.<\/p>\n\n\n\n Market volatility eased significantly by the weekend. The VIX declined from 18.58 to 15.99 (-14%)<\/strong>, while the VVIX fell below 91 to its lowest level since early July. Dealer positioning amplified market moves throughout the week, with short-gamma dynamics intensifying the mid-week selloff before reversing into a supportive tailwind during Friday’s recovery as market positioning stabilised. IPO markets remained more subdued, with several new listings delivering disappointing aftermarket performance despite solid investor demand during bookbuilding, highlighting that primary market sentiment continues to lag the recovery in large-cap equities.<\/p>\n\n\n\n Internationally, European equities outperformed expectations, with the Euro Stoxx 50 (+1.21%), CAC 40 (+1.23%), DAX (+1.06%), and FTSE 100 (+0.80%) all advancing as the region remained relatively insulated from volatility in AI infrastructure<\/strong>. Asia experienced considerably greater dispersion. Hong Kong outperformed, while South Korea and mainland China came under pressure as the semiconductor sell-off accelerated<\/strong> following reports of continued progress in Chinese advanced chip manufacturing. The resulting weakness in Asian semiconductor shares set the negative tone for US trading early in the week before stronger US earnings reversed sentiment into Friday’s close.<\/p>\n\n\n\n The principal message from this earnings season is that markets have become significantly more discriminating. Strong headline earnings alone are no longer sufficient to drive sustained outperformance. Investors increasingly require evidence that AI-related capital expenditure is translating into revenue growth, operating leverage, and cash flow generation<\/strong>. Companies demonstrating rapid monetisation, most notably Amazon and Microsoft, continue to command premium valuations, while those relying primarily on future AI optionality or accelerating capital expenditure face a materially higher hurdle. Although aggregate earnings remain robust and corporate activity remains supportive, leadership has become more concentrated, suggesting the market continues to reward execution, monetisation and capital discipline rather than AI exposure alone.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":" Macro US growth slowed further but continued to point to a late-cycle expansion rather than recession. Q2 GDP expanded 1.5% annualised, down from 2.1% in Q1 and below consensus, but the underlying composition remained considerably stronger than the headline. Consumer spending rose 3.2%; real personal consumption increased 0.4% MoM in June; initial jobless claims fell […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1873","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"blocksy_meta":{"styles_descriptor":{"styles":{"desktop":"","tablet":"","mobile":""},"google_fonts":[],"version":7}},"yoast_head":"\n![\"\"](\"https:\/\/i0.wp.com\/karolpelc.com\/InvestorSnippets\/wp-content\/uploads\/2026\/08\/oil_inflation_expectations_2026-08-01_W31.png?fit=1024%2C576&ssl=1\")
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\n\n\n\nRates<\/h2>\n\n\n\n
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Supply dynamics also contributed to higher long-end yields. Soft 5-year and 7-year Treasury auctions, a higher-than-expected Treasury borrowing<\/strong> estimate for Q3, and expectations for another $50bn of investment-grade corporate issuance highlighted the growing amount of duration the market must absorb. Positioning further amplified the move, with asset managers extending record net-long positions in 10-year Treasury futures while leveraged funds increased short exposure. Treasury options activity remained heavily skewed toward protecting against further increases in long-end yields, reinforcing the steepening bias.<\/p>\n\n\n\n
\n\n\n\nCredit<\/h2>\n\n\n\n
<\/p>\n\n\n\n![\"\"](\"https:\/\/i0.wp.com\/karolpelc.com\/InvestorSnippets\/wp-content\/uploads\/2026\/08\/credit_yield_vs_spread_2026-08-01_W31.png?fit=1024%2C576&ssl=1\")
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\n\n\n\nEquities<\/h2>\n\n\n\n
![\"\"](\"https:\/\/i0.wp.com\/karolpelc.com\/InvestorSnippets\/wp-content\/uploads\/2026\/08\/global_index_weekly_2026-08-01_W31-2.png?fit=1024%2C576&ssl=1\")
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<\/p>\n\n\n\n![\"\"](\"https:\/\/i0.wp.com\/karolpelc.com\/InvestorSnippets\/wp-content\/uploads\/2026\/08\/sp500_sector_weekly_2026-08-01_W31.png?fit=1024%2C576&ssl=1\")
<\/figure>\n\n\n\n![\"\"](\"https:\/\/i0.wp.com\/karolpelc.com\/InvestorSnippets\/wp-content\/uploads\/2026\/08\/ai_trade_divergence_2026-08-01_W31.png?fit=1024%2C576&ssl=1\")
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