PPI Shows Surging Inflation Across Prices that Companies Pay Each Other

In a nutshell: Inflation in prices that companies pay each other, not even including energy, accelerated in services to 4.5% and in goods to 5.0%, year-over-year. On top of that, energy prices spiked by 24%. But food prices were barely up, after the surge. (…)

 

 

• The core PPI for personal consumption accelerated modestly to 4.6% y/y. It remained above both core PCED and core CPI inflation, suggesting that upside risks to consumer inflation remain elevated. (Ed Yardeni)

• US Diesel Prices Rise Past $6 a Gallon for First Time Ever

(…) The workhorse fuel of the global economy, diesel is used in everything from power generation and home heating to farm equipment and tractor-trailers. While few Americans are exposed directly to diesel in their day-to-day purchases, it’s a key input in food prices, the cost of shipping and construction — meaning the impact of record-high prices will trickle down to consumers. Demand also picks up heading into the fall as heating and agricultural consumption rise.

Geopolitical turmoil has sharply curtailed the world’s ability to produce and ship sufficient quantities of the fuel. In Russia, months of Ukrainian drone strikes on refineries have triggered a diesel export ban. And in the Middle East, stop-and-start shipping through the Strait of Hormuz and lost refining capacity have limited both production and distribution, with fuel cargoes still well below pre-war levels.

Fighting around the vital Strait of Hormuz and the Bab al-Mandeb Strait has also picked up this week, and the US and Iran appear to be digging in for a protracted war — which could keep energy prices higher for longer. (…)

IEA Warns Oil Demand May Have to Fall Further as Iran War Drags

The International Energy Agency cut its forecast for oil demand and said consumption may have to decline further in the coming months as the Iran war drags on and consumers are forced to adjust to lower supply.

The Paris-based agency deepened its estimates for this year’s decline in global oil demand by 940,000 barrels a day to 2.5 million barrels a day — the biggest loss in annual average terms since the 2020 Covid pandemic shuttered vast swathes of the world economy. The return of a supply surplus will now be delayed until 2027, it said.

“Global oil inventories have been drawing at record rates,” the energy adviser to major economies said in a monthly report. “With supplies still constrained, and commercial inventory buffers rapidly depleting, further demand reductions may be required in the coming months to close the gap.”

The agency said the hit to 2026 oil demand looks set to be on a comparable scale to the four largest shocks of the last 60 years, with the biggest impact falling on middle distillates like diesel, and feedstocks for petrochemicals plants in Asia. (…)

Still, the market is heading for a deeper supply shortfall than previously estimated because the war is having an even bigger impact on the flow of oil than on consumption, according to the IEA.

The agency’s latest data indicate an average global oil deficit of about 1.7 million barrels a day this year, compared with a shortfall of 1.3 million a day in last month’s report. It shows stockpiles continuing to draw in the fourth quarter, instead of a marginal increase for the same period that it previously forecast. (…)

The agency — which has characterized the crisis as a record supply disruption — lowered projections for global supply by 1.3 million barrels a day, to an annual loss of 5.7 million a day, and said it had pushed back expectations for a recovery into next year.

As a result, world supplies are on track to fall short of demand this year by about 1.75 million barrels a day, data from the report indicated. Between February and August, inventories declined at even more stark clip of 2.8 million barrels a day, the IEA said.

• Ukraine Strikes Degrade Russian Oil-Refining Industry, IEA Says

(…) “It now appears likely that the persistent drone strikes and the patchwork nature of repairs are having a cumulative negative effect and degrading the refining system,” the Paris-based agency said in a monthly oil report published Friday.

Ukraine has been attacking Russia’s energy infrastructure to reduce the nation’s ability to process and export crude and curtail the Kremlin’s revenues used to finance the full-scale invasion. In August, the Russian oil refineries were hit at least 22 times, the highest monthly total since the start of the war, according to a Bloomberg tally based on public statements from both nations.

The IEA revised down its baseline outlook for Russian oil processing over the next 18 months to around 4 million barrels a day, down 30% from levels before the invasion of Ukraine, it said.

“Risks remain that even this more cautious assessment may yet understate the problems that Russia’s refining complex faces,” according to the report. “Longer lead-times to source replacement parts and the approach of colder weather could compound the stress placed on the Russian system.”

Russia’s government introduced temporary bans on exports of most diesel, gasoline and jet fuel to bolster domestic supplies, but some regions still had to introduce fuel rationing. (…)

Drones are now hitting secondary-processing units at Russia’s refineries, which may require six to eight months to replace, according to the IEA estimates. International sanctions against the Russian energy industry are limiting its access to replacement equipment, further complicating the repairs. (…)

Gulf States Weigh Rare Meeting With Iran Next Week on Hormuz

A six-member bloc of Gulf states is weighing a meeting with Iranian officials next week to discuss the future of the Strait of Hormuz, people familiar with the matter said, in what would be the first gathering with the Islamic Republic since war erupted more than six months ago.

Oman is aiming to get foreign ministers from the Gulf Cooperation Council and Iran together on Monday in Salalah, a southern Omani city, according to people familiar with the matter, who asked not to be identified discussing sensitive matters. (…)

Even if it happens, it’s unclear if all states in the bloc, including Saudi Arabia, the United Arab Emirates, Qatar as well as Oman, will attend, the people said. (…)

This week, Qatar announced a fiscal deficit in the second quarter that was its biggest in almost a decade. Saudi Arabia’s economy contracted in the same period.

• Houthi-Saudi Clash Escalates as Rebels Push into Key Strait

(…) The Houthis have gained ground in their attempt to seize Mokha near the southern end of the Red Sea, according to several analysts, with some saying the Yemeni port city has been captured. (…)

Gaining Mokha would see it take charge of a second important port in the area and further tighten its grip on the waterway.

The seizure of Mokha “can certainly have an impact on maritime security in the region,” said Bjorn Beirens, a shipping-security consultant. “It gives them a foothold from which they could push further south in a bid to get almost full control of the strait.” (…)

Saudi Arabia’s Crown Prince Mohammed Bin Salman called President Donald Trump twice Thursday and urged him to strike the Houthis, Axios reported, citing two US officials it didn’t name. Trump declined, saying he has no plans to intervene directly against the Houthis for now. But a US official said the administration will provide Riyadh with intelligence on the Houthis and targeting data. (…)

America is losing its captive creditors The US is paying a higher cost to induce more price-sensitive investors to buy Treasuries

(…) What makes this spiral potentially explosive is that the interest rate demanded by investors to absorb this debt appears not to be a straight linear function of its growth. Instead, more debt seems to accelerate the rise in the rate demanded. 

The reason lies in who buys the debt. Nineteen years ago, 76 per cent of US Treasury bonds were held by price-insensitive investors, such as central banks, who bought them more or less reflexively according to their stable reserve-management policies. Today, they hold only 43 per cent. 

The majority is now held by price-sensitive investors, such as households and investment funds, which demand greater returns as government debt grows and inflation erodes their purchasing power.

What is driving the shift in investor profile? Central banks that have historically held large amounts of Treasury bonds — China foremost among them — have reduced their reported holdings relative to the growth in US issuance, while diversifying into gold at pace. Geopolitics has played a part.

The weaponisation of the dollar through the growth of US financial sanctions has raised the risks associated with dependence on dollar assets. Japan, meanwhile, has seen its share of the Treasury market fall from 18 per cent in 2004 to 4 per cent purely as a function of slowing reserve accumulation.

More broadly, global reserve accumulation has slowed sharply since the early 2000s, when emerging-market central banks were rapidly building their dollar stockpiles.

The upshot is that the issuance of Treasuries needed to finance US debt has been outpacing the demand of these once-reliable price-insensitive borrowers. The new private buyers pay far more attention to yield and have to be offered higher and higher rates to absorb the growing Treasury supply.

The twin problems of surging Treasury supply and stagnant foreign official demand will be exacerbated further still if new Federal Reserve chair Kevin Warsh ploughs forward with his stated ambition of reducing the central bank’s security holdings. The last episode of Fed balance-sheet reduction saw the share of Treasuries held by price-sensitive investors soar by 17 percentage points over 2022 to 2025, while the so-called term premium — the extra compensation demanded by investors to hold long-term debt — rose by 1.1 percentage points.

Given the continued increase in price-sensitive investor dominance, further Fed balance-sheet reduction could see yet sharper rises in the price of long-term US debt.

The danger is not merely an isolated bump in borrowing costs. Higher debt-service costs increase the deficit, which requires more issuance, which in turn pushes yet more supply on to price-sensitive investors, who demand still higher rates.

Even a modest sustained rise in the average interest rate has enormous fiscal consequences. The Congressional Budget Office estimated that each percentage point rise in rates above its projected path would add $3.2tn to cumulative federal interest costs over the coming decade. (…)

• Bessent and the Bonds Big talk, but he carries a very small stick

(…) So what is driving interest rates higher? It may not have much to do with policy at all. The simplest story consistent with the facts is that we’re seeing a surge in demand for funds as a result of the AI boom. We are in the midst of a surge in spending on information technology (information processing equipment and software) that is on track to be even bigger than the boom of the late 1990s:

(…) It is, however, foolish of Bessent to imagine that he can beat rising rates back by talking big while waving his tiny, tiny stick. All he’s doing is further draining his rapidly diminishing reserves of credibility.

U.S.: Growth is accelerating amid an investment boom

• After an already decent start to the year, growth appears to be accelerating in the United States, driven by a recovery in the manufacturing sector spurred by artificial intelligence.
• Manufacturing is not the only sector currently experiencing the positive impact of AI development; business investment and construction are also feeling its effects. There are also early signs of improvement in the labour market.
• Although welcome, these positive developments could complicate the Federal Reserve’s task. It is worth recalling that one of the main reasons cited by policymakers for not raising rates in recent months to counter a resurgence in inflation was the fear of a weakening job market. However, this argument is beginning to lose credibility.
• Without suggesting that the Fed’s decision on whether or not to raise its benchmark rates in the coming months will have no impact on the economy’s trajectory, we believe that changes in long-term interest rates will have more significant consequences. At current levels, borrowing costs are likely to continue weighing on the sectors most sensitive to interest rate fluctuations.
• However, since these weaknesses are largely offset by the resilience of other sectors in our scenario, growth should remain robust over the coming quarters. We forecast an identical GDP growth rate of 2.3% for both 2026 and 2027.

 

 

 

BofA Strategists Warn of Stock Volatility as Outflows Hit US

US equity funds shed $14.2 billion over the past three weeks, the largest outflow since January, BofA said, citing EPFR Global data. Inflows are slowing worldwide, with global stock funds averaging $7 billion a week over the same period, down from $52 billion in July. (…)

The BofA team warned that despite $1.5 trillion spent on AI in the past three years, there is little evidence yet of economy-wide productivity gains. In fact, total factor productivity is falling below trend, a measure highly correlated with consumer confidence over the past 50 years.

“The Little Excursion”

With Close Calls on U.S. Warships, Iran Shows New Appetite for Escalation Tehran’s forces are taking aim at the U.S. Navy in a way they haven’t done since the start of the war

• Trump’s Top Advisers Confront Possibility That Iran War Lasts Through End of Term The president still says he expects the war will end ‘immediately’ after midterm elections this fall

(…) “because they can’t hold out any longer.”  (…)

The Pentagon has planned to extend the deployment of some air-defense units in the Middle East with no firm end date, according to people familiar with the matter. The units, part of some 50,000 troops deployed to the region, are spread across the Gulf to shoot down missiles and drones.

A third Marine Expeditionary Unit is preparing to deploy to the region this fall, a U.S. official said, signaling a continuing rotation of the amphibious units that operate from a group of warships. (…)

Analysts say it makes sense that the Trump administration might be settling in for a lengthy fight.

“The U.S. naval blockade is unlikely to produce a decisive outcome in the near or even medium term, so the only realistic use of this tool would have to be predicated on plans for a long-term siege,” said Suzanne Maloney, an Iran expert and vice president for foreign policy at the Brookings Institution think tank in Washington.

“Even then its prospects for success are dubious, mainly because of the unintended consequences,” she added, such as attacks on energy and economic targets in the Gulf states. (…)

“Everyone pays, but neither leadership is yet paying enough to accept the other side’s terms.”

David’s analysis:

A protracted war enters a wider, less controlled phase. The current phase of instability is marked by geographic expansion of the theater around the two key maritime chokepoints — Hormuz and Bab el-Mandeb — the employment of improved technology on both sides, and a more chaotic exchange of blows. The Houthi offensive on the Red Sea side is fundamentally about control of their own strait and the standing threat it poses to the Saudi Red Sea route.

Real power in Iran has shifted to the IRGC, a drift of years that became an abrupt lurch with the death of Khamenei. Mojtaba Khamenei, elected Supreme Leader days after his father’s killing, has not appeared in public in six months; his decrees reorder the military command while the war is run from elsewhere.

In Samuel Finer’s terms, the Islamic Republic is moving from a palace-church polity toward a praetorian state: the institutional forms remain, but the Guard is now the decisive power, and the evidence is written into domestic policy. Implementation of the harsher 2024 veiling law was suspended by the SNSC itself, and the state tolerated open defiance of religious norms throughout the war — the security organ overriding the clerical-moral one.

The main counterweight is not theocratic but republican: the forum represented by Ghalibaf, Araghchi and Pezeshkian, who speak for the public and the war’s economic toll. Ghalibaf is himself ex-IRGC, but as negotiator he has called the memorandum a “true victory” and pressed de-escalation in Baghdad and Doha — the forum speaking, not the barracks.

Iran’s strongest legal case — temporary, reversible restrictions on transit through its own territorial waters under a self-defense justification — was overshot long ago, when Tehran declared the entire strait closed except to traffic using its designated channel, citing war. The new exclusion zone, extending from the line of the American blockade toward the strait and into the Gulf of Oman, pushes the claim well beyond any defensible limit and does not bode well for the adapted traffic pattern that had emerged.

Iran gave diplomacy a chance, and diplomacy, like war, has its risks: Tehran scored real victories, but the Oman deal remains on the table. The expanded zone is best read as an attempt to dislodge the holding, staging and transfer activity that has dominated the Gulf of Oman since April and anchored the limited success of the southern corridor.

It also places American warships directly in the crosshairs. The exclusion zone is offensive in character — an assertion of control rather than a reprisal — and together with the strikes on Al-Azraq (Jordan), it marks a break from the exchange-cycle pattern of the earlier war.

The American decision to sink rather than board or disable tankers on the Iran–China route is a significant escalation in its own right, and Washington is fielding more unmanned surface vessels while Iran deploys new missile technology.

The other war:

Bessent Dares Bond Traders to Burn Down the House

It’s not the best idea to goad markets into betting against you. (…)

After that buildup, Wednesday’s announcement that buybacks were being tripled wasn’t enough. The market responded with disappointment that he hadn’t used even more shock and awe, and pushed up the 10-year Treasury yield to 4.84%, its highest in three years. Bessent has revealed that he’s prepared to intervene, and it was predictable that the market would respond by testing just how far he’d go.

It will be interesting to see what Bessent does next, but the day’s hectic events also highlight another conundrum. Bond yields have been rising steadily without tipping over the stock market. Even Wednesday, the S&P 500 clawed back much of its fall. Could there be a tipping point ahead at which higher yields finally bring down stocks, and could yields hit 5% for the 10-year Treasury? (…)

The key reason investors feel able to look through rising bond yields is, inevitably, the AI buildout. That is seen as an external factor that counteracts the strong macroeconomic headwinds. To quote Freya Beamish and Davide Oneglia of TS Lombard:

When tech companies are chasing the notion of infinite demand, it is quite hard to slow them down with a few basis points, particularly as the process of leveraging up has only just begun in big tech, though there are some clear front-runners. While the financing loop works, it is self-reinforcing.

Spectacular earnings growth has so far more than counterbalanced the tighter multiples that have come with the shift in the bond market. And investors seem convinced that it can continue. The latest survey of global asset allocators by Absolute Strategy Research finds comfortable majorities believing both that yields will continue to rise and that the stock market will be higher a year from now.

Earnings growth is seen as making stocks immune to a rising cost of money, although Absolute Strategy’s David Bowers cautions that “some investors are viewing this corporate earnings/margins story in isolation” and underestimating the effects that AI investment could have in raising interest rates and inflation.

If any stock market is particularly at risk from rising bond yields, it is the US. That’s because a huge chunk of American companies’ value is tied up in future earnings. These will be automatically rendered cheaper by higher bond yields, as they would have to be discounted at a higher rate. (…)

Nobody care of these wars, as John Authers shows!

(…) the stock market now believes it can live with higher oil. For the first month of the Iran conflict, Brent and the S&P 500 acted as mirror images, with stocks gaining only when Brent fell. That relationship is over. Global stocks are now 14% above their level when oil first hit $100::

As this simple model from Absolute Strategy Research illustrates, if gasoline stays where it is for the next six months, US headline inflation should rise to 4.9% — a level that would more or less force the Federal Reserve to raise rates:

This seems truly horrendous news. Higher oil prices act like a tax hike to brake growth, and also require rate increases that weigh on growth. But somehow markets aren’t seeing it that way. One-year inflation breakevens are barely half their level when the $100 mark was first breached back in March:

Prediction markets reflect that hopes of a reopening any time this year are draining away, and oil futures disprove the positive assumptions of traders closest to the action.

“K” is the key. Consumers were first but the corporate world and the stock market are also about to turn K-shaped, as rising input and financial costs inevitably seep into non-AI sensitive P&Ls and P/E multiples.

Credit markets are already in K-shape mode:

More from John Authers’ column:

Almost a year after JPMorgan’s Jamie Dimon famously complained of cockroach infestation, there are signs of financial distress in rising defaults. Fitch’s broad measure of defaults has shot up to 6% from 5% in 2024 as publicly traded business development companies’ also lost value.
It remains unclear how the credit cycle might evolve as more debt comes to market. Credit investors are set to be offered more than $138 billion of buyout debt in the coming months, with US issuance at its highest level since 2007 and European issuance at its highest since 2021. New supply is already visible in real time. At least seven companies began loan repricing marketing this week.

Private credit has funded 82% of buyout deals so far in 2026, up from 61% in 2019. The question now is whether it can keep absorbing such a large share of the LBO market as debt supply swells. (…)

Another risk is that the portion of the $138 billion pipeline for debt where banks and private-credit firms share exposure could come under pressure as more companies struggle to repay their debts. Steve Caprio at Deutsche Bank points out that over 80% of B-rated debt sits in floating-rate leveraged loans or private credit, which leaves those borrowers in a rough spot with a big wall of maturities coming due.

Direct lending loans rarely trade, and their prices are hard to pin down, so weakening credits can go unnoticed for a while. If the markdowns arrive all at once, lenders will finally have to put a number on the damage. It’s still too soon to declare that the storm — or the cockroach infestation — is over.

Seems like a good time to go fishing…

Can Trump Really Pay Every Adult American a $5,000 ‘Dividend’?

During his keynote speech at the first Republican midterm convention, US President Donald Trump made an extraordinary announcement: He said he would pay every American adult a $5,000 “Trump dividend” if the Republicans retain control of both chambers of Congress after the November elections.

Trump said the dividend would have to be spent in the US: “We don’t want you going to Canada to spend the money, we don’t want you going to China, to Germany. You gotta spend the money in the United States of America.” (…)

If Trump paid $5,000 to every US adult citizen, the plan would cost around $1.2 trillion in total. (…)

Trump provided no information on how he would pay for the initiative. Unless the government raised taxes, cut spending elsewhere or found enough new revenue to cover the payments, the government would likely have to fund it with borrowing.

Last year, Trump floated the idea of mailing $2,000 “dividend” payments to low- and middle-income earning Americans funded by revenue from his sweeping tariffs on US goods imports, but the proposal never got off the ground. (…)

A cash payment program would require approval from Congress. Fellow Republicans previously rejected Trump’s tariff “dividend” proposal, and any legislation offering direct payments to voters would face a steep path to becoming law. (…)

Even if Republicans retain control of Congress, Mondschein said, the government’s already significant debt load and other competing spending priorities meant it would be hard to get support for direct payments to citizens. (…)

Mondschein said he would expect the inflationary impact of giving $5,000 to every adult to be “pretty significant”. (…)

Axios has this other one today:

Trump plans $500 Obamacare rebates

The Trump administration plans to send $500 rebate checks to as many as 1 million people who it says were overcharged for coverage under Obamacare, Axios’ Marc Caputo has learned.

The direct-deposit payment would be sent to people in 30 states before the Nov. 3 midterm election, as President Trump touts savings from his tax-cut legislation and prescription drug plan.

Trump’s ways of tackling the affordability issue, oblivious to any collateral issues.

Like how rising bond yields can push mortgage rates up 75bps since the war with Iran began.

Redfin’s data show that the median sale price is up 4.7% since the war started. Unsurprisingly, active listings are up 7%. But sales are down 5.9% YoY at the end of August.