Warsh Faces Intensifying Pressure to Raise Rates After Hot CPI

Underlying inflation rose more than expected in August, as the core consumer price index, which excludes food and energy costs, increased 0.3% from a month earlier, according to Bureau of Labor Statistics data out Friday. The report bolsters the argument already embraced by several policymakers that the Fed must act to curb price pressures after more than five years of elevated inflation.

The probability of a hike at the Fed’s Sept. 15-16 gathering, based on federal funds futures, jumped to above 85%, up from about 70% on Thursday. They also expected a second rate hike by December. (…)

“Now the question is not whether they hike, it’s how much they need to hike to contain this inflation.” (…)

The University of Michigan’s latest survey showed one-year inflation expectations jumped in early September to 4.6% from 4% a month earlier. And for the first time since 2023, a majority of consumers expect interest rates to rise over the next 12 months. (…)

Some CPI stats:

• Headline rose 0.4% MoM and is flat in the last 3 months. +3.4% YoY.
• Core rose 0.3% MoM after 0% in June and +0.2% in July. +2.4% YoY but 3.0% a.r. in the last 2 months.
• Core goods rose 0.1% MoM, pretty flat YtD. +0.7% YoY
• Core services rose 0.3% MoM after 0% in June and +0.2% in July. +3.0% YoY.

Saudi Arabia Shuts Down Pipeline That Was a Crucial Hormuz Bypass The kingdom said drones fired from Iraq damaged the East-West pipeline, which can carry up to 7 million barrels of oil a day

(…) The crucial East-West pipeline can carry up to 7 million barrels of crude a day 750 miles from Saudi Arabia’s oil-producing heartland on the Persian Gulf to the port of Yanbu on the Red Sea. From there, the Saudis had been able to ship millions of barrels of oil to customers around the world.

The Saudi Foreign Ministry said several drones caused injuries and damage that the kingdom was repairing. It said the drones were fired from Iraq, where authorities have struggled to control Iran-backed militias that have repeatedly targeted Saudi infrastructure. Saudi Arabia, with the U.S., carried out rare airstrikes earlier this year against Iraqi militias, but this time, the Foreign Ministry said it would refrain from retaliating at Baghdad’s request. (…)

Attacks earlier this year damaged a pumping station and reduced the line’s capacity by about 700,000 barrels a day. The country restored the pipeline to its full capacity within days. Thursday’s attacks targeted several pumping stations, the Saudi official said. (…)

The kingdom’s crude supply fell 2.3 million barrels a day to 6 million barrels a day in August, the Paris-based IEA said in a report Friday. Saudi Arabia produced around 9.4 million barrels a day on average last year.

The disruptions are adding pressure to the Saudi economy and complicating Crown Prince Mohammed bin Salman’s Vision 2030 plans, which rely on sustained state spending to diversify the economy and finance large-scale infrastructure projects.

Saudi gross domestic product contracted 4.7% from a year earlier in the second quarter, as the disruption to oil exports hammered activity. The kingdom’s budget deficit, at the equivalent of $42.7 billion in the first half, is already running close to the shortfall it had budgeted for the entire year.

The supply crunch is live:

• The IEA last week: ““With a refining system stretched to capacity, there appear to be limited options available to avert a further tightening of supplies and higher prices in the coming months.”
• “Costco in now rationing motor oil” as its Kirkland-Signature full-synthetic is now selling for $58, up 93% pre-war. Some stores are imposing a two-per-customer, per-week limit. (The Drive)
• “(…) one measure keeps bubbling up as a far-fetched, yet not impossible, idea: banning American exports of key refined products including diesel and/or gasoline.

So, Trump cut oil supply to the world and would now cut US exports…

Trump Says Open to China Building Cars in US as Xi Visit Looms

President Donald Trump suggested he might be willing to allow a Chinese car company to build electric vehicles in the US if it did so with American workers, while pledging to maintain the effective US ban on imported vehicles from China. (…)

“Now, if China wanted to come in, and open a plant to build their cars here, I’d be okay with it — Japan does it — but they hire our people,” Trump said. “The big thing is they hire our people, they use our people.” (…)

Electric vehicles?

Trump Ally Says US Underestimates China Tech Sector After Visits

US Senator Steve Daines said the US may be misjudging the sophistication of China’s technology sector.

The Montana Republican — an ally of President Donald Trump — traveled to the Chinese cities Hangzhou and Guangzhou on what he described as a “fact finding mission,” as well as to prepare for the summit between Trump and Chinese President Xi Jinping later this month.

“I think we’re underestimating both the quality and the scale of the tech innovation ecosystem in China,” Daines said in a phone interview with Bloomberg on Friday.

“It’s important that that we in the United States have a better awareness and understanding, because we’re going to have to and are competing with some of the very best and brightest in the world,” he said. (…)

Daines worked as an intermediary during the last trade war between the two nations during the first Trump administration, holding high-level meetings in 2019 with officials in Beijing, including with Xi’s top negotiator at the time, Liu He.

He’s also a rare US politician with experience in China, having worked as an executive for Procter & Gamble Co. in China and Hong Kong. (…)

Evidence of increasing AI capabilities: GPT-6 Astra and the ARC Prize Foundation

The Millennium Math Prize allegedly solved by OpenAI got a lot of press this week, but capabilities of OpenAI Astra 6 are just as interesting.

Francois Chollet, a French computer scientist who worked at Google, has been a notorious AI skeptic. The Atlantic in April 2025 cited him in an article titled “The Man Out To Prove How Dumb AI Still Is”. In 2019, Chollet created the Abstraction and Reasoning Corpus for Artificial General Intelligence (ARC-AGI), an exam designed to show the gulf between AI model memorized answers and the fluid intelligence that people have.

The exam assesses the ability to quickly acquire skills and solve unfamiliar problems from first principles, rather than just memorizing enormous amounts of training data and regurgitating information. GPT-
3 scored a zero on ARC-AGI-1 (humans score 60%-70%), and OpenAI o1 scored just 3% on ARC-AGI-2.

In March 2026, Chollet and the ARC Prize Foundation released ARC-AGI-3, a harder set of problems that shifted from static to dynamic interactive video challenges. As shown below, GPT-6 Astra scored 62% with a standard harness and 99% with a Provider Adapter harness (which uses OpenAI’s context management features to preserve and reuse the model’s reasoning between interactions).

Astra figured out how to represent game mechanics as logical rules and developed its own domain-specific language shorthand to track its state and plan actions. Astra also needed fewer actions than a human baseline to execute the solutions, which is notable for an industry known for its brute force less efficient solving methods.

Following the Astra release, Chollet was asked whether he still thinks ~2030 is on track for true AGI. His answer: “Sooner, given progress is happening faster than I expected.” While Millennium Math and ARC-AGI prizes involve abstract mathematical reasoning, there are applications in biology (drug discovery), cybersecurity, chip design and defense that have obvious parallels.

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.