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Bessent Tells Bond Vigilantes: "I Am The House"
I. Bessent Intervening On August 19, Treasury Secretary Scott Bessent announced an expansion of the Treasury's buyback program in the long end of the yield curve. Today, the Treasury unveiled a $6 billion buyback operation in the 10- to 20-year sector, with Bessent stating that the goal is to ensure "that there is not a bad, big adverse outcome" in the Treasury market. However, the market remained unconvinced, with the 10-year Treasury yield rising to 4.85%, its highest level since November 2023. Investors remain focused on the fundamentals supporting elevated long-term rates, including robust consumer spending, an AI-led capital spending boom, huge federal deficits, and inflation stuck above the Fed's target. Nevertheless, we continue to expect the 10-year yield to remain in the back-to-normal 4.00%-5.00% range (chart). If so, Bessent may be overreacting because he fears more than we do that the Bond Vigilantes will drive yields above 5.00%. Bessent is talking loudly and carrying a big stick. The "Bessent Put" raises the odds that 5.00% won't be breached, making bonds at these levels more attractive. On July 31, Bessent also joined Japan in supporting the yen after the currency plunged to a 40-year low against the dollar. Japan still spent a record $98.6 billion defending the currency between July 30 and August 26, partly financed through Treasury sales. The yen has since rebounded more than 6% from its late-July low (chart). In our view, the interventions helped establish a floor under the currency, while the subsequent rally reflected a hawkish repricing of BOJ policy and an unwind of short-yen carry trades. A big stick often works. The broader takeaway is that Bessent is willing to intervene when he believes markets have drifted too far from fundamentals. He has framed this strategy as leveraging "asymmetric information" to force speculators to reassess their views. Yesterday, in a speech at Southern Methodist University, he declared: "I am the house now." Referring to coordination with Japan, he added, "When we intervene with the Japanese yen, I have pretty good insight into what the Bank of Japan is going to do ... Bet against me if you want." Meanwhile, the latest economic data show that despite the recent rise in bond yields and the rebound in oil prices, the labor market is improving and consumers show no sign of retrenching. II. Consumers Consuming The latest labor market data suggest the US economy continues to operate at full employment. According to ADP, private employers added an average of 12,500 jobs per week in the four weeks ending August 22, equivalent to a monthly pace of 50,000 jobs (chart). We think that is sufficient to keep the unemployment rate around 4.0%. The latest NFIB survey shows that 17% of small businesses planned to increase employment in August, above the historical average of 11% (chart). Job openings remained 11 points above their historical average. Hiring likely remains constrained by a shortage of skilled workers, with 47% of firms reporting no qualified applicants for an open position, well above the historical average of 37%. Another upbeat sign for overall payroll employment is that the y/y growth rate of temporary help employment turned slightly positive during August for the first time since October 2022 (chart). Despite elevated energy prices, consumers continue to spend at a solid pace. Redbook same-store retail sales rose by 8.3% y/y during the week of September 04, well above the 2025 average of 5.8% (chart). III. Inflation Inflating While the labor market data suggest the Fed has no reason to worry about the full-employment side of its dual mandate, the inflation picture remains unsettling. Oil prices surged above $100 per barrel today for the first time since July as the US-Iran conflict re-escalates. Higher oil prices will boost headline inflation and increase the risk that temporary supply shocks become more persistent inflationary pressures, strengthening the case for the Fed to raise the federal funds rate next week. Diesel prices have also continued to surge, reflecting tightening global distillate supplies and refinery disruptions (chart). Because diesel fuels much of the transportation, agricultural, and industrial sectors, higher diesel costs tend to raise prices across the broader economy. Grain prices are also spiking amid Black Sea export disruptions, extreme weather-related crop losses, and rising energy and transportation costs (chart). This is likely to filter through to consumer food prices with a lag. On a more encouraging note, the latest NFIB survey shows that the percentage of firms planning to raise prices was 28% in August, the lowest since April (chart). However, the overall data suggest inflation remains a troublesome issue for the Fed.
ECONOMIC WEEK AHEAD: September 7-11
August payroll employment jumped 162,000, a sharp reversal from July's decline, while the August unemployment rate held steady at 4.1%. Those numbers reinforce our view that the labor market remains solid, so the Fed has little reason to delay a rate hike. The federal funds futures market now prices a 59% chance of a hike at the September 15-16 FOMC meeting, up from roughly 50/50 before the employment report, with room to move either way once fresh data lands. This week, attention turns to inflation, with August's PPI (Thu) and CPI (Fri) coming out. Overseas, China's CPI and PPI (Wed) and the European Central Bank's (ECB) meeting (Thu) top the international agenda. We will also see earnings reports from Oracle and Adobe (Thu). Here's more: (1) Inflation. The Cleveland Fed Inflation Nowcasting model projects August CPI (Fri) rose 0.36% m/m and 3.38% y/y, unchanged from July's 3.4% (chart). The model's core CPI projection eases to 0.20% m/m and 2.38% y/y, down from 2.5% in July. A mild print this week could pull the odds of a September Fed rate hike back down. An upside surprise would practically guarantee a majority vote to hike at the FOMC's September 15-16 meeting. Rising high-tech component costs continue working through the pipeline. PPI Electronic Components & Accessories is up 28.0% y/y, outpacing CPI Computer Software & Accessories, up 21.2% (chart). The gap suggests plenty of upstream pressure still has room to work through to the consumer level. Record diesel fuel prices are also putting upward pressure on inflation. Headline PPI Final Demand cooled to 4.7% y/y in July from 5.5% in June (chart). The underlying trend remains sticky, though. The measure excluding trade services was 5.2%, and the core PPI came in at 4.7%. (2) Unemployment Claims. Initial claims was 206,000 for the week ending August 28, with the four-week average at 207,300 (chart). That's consistent with Friday's employment report, which showed the unemployment rate holding at 4.1% in August alongside broad-based job growth, with no signs of rising layoffs. (3) Global. The ECB meets Thursday, with markets treating a hike to 2.50% from 2.25% as a virtual certainty (chart). More interesting will be what ECB President Christine Lagarde signals for October’s meeting; the odds of a follow-up hike then sit at just 31.5%. China's PPI climbed to 3.5% y/y in July, its firmest reading in years, driven by mining and raw materials prices (up 16.4% and 6.1% y/y, respectively) amid global commodity price pressures (chart). The CPI has barely moved, at 0.5%, so the reflation so far looks like a factory-gate story rather than a consumer one. August's data (Wed) are expected to show a small pickup in both measures.
US SECTORS CALL: Financials, Real Estate & Utilities
Energy (OW) led the S&P 500 sectors again last week, up 2.3% as the price of Brent crude rose back above $95 a barrel. The sector is now up 41.6% ytd, the best of all sectors (chart). Information Technology (MW) rose 1.1% wtd, with Dell stealing the headlines. The performances of the rate-sensitive sectors were mixed: Utilities (OW) rose 0.7%, while Real Estate (UW) fell 1.3%. Financials (OW) was unchanged. Here's more on Real Estate, Utilities, and Financials: (1) Real Estate. Real Estate trades at a forward P/E of 35.3, up from 35.0 at the end of 2025. The S&P 500’s forward P/E fell from 22.2 to 19.6 over the same period, and Information Technology’s fell from 26.5 to 21.0 (chart). Real Estate is one of only three sectors that investors have revalued higher this year, and it’s the most expensive sector in the index by a wide margin. Analysts expect the sector's earnings to grow 15.8% this year and 6.6% next (chart). The Data Center REITs industry leads the sector with a 30.0% ytd gain (chart). However, industry analysts expect long-term earnings growth (LTEG) of 1.6%, with short-term expected growth (STEG) of just 4.8%. Yet it trades at 60.7 times forward earnings. Local opposition blocked or delayed at least 75 US data center projects worth roughly $130 billion in Q1, according to Data Center Watch. Charlotte has since passed a 150-day moratorium on new construction, the largest US city to do so, with more state bills pending ahead of the midterms. Prices have started to reflect it. The RACK data center supply chain ETF has fallen 10% from its June peak. Estimates for the REITs have not been marked down at all; and at 60.7 times earnings, nothing is priced for construction delays. We are retaining our underweight rating on Real Estate. (2) Utilities. The Utilities sector has gone nowhere this year, and its profitability has never been better. The sector is up 0.3% ytd, ahead of only Consumer Discretionary, while its forward profit margin has risen to 15.1% from 8.2% in 2012. It trades at 16.7 times forward earnings against 19.5 for the index (chart). The sector's growth is concentrated. Analysts expect Utilities earnings to grow 11.3% this year, but Independent Power Producers’ growth is forecast at 90.2% against 13.4% for Gas Utilities, 8.5% for Electric, 7.9% for Multi-Utilities, and 6.8% for Water (chart). The rest of the sector is expected to grow at rates in the single digits. We are retaining our overweight rating on Utilities. (3) Financials. Forward earnings for the Financials sector has risen 11.7% ytd while the forward P/E has fallen 6.0%, leaving the price up 5.8% (chart). Earnings has risen every month this year. The multiple has not recovered its January level. That leaves the sector trading at 15.3 times forward earnings against 19.5 for the index, a discount it has held since 2010 (chart). It produces 15.7% of the S&P 500's forward earnings on just 12.4% of the index's market capitalization. Analysts expect Regional Bank earnings to grow 15.9% this year and 12.9% next, while they see Diversified Banks earnings growth shrinking from 22.5% this year to 7.6% next year (chart). Regional Banks trade at 10.4 times forward earnings against 12.8 for Diversified. The cheaper industry has more durable growth. The sector's performance spread is wide. Investment Banking & Brokerage leads at 17.1% ytd, and Life & Health Insurance is close behind at 15.4%, while Regional Banks is up 9.5% (chart). We are retaining our overweight rating on Financials.
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