The Week in Markets: Rate-Hike Odds Tumble, but Cooling Inflation Cannot Rescue Long Bonds

Market recap

The US dollar index was choppy over the week. Better inflation data pushed markets to reduce expectations for a Federal Reserve rate increase and initially weighed on the dollar, while haven demand generated by tensions in the Middle East limited the decline. An unexpected monthly contraction in US retail sales accelerated Friday's fall. The index closed at 99.64 and was almost unchanged for the week.

Spot gold extended its advance before pulling back from high levels. It approached a two-month high in midweek, then retreated as investors took profits. Gold traded close to $4,450 an ounce at its peak, fell back toward $4,320 and recovered on Friday to close at $4,375.59, its second consecutive weekly gain.

International oil prices surged and then consolidated. US-Iran tensions and risks to shipping through the Strait of Hormuz drove a sharp rise early in the week. Prices later eased after a large increase in US crude inventories and demand forecast cuts by OPEC and the International Energy Agency, returning attention to ample supply and slower demand.

Among other major currencies, the euro declined in volatile trading as investors considered the European Central Bank's remaining policy room. Sterling drew support from 0.4% UK second-quarter GDP growth, although expectations of an economic slowdown capped gains. The yen weakened, with dollar-yen again above 159 as markets watched intervention risk and the Bank of Japan's rate path. Improved risk appetite supported the Australian dollar, but commodity-price volatility remained a drag.

US equities edged higher. The S&P 500 and Nasdaq reached interim highs; the Dow lost 0.56% for the week, while the S&P 500 gained 0.36% and the Nasdaq 0.14%. The dominant trade shifted from defensive positioning toward lower-rate expectations and delivered AI earnings, putting technology and chip stocks back in the lead.

South Korea's KOSPI rallied 11.5%, ending seven consecutive weekly declines and returning to a technical bull market.

Investment-bank views

Goldman Sachs said the Fed may not raise rates this year and that investors need not leave the market because of policy uncertainty. JPMorgan said inflation should ease gradually and saw no need for a Fed increase.

UBS said gold could reach $5,000 an ounce by the first half of 2027 and set a $5,200 target for the end of June. CICC recommended remaining overweight gold for its medium- and long-term allocation value. CITIC Securities said the area around $4,000 was probably close to the bottom of the current correction.

JPMorgan raised its year-end S&P 500 target to 8,000, citing better-than-expected second-quarter earnings in the US and Europe. Barclays also said S&P 500 companies had substantially exceeded earnings expectations. Bank of America said its sentiment gauge was at its most bullish since 2021 and advised investors to reduce risk exposure.

Goldman Sachs said Japan's reserves, measured in the trillions of dollars, leave room for repeated currency intervention. JPMorgan said the US Treasury may avoid changing its debt-issuance plan because of the midterm elections.

China Securities said AI remained the main medium-term growth theme, although expensive computing-hardware names were beginning to diverge as capital spread toward AI applications. CITIC Securities said AI and technology growth remained core investment themes.

Nine developments that defined the week

1. US CPI and PPI cool; traders no longer fully price a rate increase this year

July CPI and PPI data showed inflation continuing to cool and sharply reduced expectations of a September Fed rate increase. Fed funds futures put the probability at about 35%, and rates traders no longer fully priced an increase this year.

Headline consumer prices rose 0.1% month on month and 3.4% year on year, down from 3.5% in June. Core CPI, excluding food and energy, rose 0.2% on the month and 2.5% on the year, also slower than in June.

Producer prices were unchanged in July, below expectations for a 0.2% increase, while annual inflation slowed to 4.7% from 5.5% in June. Goods prices fell 0.7% and services prices rose 0.2%.

The benign releases encouraged markets to reassess the Fed's room to move, but officials remained divided. Some argued that inflation was still above target and required continued restrictive pressure.

Cleveland Fed President Beth Hammack said the central bank should raise rates immediately to curb persistent inflation. Businesses still showed strong willingness to borrow and expand, she said, and resilient demand could push prices higher, requiring sufficiently restrictive policy.

Richmond Fed President Thomas Barkin was more cautious, calling the need for another increase an “open question.” Changes in supply and labour demand caused by tariffs, oil and AI investment could fade over time, he said, and current rates might already be restrictive enough. The Fed could still act if supply constraints or inflation pressures lasted longer.

Chicago Fed President Austan Goolsbee said the latest inflation data were “a little better.” If the effects of tariffs and the oil-price increase caused by the US-Iran conflict faded, inflation could return to a “golden path” toward 2%. He also said inflation near 3% remained too high and warranted further observation.

The debate over Fed independence also intensified. The Trump administration renewed its attempt to remove Fed Governor Lisa Cook, seeking her response to earlier mortgage-related allegations. Cook denied wrongdoing. The Supreme Court had temporarily blocked her removal in a 5-4 decision, but the dispute continued ahead of the September FOMC meeting.

2. Thirty-year Treasury auction yield reaches its highest since 2001

Cooling inflation eased pressure on Fed policy, but a widening fiscal deficit, a larger debt stock and heavier Treasury supply continued to limit any decline in long-term yields.

The Treasury sold $25 billion of 30-year bonds at a 5.22% yield, the highest since 2001. Investors still bought the issue, but demanded a higher return for holding long-dated US government debt, indicating a larger premium for long-term fiscal risk.

The federal budget deficit reached $432 billion in July of fiscal 2026, the largest ever for that month and the biggest monthly shortfall since March 2021. The cumulative deficit for the first ten months of the fiscal year reached $1.799 trillion, already above the $1.775 trillion recorded for all of fiscal 2025.

The increase came mainly from spending, which rose 22% from a year earlier to $766 billion. Revenue fell 1% to $334 billion. Even after adjusting for some benefit payments brought forward, the deficit was $333 billion, up 18%.

As debt grows, so does the government's interest bill. Investors fear additional issuance will force the market to demand higher yields. The Treasury market is consequently split: expectations for Fed cuts weigh on short-end yields, while fiscal risk supports the long end. Reuters described the emerging trade as buying short maturities and selling long ones.

3. Iran escalates its warnings, the US increases pressure and fighting in Yemen intensifies

The Middle East remained focused on the US-Iran confrontation, security in the Strait of Hormuz and fighting in Yemen. Both Washington and Tehran maintained hard lines, risk to regional shipping and energy facilities increased, and diplomatic mediation continued.

President Donald Trump said that after defeating Iran he would declare the Strait of Hormuz “US territory.” He called the blockade of Iran “unstoppable” and a “wall of steel,” said the US was fully prepared and would not allow Iran to obtain nuclear weapons, and said consumers would pay a “very small price” in higher gasoline costs. He said he did not care about damage to Iran's economy before the midterm elections and added that the US had “made a lot of money” from tariffs.

An adviser to Iran's supreme leader said the conflict could escalate if Iran's conditions were not met. Vice-President JD Vance had said the confrontation would end with the US in a position of strength and that Washington retained several policy tools. Treasury Secretary Scott Bessent said unprecedented economic-isolation measures against Iran would be announced the following week, complementing the US naval blockade.

Iran said no ship could pass safely through the Strait without authorisation. The Islamic Revolutionary Guard Corps said the Strait was closed and under Iran's full control, and that battlefield conditions should guide any judgment of the situation. Trump had previously said the US had completed mine-clearing operations and that the Strait was open and controlled by the US.

Maritime risk spread toward the Red Sea and Bab el-Mandeb. Abu Dhabi National Oil Company said two vessels were attacked while passing through Hormuz on Thursday, with no casualties reported. Yemen's Houthi-controlled Saba news agency said the group used two drones to attack a Saudi Aramco refinery in Jizan, and warned that a full Saudi assault on Yemen would bring strikes on oilfields, airports, electricity and water infrastructure.

Indirect US-Iran communication continued. Pakistan said it would keep promoting direct and indirect diplomatic channels and seek an extension of the 60-day ceasefire. Iran said it was exchanging messages through intermediaries rather than negotiating directly. An Iranian parliamentary official said the nuclear issue remained the central obstacle and future talks would be very difficult.

Military pressure rose at the same time. The IRGC warned that renewed threats to Iran could put US and non-US facilities, energy routes and global infrastructure at risk. The US strengthened its Middle East deployment, sending the USS George Washington to relieve forces in the region and building its first multinational drone task force.

4. Yen approaches 160 again as markets bet on whether the Bank of Japan will act

The effect of joint US-Japan currency intervention faded and dollar-yen again tested the key 160 level, while expectations of a Bank of Japan rate increase grew.

The 160 level has long been treated as an important policy marker. Japan's government and central bank have acted during earlier periods of rapid yen depreciation, so another break could bring renewed intervention pressure. Most market participants, however, believe intervention can only influence short-term moves and cannot resolve the structural forces weighing on the currency.

The large US-Japan rate gap still encourages investors to borrow low-yielding yen and buy higher-yielding dollar assets. Unless Japanese monetary policy changes materially, that carry trade could put the yen under pressure again.

Japan's corporate goods price index rose 7.2% in July from a year earlier, pointing to persistent business-cost pressure. Reuters said growth in AI-related demand, higher metals prices and energy costs drove wholesale inflation. Non-ferrous metal prices rose 40.6% and chemical prices 12.9%, while yen depreciation lifted the yen-denominated import-price index by 29.1%.

The cost pressure strengthened expectations for further BOJ tightening. Traders increased bets on a September move, arguing that a higher policy rate could ease the import-cost impact of a weaker yen. Foreign media cited three people familiar with internal thinking as saying the BOJ could raise rates as soon as September and later consider a pace faster than its current roughly two increases a year.

5. Nvidia backs a $500 billion AI financing platform as credit markets examine the risk

Nvidia joined Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, KKR and other large financial institutions in planning an independent financing platform intended to mobilise more than $500 billion of third-party capital for AI data centres and computing resources.

The central change is an attempt to turn AI infrastructure from a conventional hardware purchase into an investable asset similar to other infrastructure. Nvidia chief executive Jensen Huang said AI computing capacity was becoming a new asset class, akin to electricity, transport and communications infrastructure.

The platform would finance data centres, GPUs and computing capacity for AI laboratories, corporate customers and cloud providers. Nvidia wants long-term capital to expand the reach of its GPU ecosystem while reducing the financial burden on customers deploying AI infrastructure.

Credit markets are reassessing the risks. AI infrastructure expansion has largely relied on technology companies' cash flows and capital expenditure, but debt financing, private credit and securitisation are playing a larger role. The central question is whether financed data centres can generate adequate returns and service their debt if growth in AI computing demand disappoints.

Investors had also questioned whether Nvidia might become deeply involved through guarantees, creating a loop of chip sales, financing support and further purchases. Excessive credit exposure could create additional pressure if AI investment returns weakened.

Huang later said Nvidia was not the main source of the $500 billion. Its support for any single project would be no more than about 25%, would be supplementary, and would not replace financial institutions' own risk assessment and underwriting. That reassured investors. Reports said Nvidia's long-term bond spreads narrowed and the price of its five-year credit-default swaps declined, indicating that markets saw less direct exposure than initially feared.

6. Korean equities surge more than 20% in two weeks and return to a technical bull market

The KOSPI rebounded rapidly after a sharp correction in late July. A roughly 3.6% gain on Thursday took its recovery from the July 30 low to almost 22%, returning the index to a technical bull market.

The earlier decline from the year's high was driven by a global technology-stock correction, concern about returns on AI investment and semiconductor selling. Attention returned this week to the AI-infrastructure investment cycle as large US technology companies continued to expand data-centre spending, encouraging investors to rebuild exposure to the AI hardware supply chain.

South Korea, a global centre for memory-chip production, became a major destination for returning capital. Samsung Electronics and SK Hynix benefit from rising demand for high-bandwidth memory and advanced chips used in AI servers, making them central to the rebound. Samsung gained about 5% and SK Hynix about 6% on Thursday, while semiconductor ETF flows showed growing exposure to assets linked to both companies.

The government announced a semiconductor support plan including a fund of roughly 5 trillion won for materials, components, equipment and fabless chip-design companies, plus another 5 trillion won in trade financing for supply-chain businesses. It also plans large chip-industry parks and infrastructure investment to relieve constraints in electricity and water and help Samsung, SK Hynix and suppliers expand capacity.

Confidence has not fully recovered. Reuters data showed Korean retail investors increased purchases of US equities in July, sending some capital abroad. Regulators also tightened restrictions on high-risk leveraged ETFs, requiring investors to complete educational courses before trading some products.

7. Anthropic seeks a $2 trillion IPO valuation while OpenAI accelerates commercialisation amid management churn

The Financial Times reported that some investors expected Anthropic's planned IPO could value the company at $2 trillion, above SpaceX's previous record. Optimism reflects rapid demand growth for Claude models and rising adoption by corporate customers.

Investor models put Anthropic's annualised revenue at $100 billion to $120 billion by the end of 2026, a sharp increase. The valuation rests on the view that AI-model developers are changing from research companies into high-growth software platforms.

Risks remain. Anthropic faces competition from OpenAI, Google and others, as well as regulation, model costs and customers' sensitivity to price. With AI-infrastructure spending still climbing, public-market investors will focus on whether revenue growth can become durable profit.

At OpenAI, attention centred on management changes during IPO preparations. Reports said former Wiz president and chief operating officer Dali Rajic would replace Denise Dresser as chief revenue officer. The move came only days after another senior departure and prompted questions about internal stability.

OpenAI is strengthening enterprise sales because commercial-customer revenue will support its future valuation. Dresser drove growth in enterprise customers and the company's commercial strategy has become increasingly important; the replacement suggests OpenAI wants to reinforce sales and IPO preparation. Separate reports put annualised revenue above $40 billion, driven by ChatGPT subscriptions, enterprise products and developer tools.

8. From drones to Canadian goods, Trump advances tariffs on three fronts

The Trump administration continued using tariffs as a tool of trade, industrial and national-security policy. Drone imports, North American trade talks and legal disputes over tariff authority were the week's main US trade issues.

The administration announced new tariffs on imported drones and related components, citing national security and an intention to reduce reliance on overseas supply chains. Some sensitive large or advanced drones will face a 100% ad valorem tariff and smaller drones 25%. Drones and parts from the EU, Japan, South Korea and Switzerland will face 15%, while UK products will face 10%. The measures are expected to take effect 21 days after signing, with a longer transition for some non-sensitive parts.

The US and Canada continued talks over new arrangements. Trump had proposed a 50% tariff on some Canadian goods and set August 19 as the next deadline. Canada sought concessions to prevent escalation and officials on both sides said they wanted an agreement before the deadline. Talks covered market access, automobiles and steel; Canada described progress as positive, while the US sought to avoid further harm to bilateral economic relations.

Trump's broader tariff programme still faces legal challenges. The US Court of International Trade supported the decision to end tariff exemptions for some low-value imports, finding that the president had authority under relevant emergency economic powers. It was seen as an important judicial victory for the policy.

The dispute over refunds was unresolved. The government is appealing a ruling that requires some tariffs to be returned to companies. US Customs had already refunded about $100 billion to some businesses, while others continued to seek additional repayments.

9. “All-glass iPhone” reports diverge: cancelled or delayed?

Conflicting reports emerged about Apple's next major design upgrade, an “all-glass iPhone” expected to mark the 20th anniversary of the device. Jefferies said manufacturing problems might have led to cancellation, while Bloomberg's Mark Gurman, known for debunking Apple rumours, said development was continuing.

Jefferies analyst Edison Lee said supply-chain research indicated that the 2027 project may have been cancelled because manufacturing yields were insufficient. The anniversary model was expected to support Apple's move upmarket and could have cost more than $2,000. Cancellation would reduce Apple's scope to raise the iPhone's average selling price through hardware innovation.

Jefferies downgraded Apple to underperform and cut its price target to $263.66. With smartphone innovation slowing, the market believes Apple needs a new premium form factor to support profit growth.

Gurman said Apple had not abandoned the anniversary model and that its glass-oriented design remained in development for a possible 2027 launch. The version under test may not eliminate metal entirely, instead combining front and rear glass with a thinner metal frame to create a nearly borderless, integrated appearance.