New Highs, Higher Yields, and a Weaker Dollar. Can All Three Persist?

• Markets now price a 66% chance of a September rate hike, up from 30% before Warsh's speech, as core PCE inflation remains at 3.3%, well above the Fed's 2% target
• Treasury doubled bond buybacks from $2 billion to $4 billion per operation to support liquidity as 10-year yields hit 4.75%, but this QE-like action risks dollar debasement without addressing fiscal imbalances
• July's unemployment drop to 4.1% was misleading as the economy lost 23,000 jobs and 264,000 workers left the labor force, with participation falling to 61.4%, the lowest outside pandemic since the 1970s due to demographic shifts

Market Summary: August Rally Amid Hawkish Fed Stance and Shifting Bond Dynamics

Key Market Performance:

The Nasdaq Composite gained 4.0% and the S&P 500 rose 2.7% in August—their first monthly advances since May—with both the S&P 500 and Dow reaching record highs. Emerging markets and international developed equities led gains at 3.3% each. Commodities surged, with silver up 14.8%, gold gaining 9.9%, and crude oil rising 3.5%.

Fed Policy Shift:

Fed Chair Kevin Warsh delivered a hawkish message at Jackson Hole, emphasizing the Fed's commitment to its 2% inflation target. Despite July CPI cooling to 3.4% year-over-year (core at 2.5%), the Fed's preferred PCE gauge remained elevated at 3.7% headline and 3.3% core. Market expectations shifted dramatically, with the probability of a September rate hike jumping from 30% to 66% post-speech.

Treasury Intervention:

The 10-year Treasury yield climbed above 4.75%, the highest since 2007, prompting the Treasury to double long-dated bond buybacks from $2 billion to $4 billion per operation. This quasi-QE maneuver aims to support liquidity but raised concerns about dollar debasement, driving gold near $4,700/ounce and Bitcoin above $80,000.

Labor Market Concerns:

While unemployment fell to 4.1%, the improvement masked weakness: the economy lost 23,000 jobs and 264,000 workers left the labor force. Participation dropped to 61.4%, driven by demographic shifts as baby boomers retire. Wage growth softened to 3.2% year-over-year.

European Earnings Strength:

Europe's MSCI index posted 14% year-over-year profit growth with 2026 consensus estimates at 17.8%, marking the region's strongest earnings season in years, supported by financials and industrials sectors.

Market Implications:

The combination of record equity highs, rising yields, and dollar weakness presents a challenging dynamic