The Fed may hike this week not because it believes in it but because it's terrified not to · Daily Briefing

In 30 seconds: Markets are pricing in a near-certain Fed rate hike this week, with the 10-year Treasury yield surpassing 5% for the first time since 2007, as analysts debate whether the Fed's prior rate cuts were a policy error and what the hike signals for the economic outlook. Analysts are debating China's growing trade surpluses, aggressive industrial and agricultural policy, record gold accumulation by consumers and central banks, and the divergence between China's deflationary domestic economy and its expanding global export footprint. Crude oil prices have surged to above $130 per barrel as Hormuz oil flows recover but remain well below pre-war levels, the East-West pipeline remains offline, SPR releases dwindle, and tanker rates hit record highs above $1 million per day. AI-related stocks experienced sharp swings, with Goldman Sachs' AI winners basket suffering its worst day since the DeepSeek shock after a debate over slowing AI development pace rattled the crowded trade, while concerns grow about AI risks and oversight.

US 10-year yield: 5%. The US 30-year yield hit 5.4%, a level not seen since 2004. This is not a US phenomenon. Japan's 10-year yield reached 3%, the highest since 1996. The UK 10-year yield touched 5.4%, highest since 2007. Germany's 10-year yield hit 3.5%, highest since 2009. Sovereign borrowing costs are repricing globally, and the message is uniform. The argument making the rounds is that the Fed made the mistake two years ago by cutting rates, and the market has been rejecting it through higher yields from 2-year to 30-year. The 10-year yield has risen 1.3 percentage points since the Fed started cutting on 2024-09-18. The market is not being subtle. The S&P 500 has fallen on 5 consecutive Fed days, second longest only to a streak of 7 ending in December 2018. It fell on Powell's last three as Chair, and on Warsh's first two as Chair. The outcome that would surprise most people is no rate hike and a rally in bonds; literally everyone thinks a failure to lift rates would trigger a fierce bond selloff, and that is probably why the Fed will hike — fear of the market response. The Fed, in other words, may be hiking not because it wants to, but because it is afraid of what happens if it doesn't. Gold, for its part, closed at $4,337.70, off 0.33%. Gold: $4,337.70.

The same Gold driving Fed Rate Hike Expected as Yields Hit Multi-Year Highs is also a factor in China Trade Imbalances, Industrial Policy, and Gold Accumulation.

The numbers tell a story of an economy that exports its way out of every domestic problem. China retail sales annual increase: 0.4%. China's solid export-led manufacturing growth once again contrasts sharply with sluggish domestic demand. The machine keeps building anyway. China now has production capacity of 55 million cars annually and exports roughly 10 million; existing industrial capacity in batteries, autos, and steel is so high that no new investment is needed for exports to surge further. Europe is absorbing the consequences. The EU imported roughly 1.3 million cars from China over the last 12 months of data, and that total is rising. EU car exports to China, which once peaked at half a million cars, have collapsed to 100,000. Euro area imports from China are heading toward EUR 500 billion, while exports remain stuck under EUR 200 billion. EU goods imports from China grew 10% year over year in the last 3 months of data. Car imports now represent just 5% of China's domestic market; the EU's share has fallen to 2%. China's agricultural policy extends the same logic to tomato paste, foie gras, wine and blueberries, with State banks offering dedicated loan categories for blueberry production. Meanwhile, the surplus has to go somewhere. Since 2010, China's net accumulation of foreign assets through state and policy banks far exceeds reserve growth. The accumulated settlement gap in China's foreign exchange flows has reached roughly $800 billion, with last 12 months of data settlement running $550-600 billion. August alone saw $50 billion in settlement, or $55 billion forward-adjusted. Chinese consumers, for their part, are buying record amounts of gold. Gold settled at $4,337.70, down 0.33% on the day. Priced in gold, the S&P 500 is down 30% since 1967, and the Dow remains 20% below its Jan 1 1929 level. You can argue about whether that means anything. The people buying the gold seem to think it does.

The war with Iran is now being fought in the oil market. Dated Brent closed above $130 per barrel, and physical barrels are trading even higher: Brent spot price (Forties) hit $135 per barrel, with the Brent six-month calendar spread blowing out to $20 per barrel in backwardation. Traders are anticipating an extreme shortage of crude following the halt of the East-West Petroline. The good news, such as it is, is that Strait of Hormuz transit volumes have climbed back to 12 million barrels per day on a seven-day average — the highest pace since the post-MOU June-July breakout — and continue to climb, now with reports of daytime transits. The bad news is that 12 million barrels per day is roughly 60% of prewar levels. SPR releases are sputtering out. So the market is tight even with tankers moving again. How tight? Physical oil prices in the North Sea and Mediterranean have surged as some refiners seek to replace prompt Saudi barrels lost after the East-West pipeline was hit. Forties crude premium over Dated Brent has surged to +$15 a barrel. US diesel crack spread (vs Brent): $111 per barrel. Oil tanker hire costs from the Middle East to the Far East have topped $1 million a day for the first time ever. Meanwhile, the CFTC has held meetings on 24/7 oil trading with Exxon, Chevron, Shell, BP, Valero, Marathon Petroleum, and Vitol over the last two months to discuss the risks of around-the-clock energy trading. The industry has come out strongly against proposals to extend oil trading to 24/7, with lobbying and public letters to the CFTC urging it to block round-the-clock trading. The oil industry has cited margin calls as a key concern in its lobbying against proposals to extend oil trading to 24/7. US diesel crack spread (vs Brent): $111/bbl.

The trigger: a debate over slowing the pace of AI development that sent tremors through what has become, by most accounts, a very crowded consensus. The damage was uneven in revealing ways. The broader concern is about what the debate over slowing AI development signals — not just where positions are crowded. That framing matters: the risk is not that the models themselves cause a catastrophe, but that humans leaning on them do. Which is a subtler problem and, if you are trying to price it, a harder one.