AFS Markets Blog: Morning 12/08/2026

• Meanwhile in markets, ahead of what is expected to be the lowest US core CPI reading since the pandemic, long end US Treasury yields are loitering near their highest level in years if not decades;

• Without a doubt, punters are fretting not just about inflation but also yawning fiscal deficits (the two go hand in hand). Regardless, core CPI is expected to print at 2.5% YoY, matching the January and February 2026 lows. Inflation problem solved for the large part, no? Problem is that the Fed’s preferred price gauge, the PCE index, is tracking at a lofty 3.4 percent for July according to the Cleveland Fed’s nowcast. Remember: the Fed targets PCE inflation. The difference can be explained by the heavy weighting of shelter in CPI relative to PCE, with shelter inflation running cool these days. Furthermore, services, and healthcare and financial services in particular, weigh comparatively heavy in PCE. These services items are currently running hot;

• Furthermore, while the FOMC median and sell-side consensus have core PCE inflation falling to 2.5% next year from 3.3% this year, that would still leave us with seven straight years of above target inflation. Furthermore, there are plenty of forecasters that have core PCE close to three percent next year. Bottom line: the Fed’s inflation problem isn’t going anywhere anytime soon. And it turns out that we have a Fed Chairman who’s all talk about inflation. And, as the age-old adage tells us, talk is cheap. Predictably, pricing of September quarter point hike is now a coin toss while before the July FOMC and disappointing July payrolls it was (essentially) fully priced. For the record: I still expect that hike;

• Turning to some overnight market commentary, US Treasury yields are flattish while equities in Asia are mostly higher on the back of a reinvigorated AI trade. AI darlings Coreweave (rents out AI compute infrastructure) and Super Micro (builds hardware for those data centers) are up strongly in aftermarket trading on the back of better than expected earnings releases. Coreweave is up no less than fifteen percent at pixel time;

• Korea’s wild equity market is higher too on the back of gains of about five percent for Samsung and SK Hynix. In the greater scheme of things, AI stocks of both the hardware and hyperscaler variety have bottomed out following the early summer sell-off;

• In FX space I take note of the moves in USDJPY and EURCHF. Regarding the former, the cross is grinding higher in the 159 handle, trading at 159.4 or thereabout. For the record, close to half the intervention gains for the yen have been erased. In this regard, I take note of an overnight Bloomberg story that mentions that US Treasury Secretary Bessent and Japan’s Prime Minister Takaichi are split on the Bank of Japan’s role. Bessent wants the BOJ to tighten, while the Prime Minister prefers the central bank holds back its fire in order to prevent Japan’s economic rebound (and stellar performance of the Nikkei index) to fizzle out;

• EURCHF has broken out to the upside, with the next ‘target’ being the 0.94 handle. The cross is moving like clockwork on the back of our forecast that the ECB will hike once more in September while the Swiss National Bank will stay pat for the next twelve months as markets chip away some of the franc’s overvaluation;

• Brent crude futures are a hair below the $90 handle after punters have started to doubt yesterday’s remarks by Pakistan’s Defense Minister that some “sort of arrangement” between the US and Iran over the Strait is “close”.  Close but no cigar;

• Keep an eye on OATs, the Eurozone govvie market’s perennial underperformers. The Bloomberg generic spread with Bunds is slightly above 80bps, thus exceeding the generic BTP-Bund spread by a couple of basis points. Clearly, punters are already fretting about next year’s contentious French Presidential elections;

• Looking ahead, besides US CPI the calendar is simply empty. Which means more Iran headline watching.

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