New here? Been here a while, but you had too much Mellow Corn?
Well, Chart Party is our weekly outlook and recap that is taken through charts…
As we look into September, we know that the calendar is working against the market.
This is a month where seasonality plays a little bit of a toll as the summer months come to an end… we approach Triple Witching in the middle of September… and we look at the wall of factors.
The Federal Reserve seems to be talking tougher, but doesn’t want to talk as much. They have another meeting coming in the middle of the month, and the market expects a live meeting where we see an above 50% chance of a rate hike.
The Treasury, meanwhile, is experimenting with ways to drive down yields and improve overall market capacity.
AI spending continues to dominate the capital markets… and NVIDIA (NVDA) is getting creative with its balance sheet to keep this story running hard into 2027…
And Japan is still dealing with the consequences of 30 years of cheap financing reversing and leading to global fallouts in the bond markets. It’s a generational event, and you can see the creativity of central bankers and officials behind the scenes…
Now. Let’s look at the weeks ahead…
Chart No. 1: The Reputation
We’ll start with the obvious. Treasury buybacks are going to run from September 9 until the day after the election. How curious… how coincidental…
Source: TrendSpider
Historically, September has been the weakest month for the market during midterm election years… How curious. How coincidental.
It’s important to note that seasonality is never a reason to sell a stock.
September does have a reputation, and sometimes they are unfair…
Just because a guy gets arrested nine times… should you really stop lending him your car? You should be… well… very cautious… I hope.
Keep an eye on momentum - and our Capital Wave scores - as markets experience a convergence of catalysts.
September brings a lot of things… inflation numbers… a live Fed call… Treasury market questions… geopolitical tensions… and massive positioning around a major expiration Friday (that will likely witness record settlement)
The calendar is never the story… it’s just about the dry tinder… and the dry powder.
Position accordingly.
Chart 2: We’re Live Now for September Fed…
Jackson Hole remains an odd one… largely because Warsh didn’t say anything that consequential. But markets did react, with the odds of a September rate hike increasing from 40% to 57% in about a week..
Source: CME FedWatch Tool
That’s a pretty big move… and perhaps a bit of an overreaction. The thing about Friday’s speech by Warsh is that it just makes everyone a little more tense about economic data over the next three weeks.
So, we not only have the ADP report and the BLS jobs report this week. But we’ll get a lot of focus on new unemployment claims, job opening numbers… any other reason to overreact to data reports that usually don’t get so much attention during any other month. Everyone, everywhere will be acting like an economist in September…
3. The Bond Market Liked the Hawkishness
The cure for high long-term rates is the Federal Reserve threatening to make everyone miserable in the short term. That’s sort of the lesson, I think.
This week… short-term yields rose as traders priced a more aggressive central bank. But the long-term yields reacted far less dramatically…
Source: Bloomberg and ZeroHedge
Are we really going to have to talk about this all month? Really?
Chart 4. The Long Trap
Let’s turn our attention to the 30-year bond… shall we?
Source: CNBC (CMCSA)
Long-duration bonds have spent the summer absorbing inflation fears… Everyone became an expert on the U.S. debt when we hit $40 trillion.
But the trend-investors are very short right now…
So… another inflation scare can send yields higher, but a very hawkish Fed or Treasury action can force short covering.
It’s going to be a very interesting month, since it could produce violent moves in bonds without producing any meaningful change in the underlying fiscal story.
As I’ve said… we’re heading to $60 trillion in debt… and they’re more focused on carrying that debt than actually addressing the underlying problems.
Chart 5. America Still Needs Someone to Buy the Debt
They can build the greatest balance sheet capacity for U.S. debt in the history of man. They can find hundreds of billions of dollars of “Space” on dealer sheets…
But none of it will matter if we can’t find people to buy this paper…
Source: Bloomberg, Lukas Ekwueme
Again, this is the problem that remains and will follow us every month moving forward. International demand for U.S. debt is weakening, and it’s unclear what Scott Bessent’s “Fast and Furious” sounding “Operation Economic Outcast” program will produce.
Will that lead to even more gold buying and greater skepticism about U.S. debt?
If we end up owing all the debt to ourselves in the end… what do we do then?
The real question is who has the balance sheets to absorb all of this… and at what yield moving forward. There’s a reason why there is so much chatter around clearing… repo, balance sheets, and buybacks.
Chart 6: Capital Competition
Meanwhile, the AI capex cycle is getting larger, not smaller.
As I explained in the NVIDIA recap the other day… NVIDIA thinks that the capex story moves forward a year in terms of nominal spend.
The figure is pulled forward to $1.3 trillion in 2027.
Source: Marlin Capital
This is creating competition for capital… and the Fed now has to keep an eye on where a lot of that capital and credit is originating.
Governments need to refinance trillions and issue NEW debt… AI companies need a lot of financing… the same for real estate and corporations…
September arrives in the middle of an extraordinary global competition for capital.
Watch those rates…
Chart 7: Japan is a Preview
Once again… all roads go through the Japanese reset… And we’re still kicking the can a bit… and yields just keep climbing. I’ve done all the research around that relationship between the U.S. and Japan.
I just can’t make anyone have to read it all… The Japanese 10-year is at 2.93%… and a rate hike in September feels inevitable here…
Source: TradingEconomics
We should keep apying attention. Because government debt at above 200% of GDP makes for an interesting problem with rates rise. Tokyo has been reducing its bond buying, and it needs its private investors to absorb supply that the BoJ used to buy.
Every highly indebted nation will face this problem in the future.
We just have to pay attention… and pour a Mellow Corn.
Chart 8: Grey Swan No. 1: The Refinery Shock
So, what are the things that can create a lot of pressure in the month ahead?
Start with the nastier inflation pressures that can come on the diesel front. Prices are rising in Europe… everything in the U.S. that gets delivered touches a truck… and refinery exports remain under deep pressure globally.
Russia’s export restrictions and ongoing war… mixed with Middle East tensions are tightening available supplies. Brent crude doesn’t need to hit $150 a barrel for problems to persist.
The exploding crack spread does enough damage… and it’s just as bad since the world doesn’t “run” on oil.
It runs on diesel, gasoline, and byproducts.
This can raise trucking, distribution, construction… and agriculture (right in the middle of the harvest).
This can’t be solved by a rate decision.
Chart 9: Grey Swan No. 2 - If Iran Becomes a China-Dollar Crisis
This is going to get interesting…
China is the dominant buyer of Iranian crude oil.
Source: Bloomberg
That means that America’s secondary sanctions might make their way to a major Chinese refinery… or a bank… or someone in the middle of the financial transaction…
Iran isn’t an oil story anymore. It’s a shipping… gold… aviation… technology… and digital assets story. This has implications for the yuan… and sets up an interesting conversation between Xi Jinping and President Trump in late September…
Chart 10: Grey Swan No. 3 - If France Breaks Europe’s Bond Market?
We’ll wrap here… because we can’t take our eyes off Europe.
If there’s a debt problem there… it could accelerate quickly.
The Financial Times
Right now, France’s debt problems are on full display, and we have a budget battle that is pushing the nation’s sovereign spreads. This could go far enough to ultimately infect banks and peripheral European debt.
It’s been a while since we had a good old fashioned European debt problem… so, let’s revisit. A nightmare for the ECB would force them to contain a sovereign-credit event at the same time that inflation prevents it from freely opening the monetary-policy firehose. That’s an issue everywhere isn’t it…
We’ve pumped this system to the brink… and now that inflation is high… while equity markets are high… we’re breaking the glass with new programs.
We’ll dig deeper into what they’re doing in What Are We Missing. Until then…
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