Long Yields Climb As Fed Holds Steady

For the week ending 31 July 2026

As of midday Friday, global equities were firmer on the week amid exceptionally strong US earnings reports. The yield on the US 10-year Treasury note edged up to 4.73% from 4.68% a week ago, while the price of a barrel of West Texas Intermediate crude fell $4 to $85.60. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), slipped to 18.6 from 19.1 last Friday.

MACRO NEWS

Fed holds, investors grumble

Heading into Wednesday’s meeting of the Federal Open Market Committee, investors were unusually split over the meeting’s outcome, with futures markets implying a roughly 35% chance of a hike. This contrasts with recent years, when the markets were generally able to fully anticipate Fed policy moves in advance. The decision to hold rates steady — a 9–3 vote, with three regional Fed presidents voting to hike — was not a surprise, but the less-hawkish-than-expected tone from Chairman Kevin Warsh was, and he gave no indication that a rate hike in September is a done deal. A key takeaway from the press conference: despite lingering inflation pressures, the bar for rate hikes appears higher than investors had anticipated.

Warsh also noted that both real and nominal yields had moved materially higher since the June FOMC meeting. He suggested that a reduction in forward guidance may have played a role as the market was reacting to economic developments instead of the Fed, a response he welcomed. Those higher rates were doing part of the Fed’s work by tightening financial conditions, he suggested. The long end of the Treasury curve sold off after investors viewed the press conference as insufficiently hawkish, sending the 30-year Treasury bond yield above 5.20% for the first time since 2007, sharply steepening the 2s30s curve.

Warsh’s tight-lipped communications style has not been well received by Fed watchers, with many complaining of not understanding the central bank’s reaction function, leading to increased volatility. Focus will turn to the chairman’s address at Jackson Hole in late August in the hopes of greater clarity.

Imports subtract from otherwise-solid US GDP

The first estimate of second-quarter US GDP was below expectations at 1.5%, but the miss reflects stronger imports and weaker inventories, while core GDP (defined as final sales to domestic private purchasers) rose a robust 3.9%. Heavy imports of components related to the AI buildout subtracted from the headline figure. Consumption bounced back from the first quarter, rising at an annual rate of 3.2%.

On the inflation front, core PCE rose 0.1% month over month versus the 0.2% forecast, and year-over-year core PCE fell to 3.3% from 3.4%, its first decline since February.

US–Iran conflict remains stop-start

The US paused strikes around the Strait of Hormuz early in the week amid talks over an Omani proposal, backed by the Gulf states, that would rely on voluntary fees linked to transiting the strait rather than mandatory Iranian tolls. Iran rejected the proposal, saying it did not address their concerns and insisted that inbound routes remain under Iranian control.

The pause in conflict proved brief as Iran resumed strikes against US bases, resulting in US reprisals. The US this week also sanctioned two Iranian entities backed by the IRGC for running coercive insurance schemes affecting shipping through Hormuz. US and Saudi forces also struck Iranian proxies in Iraq this week.

Energy supply chains continue to adapt to the disrupted flows out of the Persian Gulf. For example, oil shipments are being rerouted through the Suez Canal and terminals in Egypt as Red Sea exports have slowed amid Houthi threats. The conflict in the strait has also intersected with the Russia–Ukraine war, as Ukrainian drones hit cargo vessels on Caspian Sea supply lines linking Russia and Iran, a route that could help Iran work around the US military blockade of ports along the Persian Gulf and northern Arabian Sea.

The US is reportedly considering a 10- to 14-day final air campaign against Iranian missile production facilities in the hope of crippling that capability.

KOSPI’s rollercoaster ride continues

South Korea’s KOSPI index endured a very volatile week, with early weakness tied to sharp swings in Korea’s semiconductor heavyweights giving way to a nearly 18% rally on Friday, though it still ended the week down about 1.4%.

South Korean regulators moved this week to curb speculation in single-stock leveraged ETFs. Authorities pledged steps to stabilize the equity market, raised minimum margin requirements for single-stock leveraged ETFs, and said they may impose higher trading costs on these products.

QUICK HITS

The Nasdaq 100 briefly dipped into correction territory at midweek, falling about 11.6% from its June peak before rebounding strongly on Thursday. The bounce back came after reports that a leveraged hedge fund run by a 20-something AI wunderkind was forced to sell the leveraged portion of its public equities portfolio due to margin calls. The firm, Situational Awareness, reportedly recorded first-half returns of 439% before imploding during the July AI sell-off.

Japan’s Ministry of Finance is believed to have sold approximately 53 billion  on Thursday morning to strengthen the yen, which had fallen to 40-year lows. On Friday, the Bank of Japan indicated that it might hike rates at its September meeting, which could further boost for the yen.

The Bank of England held rates steady with a 6–3 vote that included three dissents in favor of a hike. Like Fed Chair Warsh, BOE Governor Andrew Bailey did not signal a September move at his press conference.

Japanese Prime Minister Sanae Takaichi reportedly plans a temporary two-year cut in Japan’s sales tax on food from 8% to 1%.

US durable goods orders rose 0.3% in June, below expectations for a 1.8% advance. Core capital goods orders, excluding aircraft, rose a stronger-than-expected 1.9%, versus consensus for 0.6%.

The eurozone economy outperformed expectations in the second quarter, growing 0.4% quarter over quarter and 1.0% year over year versus expectations for 0.2% and 0.7%, respectively. The unemployment rate ticked up to 6.3% in June from 6.2% in May.

Major US companies are reportedly starting to hire again after holding back, reflecting the need for people to work alongside artificial intelligence. Entry-level headcount and software developer demand are rising again, contrary to earlier fears.

FactSet data show the earnings beat rate remains elevated at just under 87%.

Russia extended its diesel export ban until September 1 and its gasoline export ban until January 31 as it works to combat domestic fuel shortages.

Reuters reported this week that Iran is expected to receive its first shipment of as many as 400 Chinese-made, shoulder-fired air-defense missile launchers within weeks. President Trump said he’d be “quite disappointed” if the reports were true. Beijing denied the report.

A collection of small businesses has launched a legal challenge to the Trump administration’s use of Section 301 tariffs.

The Trump administration added foreign-made — primarily Chinese — advanced robotics and battery inverters to a restricted list after national security officials cited supply chain vulnerabilities, prompting China to vow retaliation.

Consumer prices in the eurozone rose 2.9% year over year in July, slightly more than the consensus forecast.

President Trump announced Thursday that Hamas has agreed to disarm under an agreement in which the Israel Defense Forces will eventually withdraw from Gaza. The deal, reached by the Board of Peace, lays out the disarmament of all terror groups in the region as well as the area’s large-scale reconstruction to bring an end to the war between Israel and Hamas.

US Treasury Secretary Scott Bessent said seven million children have been signed up for Trump accounts, new tax-deferred savings and investment accounts that can receive contributions of up to $5,000 per child per year and invest in ETFs tracking the S&P 500.

The Trump administration ended the Medicare prescription drug premium subsidy program, arguing that the extra subsidies encouraged insurers to raise rates and were no longer needed.

Ukraine’s President Volodymyr Zelensky said he and President Trump discussed licensing Patriot missile technology and other steps to intensify diplomacy.

Canadian GDP rose 1.7% year over year in May, beating expectations for a 1.4% gain.

Saudi Arabia launched air strikes against the Houthis following drone and missile attacks on energy infrastructure, while the IRGC called on Saudi Arabia to end the blockade on Yemen.

EARNINGS NEWS

With about 60% of the constituents of the S&P 500 Index having reported, blended earnings per share (which combines reported data with estimates for those companies that have yet to report) rose 47.3% compared with the same quarter last year, according to data from FactSet. Blended sales rose 13.9% over the same period. Cloud computing providers are leading the way, posting extraordinary earnings growth and soothing fears over their enormous capex spending.

THE WEEK AHEAD

Monday: Global manufacturing PMIs

Tuesday: US factory orders, trade balance, JOLTS

Wednesday: Global services PMIs

Thursday: Eurozone retail sales; US productivity

Friday: US employment report

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.