Key Highlights :

• Powell’s Jackson Hole speech signals increased likelihood of a September rate cut.
• AI bubble concerns weigh on US tech stocks despite record investment.
• Tariffs begin to erode corporate margins, raising caution on profitability.
• Credit spreads at tightest levels since 1998, supporting bond demand over cash.

Fed’s Dovish Tilt at Jackson Hole

At Jackson Hole, Federal Reserve Chair Jerome Powell struck a dovish tone, shifting focus toward downside risks in the US labor market rather than tariff-induced inflation. While acknowledging that tariffs are lifting prices, Powell stressed these effects are likely short-lived and not a source of persistent inflation. His remarks boosted market expectations for a September rate cut to over 90%, though investors also noted the near-term risk of renewed USD weakness should easing materialize.

AI Bubble Fears Hit Tech Stocks

US technology stocks suffered a sharp pullback prior to Powell speech, as concerns over an AI bubble resurfaced. OpenAI CEO Sam Altman’s warning of “irrational exuberance,” reminiscent of the dot-com burst, rattled investor sentiment. A recent MIT study further fuelled doubts, suggesting that up to 95% of firms could see no return on their AI investments. Despite this, Big Tech remains committed to large-scale spending, with industry capex surging 23% quarter-on-quarter to USD101bn in 2Q25, mainly for AI data centre expansion and talent acquisition. This contrast underscores the tension between short-term scepticism and long-term structural transformation driven by AI.

Tariffs Begin to Pressure Margins

Corporate America is starting to feel the weight of tariffs. Walmart, one of the largest US retailers, reported that rising import costs are squeezing margins, highlighting how tariffs are beginning to filter through to corporate profitability. Broader data, including inflationary pressures in ISM services, align with these concerns. As these tariff effects gradually transmit across the economy, the Fed faces the challenge of balancing the need to support growth without cutting rates prematurely. Futures markets currently assign an 81% probability to a September rate cut.

Credit Spreads Tighten to Multi-Decade Lows

Meanwhile, credit markets are signalling extraordinary risk appetite. The gap between US corporate borrowing costs and Treasury yields has narrowed to its tightest level since 1998, driven by strong investor demand. Banks and emerging-market firms outside China are issuing international bonds at the fastest pace since 2021 to tap this liquidity. With large government deficits, relatively low corporate leverage, and the Fed pivoting toward rate cuts, spread products are expected to continue outperforming government bonds. The demand outlook for credit remains strong as investors seek yield in a falling rate environment.

Conclusions

• Monetary Policy Pivot in Play – The Fed is preparing markets for rate cuts, with September highly probable, but risks remain around timing given tariff-driven cost pressures.
• AI: A Tale of Two Narratives – Investor scepticism is growing, yet capex data shows unwavering Big Tech commitment; long-term transformation continues despite short-term volatility.
• Tariffs Create Corporate Headwinds – Margin erosion has begun, particularly in retail, suggesting broader corporate challenges ahead if tariff pressures persist.
• Credit Demand Remains Resilient – Ultra-tight spreads reflect strong appetite for corporate and EM debt, underscoring bonds’ relative appeal over cash in a dovish Fed cycle.

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