ORLANDO, Florida (Aug 17): Long-dated government bond yields around the world rose on Monday to levels not seen in decades. This weighed on stocks, which were also pressured by deepening skepticism around a US-Iran peace deal and oil prices rising to a six-week high.

I look at how the Fed could bring inflation back down ​to target. Chair Kevin Warsh has indicated a smaller Fed balance sheet and an AI-productivity boom would be useful tools. But neither is a ‌substitute for the bluntest, but most effective, instrument in the Fed's toolkit — interest rate hikes.

Long-dated bonds around the world are under the cosh again. From the US to France, from Germany to Japan, yields on government debt with maturities of 10 years and beyond spiked to fresh multi-year or multi-decade highs on Monday.

The pressure is coming from all sides — oil back above US$90 a barrel on evaporating hopes of a US-Iran peace deal; worries over a more ​aggressive rate-hike cycle in Japan; fiscal fears in France and the US, where the federal debt is about to top US$40 trillion (RM162.3 trillion); soaring government interest payments; sluggish demand at government ​debt auctions. How long before other parts of the financial market universe start to crack too?

Global stock markets and corporate earnings may be purring along nicely, but the global economy's performance ‌is less ⁠convincing. July economic indicators from China and Q2 Japanese GDP data show Asia's two largest economies aren't firing on all cylinders. The figures from Beijing were particularly worrying — retail sales, business investment, industrial production all missed economists' forecasts, once again dousing hopes that domestic demand is finally emerging from its post-pandemic slump.

If you take into account the sluggish 1.5% annualized US GDP growth in the second quarter, that's three of the world's largest economies under-performing. Policymakers will want to see how Q3 pans out, but more incoming data like this will likely ​cast doubt on the wisdom of rate ​hikes in the US and Japan, and ⁠accelerate calls for more stimulus in China.

A Wall Street Journal report on US hyperscalers' off-balance-sheet AI spending commitments is a reminder of how high the profitability bar is in the AI arms race for these firms. The report says Big Tech's AI spending ​may be US$3 trillion higher than it seems. If so, does that alter how investors should view these behemoths, and the AI ​story in general?

AI-related spending is ⁠already expected to be off the charts. Morgan Stanley reckons the four largest hyperscalers (Microsoft, Alphabet, Amazon, and Meta) will increase spending next year by 57% on this year, with a view to generating 25%+ returns on invested capital. But it is taking longer for that capex deployment to bear fruit, resulting in gloomier near-term free cash flow estimates. A wider financing gap ⁠next year should ​lead to even more debt issuance.

Uploaded by Siow Chen Ming