Monday Digest

Posted 4 August 2025

Busy going nowhere

This week has been one of the most information-heavy in recent memory, with significant implications for global markets. Equity markets began positively but turned negative, particularly in Europe. US indices fared better, buoyed by the Magnificent Seven tech giants, though Friday’s ISM manufacturing survey revealed unexpected weakness, dragging domestic stocks lower.

Bond yields fluctuated, ultimately falling sharply, while the dollar strengthened through most of the week before retreating post-ISM data. Currency movements amplified US equity outperformance until Friday’s reversal. In sterling terms, France’s CAC40 fell 3.4%, while the Nasdaq 100 rose 0.7%. Gold weakened slightly, and commodities ended the week poorly.

Markets have shifted to a risk-off stance, with defensive global quality stocks—especially tech—attracting attention. The week’s agenda was packed: trade negotiations ahead of Trump’s tariff deadline, central bank meetings, GDP and inflation data, confidence indicators, employment reports, China policy updates, and Q2 earnings from major firms.

The EU-US trade deal initially appeared constructive, mirroring Japan’s agreement. However, discrepancies—particularly around pharmaceuticals—surfaced, casting doubt. European equities, notably autos, rallied briefly before faltering. Macron’s criticism of the Commission further undermined confidence.

GDP data disappointed, with the Eurozone posting just +0.1% q/q growth. The Euro weakened significantly. Some countries portrayed trade outcomes as victories, though Mexico and China secured extended negotiations due to their leverage. Trump’s approval on economic handling has declined, prompting aggressive tariff hikes on Canada and Switzerland. The UK, by contrast, emerged relatively unscathed.

While tariffs are unpopular, they may aid US fiscal sustainability. Investors remain concerned about the deficit, evidenced by rising bond risk premia. The Treasury’s funding plans were announced, but the timing of tariff shocks—amid a fragile labour market—poses challenges.

The Fed held rates steady, acknowledging contained inflation but warning of future rises due to tariffs. Labour market data showed weak job growth but strong wage increases, suggesting supply constraints. Trump’s renewed attacks on Fed Chair Powell added to market tension, pushing yields higher.

Despite European struggles, US indices benefited from strong Q2 tech earnings. Apple’s rebound in China underscored the region’s importance. Nvidia’s results are awaited later in August.

Bills and bonds

In summary, while Q2’s policy upheavals have settled somewhat, August may bring renewed volatility. Tariff-driven price rises in the US feel imminent, and markets are increasingly uncertain about a smooth resolution.

The surge in government debt issuance has long been a focal point for asset strategists and portfolio managers. This week, the US Treasury outlined its financing plans, revealing that despite a projected $1.98 trillion rise in debt to $37.2 trillion by year-end (per the CBO), the bulk of this will be financed through short-term Treasury Bills (T-bills).

Why the preference for short-term debt? The Treasury faces a delicate balancing act: attracting investors without overburdening future cash flows. In uncertain times, T-bills—essentially short-term cash equivalents—are more appealing due to their lower capital risk. Demand for longer-dated bonds has weakened, prompting both current Treasury Secretary Scott Bessent and his predecessor Janet Yellen to favour short-term issuance.

This shift reflects investor sentiment. Since 2021, preferences have tilted toward liquidity, though there are signs of easing aversion to maturities up to five years. For the Treasury, this means lower interest costs in the near term. The term premium—the excess return investors demand for holding longer maturities—has narrowed slightly, reinforcing the appeal of short-term funding.

However, this strategy carries risks. Short-term debt is more sensitive to interest rate fluctuations. A shock to price stability or supply could drive rates higher, immediately increasing borrowing costs. With Trump’s second-term policies continuing to disrupt supply and pressure inflation, the risk is non-trivial.

Critics argue that the growing reliance on T-bills increases financial fragility. Bloomberg’s Simon White notes that the US debt maturity profile is now more vulnerable to rate hikes. While short-term debt still comprises only 20% of total issuance—broadly in line with historical norms—the rising debt-to-GDP ratio limits fiscal flexibility unless maturities are extended.

An additional concern is the quasi-monetisation of debt. Michael Howell of CrossBorder Capital suggests that increased T-bill issuance may be indirectly funded by the Fed, via commercial banks’ large cash reserves—remnants of pandemic-era stimulus. Regulatory inconsistencies have discouraged banks from holding T-bills, but reforms proposed by Bessent could redirect this liquidity.

If the Treasury taps this reservoir, it could fund more spending than forecasted—potentially stoking inflation. The Fed, already under political pressure, would face a difficult choice: tighten policy or risk its independence.

In sum, while short-term financing offers immediate savings, it leaves both policymakers and investors more exposed to future shocks.