This morning, oil is weaker and the latter helps ease pressure on global yields, yet risk sentiment is dull. Technology companies kick off the week with heavy losses. In Korea, Samsung is down nearly 9% despite its latest shareholder return announcement. In Hong Kong, Alibaba free-dives nearly 10% as news that it will issue new equity to finance AI spending displeases investors, while in Japan, SoftBank slips nearly 4.5% after announcing plans to raise capital through a share sale as well.

As I said last week, with strong Q2 earnings already baked into prices, AI financing worries and political/geopolitical headlines are gently taking control of market action. Trade tensions are back in the headlines this morning following the US and Canada’s failure to reach a trade agreement, tensions in the Middle East continue to disrupt oil flows, and debt levels across the so-called developed world keep rising, with the US’$40 trillion debt now sitting like an elephant in the room.

In this context, energy prices will matter, but the way Washington is trying to manage its fiscal and monetary policies matters as well, due to their impact on US borrowing costs that ripple through global financial markets. This week, all eyes will be on Nvidia earnings, but also on Jackson Hole and how Bessent and Kevin Warsh could work out their differences.

Nvidia earnings come at a difficult time

Nvidia will close the earnings dance this week, and expectations are enormous. Q2 revenue is expected near $92bn, up roughly 97% year-on-year, while whisper estimates reach $93–95bn. But stellar results may not guarantee a positive reaction given the souring sentiment around AI heavyweights recently. Evaporating free cash flow at major Big Tech companies (who happen to be Nvidia’s biggest customers) revived AI financing worries during the Q2 earnings announcements, and the fact that two big names, Alibaba and SoftBank, are being punished today for seeking more financing through new equity sales gives an idea of how fragile overall market sentiment has become regarding the AI complex. As such, Nvidia may not save the day, even with great quarterly results and shiny guidance.

The company just announced it would raise the price of its chips to biggest clients – who also work on their own chips. The reaction to the price hike news will be interesting in assessing the company’s pricing power and dominance in AI chip market.

Bessent vs Warsh

Broadly, the macroeconomic setup is not brilliant either. Global yields – which are under pressure due to rising energy prices – failed to come lower after US Treasury Secretary Bessent last week announced that the Treasury would double the size of its long-maturity US debt buyback operations. The latter failed to convince investors to buy US debt and raised serious questions ahead of this week’s Jackson Hole meeting.

All eyes are on how Kevin Warsh will react to the latest developments. In fact, Bessent, who is moving toward a more interventionist, YCC-like strategy to tame pressure on the longer end of the yield curve, needs Warsh to play along by keeping monetary policy as supportive as possible.

But Warsh, on the other hand, wants markets to do more of the work. He wants to move away from heavy Federal Reserve (Fed) forward guidance and has been critical of the Fed’s oversized balance sheet and of US inflation running above target for half a decade!

Now, the fact that Treasury will be buying bonds won’t grow the Fed’s balance sheet – this is not QE, remember – but it could prevent the market from fully pricing inflation and fiscal risk, and from reacting to Fed policy decisions. In other words, it could interfere with the transmission of monetary policy to the economy. As such, it could make the Fed’s job of bringing inflation back toward its 2% target harder – something that Kevin Warsh probably wants to avoid (if nothing else, not to look like a fool in front of the entire world!)

Now, I doubt that Treasury will succeed in pushing long yields materially lower while oil prices are rising and inflation remains above target. But if it could somehow impact longer-term yields, financial conditions in the US would loosen, regardless of the Fed’s input, and the latter could keep inflationary pressures elevated.

So there is a fascinating institutional tension: Warsh is effectively saying, “let the market price risk,” while Bessent is saying, “not if that market price makes US government borrowing prohibitively expensive.”

And that's why Jackson Hole could be explosive. Warsh needs to regain credibility after his latest post-FOMC presser confused investors regarding his reaction function to inflation. If he uses the Jackson Hole speech to reiterate the 2% inflation objective and resist expectations that the Fed will rescue the Treasury market, he would effectively push back against what Bessent has just done – without ever mentioning Bessent by name.

But on the other hand, Warsh was put in this position by the same US administration, meaning that he cannot completely turn his back on the broader Washington plan. So what will he do?

At the moment, we no longer know who will ultimately control the long end of the US yield curve: will it be the Treasury Department, the Fed, or the bond market itself? In the wake of last week’s reaction to Treasury’s announcement, the market still has the last word.

So maybe this week’s Jackson Hole gathering will bring some clarity on how the Fed will fit into this, but in any case, US yields won’t magically fall while US debt keeps growing and Middle East tensions keep energy prices elevated.

Bessent is expected to unveil a fiscal consolidation plan as early as this week, perhaps in an attempt to get ahead of the bond market. Whether investors will play along remains to be seen.