2026-08-18 Tuesday

Federal Reserve Governor Lisa Cook said US inflation remains stubbornly high, with PCE prices up 3.7% year-over-year in June, nearly double the FOMC's 2% target, and she is prepared to raise rates if necessary. The balance of risks has shifted toward inflation, she argued, despite a stable labor market with unemployment at 4.2% and job growth averaging over 100,000 per month in Q2. Cook identified AI-related investment and Middle East conflict as unexpected price pressures, while noting that business investment rose at a 10% annual rate in H1 2026, partly driven by AI. This hawkish stance from a Fed governor suggests the policy rate could move higher, affecting bond yields and the cost of funding for public finance entities. Cook cautioned against over-weighting a single data point, but her explicit readiness to hike marks a deviation from the prior wait-and-see stance, potentially tightening financial conditions.

Singapore's economy grew 6% year-on-year in H1 2026, up from 5% in H2 2025, driven by strong technology-related sectors, while core inflation rose to 1.4-1.5% in Q1-Q2 2026 from below 1.0% in 2025. The Monetary Authority of Singapore tightened monetary policy in April and again in July to counter imported inflationary pressures, projecting inflation to average 1.5-2.5% in 2026 and stay elevated into H1 2027. MAS reported a net profit of S$20.0 billion for FY2025/26, driven by investment gains of S$39.8 billion. AI-driven electronics exports account for over 70% of Asia's export growth year-to-date, up from 46% in 2024, but risks to AI investment sustainability—including energy costs and supply bottlenecks—could lead to a retrenchment. The tightening cycle and AI-driven growth affect regional bond yields and the Singapore dollar, influencing funding costs for public finance in the region.

South African Reserve Bank Governor Lesetja Kganyago reported six consecutive quarters of expansion, the longest since 2018, and noted the formal adoption of a 3% inflation target (±1 pp) in 2025, replacing the 3-6% range. An oil shock pushed headline inflation to 5% in June, prompting a rate hike to 7% in May, while long-term borrowing costs have fallen over 300 basis points and FX reserves grew to $74 billion, easing fiscal pressure.

Bank of Greece Governor Yannis Stournaras highlighted that the US-Iran agreement reduced energy prices, with euro area inflation falling to 2.8% in June 2026 from 3.2% in May, but renewed hostilities have created new pressures. Greece's strong bank turnaround (capital adequacy ~20%, NPL ratio 3.4%) and the highest RRF allocation as a share of GDP, with contracted loans reaching €13.2 billion and a disbursement rate of ~68.5%, underscore the need for Europe to mobilize private savings and complete the Banking Union.

China's January-July 2026 data show industrial output up 5.3% and retail sales up 1.2%, but fixed asset investment down 6.7% and real estate investment down 19.2%, with exports up 14.0% and imports up 22.0%. Taiwan's Q2 2026 GDP grew 12.93% year-on-year, with a 2026 forecast of 11.05% and July CPI up 2.54%, while PPI surged 16.94%. China's July coal production fell 10.1% to 340 million tonnes, while crude oil rose 0.8% and natural gas fell 0.9%, with thermal power down 3.5% but renewables growing.

The ECB's blog argues that AI-driven stock market valuations are likely to face a correction, as historical tech booms often end in busts; even if AI proves transformative, the shift from diversifiable to economy-wide risk raises the risk premium, leading to price declines. Euro area households hold around €440 billion in US tech equities via funds, and a US correction would likely spill over due to high market correlation, transmitting shocks to euro area financial conditions and potentially complicating the ECB's inflation fight.

Research from the National Bank of Slovakia using firm data from 2013-2023 shows a one-degree Celsius increase in average summer temperature cuts revenues by nearly seven percentage points in heat-sensitive sectors—agriculture, construction, transport, and manufacturing—which together generate about 40% of the country's value added. Firms respond by cutting costs and taking short-term loans rather than investing in adaptation, implying hotter summers could weaken corporate balance sheets and raise credit risk in these sectors. The finding appears in an NBS working paper; a follow-up quantifying the loan-loss impact on Slovak banks would settle its significance for financial stability.

Waterborne shipments of crude and petroleum products from the U.S. Gulf Coast to the West Coast more than quadrupled year-on-year in April and May after a Jones Act waiver, reaching 190,000 barrels per day in April versus under 30,000 b/d in January and February. Gulf-to-East Coast shipments hit a record 1.2 million b/d, with record highs for gasoline blending components and distillate fuel. The waiver eases a shipping constraint that typically forces West Coast refiners to rely on more expensive sources, potentially narrowing regional fuel price differentials and affecting import demand. The data hides in the EIA's weekly petroleum status report; a sustained rise above 200,000 b/d for two consecutive months would confirm a structural shift.

Hong Kong's SFC reported a 13% growth in assets under management to $35.1 trillion and record Stock Connect southbound net inflows of $1.19 trillion. Argentina's CNV issued over 110 resolutions in two years, including for virtual asset service providers, and avoided the FATF grey list. Finland raised the loan-to-value cap to 95%, while the UK FCA proposes removing the 7-day IPO research delay. Switzerland updated Russia sanctions, and the SEC charged Andrew Spaventa in a $74 million pre-IPO scam.

Bank of France First Deputy Governor Denis Beau told the CCP Global Annual Meeting 2026 that non-bank financial institutions now account for over 40% of non-centrally cleared euro repo transactions, up from less than 30% at end-2020, while sponsored clearing models represent only 5.8% of total repo transactions in Europe. He warned that greater NBFI participation may amplify procyclical dynamics during stress and that concentration in critical infrastructures and cyber threats are rising. The Eurosystem's wholesale CBDC rollout is scheduled for autumn 2026, and the European Commission's December 2025 Market Integration Package proposes centralising supervision of significant CCPs under ESMA. The speech was published on the BIS website; a settlement would be the ECB's confirmation of the CBDC launch date or ESMA's adoption of the supervision proposal.

The ECB's Philip Lane estimates that the rise in euro area defence spending since February 2025 will boost real GDP growth by up to 0.2 percentage points and HICP inflation by up to 0.1 percentage points by 2028. The fiscal expansion, equivalent to 1.4% of GDP by 2028, raises long-run real interest rates by about 0.2 percentage points, according to the EAGLE model. This transmission to bond markets is already visible: on 5 March 2025, the German 10-year OIS rate jumped 36 basis points in one day, with the euro area 10-year OIS rising 20 basis points, driven mainly by the real rate component.

The multipliers vary by spending type and financing. Model-based simulations show a GDP multiplier of about 1.2 in 2028, while empirical panel local projections for EU27 (1999-2025) suggest a cumulative multiplier of about 1.5 over five years. However, higher import content (50% instead of 16%) significantly lowers the multiplier, and anticipation of tax hikes or monetary tightening reduces it further. Government investment, unlike consumption, may lower real rates in the long run by raising productive capacity.

For investors, the mechanism is clear: additional sovereign debt issuance to fund defence and other strategic investments, with an estimated public funding gap of 2% of GDP for defence, green, and digital transitions, will put upward pressure on yields, particularly for high-debt countries. The German fiscal announcement already demonstrated the speed of repricing, with a 36 basis point one-day move in the 10-year OIS.

Portugal's public capital stock has eroded persistently since its 2013 peak, with real public capital falling 13.3% by 2024 and the capital-to-GDP ratio dropping from 77.2% to 53.8%. Even the projected 2026 investment surge leaves the stock about 9% below its 2013 peak, and the capital-to-GDP ratio is projected to reach 52.6% in 2026 and 53.4% in 2027. This decline may reduce 2026 GDP per capita by 0.7–5.3% (central estimate 1.4%) relative to a counterfactual that preserves the 2013 stock, and announced projects slow but do not reverse the projected decline in the capital-to-GDP ratio.

The paper extends the IMF Investment and Capital Stock Dataset through 2027 using AMECO data, updating the capital stock with a perpetual-inventory equation and a fixed depreciation rate of 4.62% per year. The bivariate regressions show that a one-percentage-point increase in contemporaneous public-capital growth is associated with approximately 0.41 percentage point higher labor-productivity growth, with lagged coefficients of 0.38 and 0.31. Under a calibrated Cobb-Douglas production function, the post-2013 decline implies a 2026 output gap of 0.7% to 5.3%, with a central estimate of 1.4%, equivalent to an average annual growth drag of 0.05–0.42 percentage points over 2013–2026.

Counterpoints include that the regressions do not identify causal effects, and the calibrated exercise is a partial-equilibrium accounting counterfactual that excludes crowding-in, endogenous responses, and financing effects. The paper also notes that low execution—realized expenditure fell short of budget plans by an average of EUR 719 million per year over 2019–2023—provides a complementary explanation for the decline. The market effect is that persistent public capital erosion weighs on potential growth and productivity, which is relevant for sovereign risk assessment and fiscal sustainability, as the Banco de Portugal and the Public Finance Council have highlighted the persistent weakness of public investment.

The Danish FSA's June 2026 risk assessment warns that elevated macro-financial risks from geopolitical tensions, particularly the Middle East crisis, have spiked oil prices and raised long-term bond yields. About one-fifth of world oil supply and one-seventh of natural gas supply transit the Persian Gulf, and the US-Israeli attack on Iran in March 2026 triggered a blockade that lifted only temporarily. Yields on 10-year government bonds in Denmark and elsewhere have risen since March, largely due to the risk of significant and prolonged energy supply disruption. US equities are overvalued relative to earnings, driven by a few large tech companies and AI expectations, while US fiscal policy is very expansionary and public debt is large and rising, creating overheating risks.

The financial system is more resilient than before 2008: Danish credit institution lending has grown modestly since 2009, reducing the debt ratio markedly. However, vulnerabilities remain in private credit, which has grown strongly and is less regulated than bank lending, and in Copenhagen owner-occupied flats, where prices and housing costs as a share of income are higher than elsewhere. Cyber risk is a top concern: SAMSIK has raised the threat level for destructive cyber attacks against the Danish financial sector from 'low' to 'medium', citing Russia's increased willingness to use hybrid means against European NATO countries, though no increase in attacks has been observed in Denmark. The FSA's risk scenarios include a hard recession comparable to 2008, a financial market crisis, and critical infrastructure breakdown; these are not forecasts but potential outcomes if risks materialize. The rise in 10-year Danish government bond yields directly raises government borrowing costs, and the identified US overheating and recession risks could influence ECB and Danmarks Nationalbank policy, affecting Danish yields and the krone.