Inflation came in cooler today. Growth came in hotter.
And the 10-year Treasury yield went higher, not lower. It hit 5.30%, a high going back to 2002.
It’s a growth story, not an inflation story.
The Fed’s favored inflation gauge (PCE) came in at 3.4% for August. Excluding food and energy, 3.0%, down from 3.3%. And the government’s annual revisions took July down too, from 3.7% to 3.4%.
Meanwhile, the economy grew faster in the second quarter than first reported: 2.2%, revised up from 1.5%.
So, lower inflation, stronger growth, higher yields.
As we discussed on Monday, this rise in yields is about competition for capital. AI builders are competing with the Treasury for money. Rates are rising because capital is in demand, not because inflation is running away.
And the builders are paying up for capital because they expect high returns.
After the close, Micron gave us more evidence of that reality. They reported revenue up 379% from a year ago, and guided next quarter well above Wall Street’s estimates. The CEO said they “do not have line of sight to when supply and demand will return to balance.”
Their customers have now put up $32 billion in commitments, mostly cash deposits, to lock in memory supply through 2030 and into 2031. They are paying cash today for memory they won’t receive for years.
And Micron is raising its spending to build new factories.
Add to that, the President announced today $200 billion of South Korean investment in American energy: eight new nuclear reactors and a 6.5 gigawatt natural gas power complex in Texas to supply AI data centers.
As we discussed yesterday, power, memory and equipment set the speed limit on this build-out. The above is addressing the limiters.
Now compare this all to Europe.
Germany’s inflation jumped to 3.3% from 2.9%. France came in at 3.4%, Spain at 5%. Inflation is rising and growth isn’t.
Today, Italy’s borrowing cost moved to 104 basis points over Germany’s, the widest of the year. And the cost of insuring against an Italian default hit a new high for the year, more than double where it was when the war started.
Rates are rising on both sides of the Atlantic, but for opposite reasons.
In the U.S., the Treasury is competing for money with builders who expect big returns. In Europe, lenders are demanding more return to lend to governments like Italy’s, because the risk is rising.
