The European Central Bank raised interest rates this morning, to 2.50%.

The decision was unanimous. It was expected.

Let’s go through what Christine Lagarde said in the press conference, because she spent the time making the case against her own decision.

Asked to explain the framework, she described the situation in Europe as “predominantly a supply shock.” Exactly. Europe has an energy problem, not a demand problem.

Then the monetary policy statement said this: wages do not show a material response to the energy shock at this stage. Compensation per employee grew 3.3% in the second quarter, down from 3.5% in the first. Unit labor costs slowed to 2.6% from 3.5%.

And on food prices, steady at 1.2%. 

So, Lagarde says it’s a supply shock. No wage pressures. Falling unit labor costs. No second round effects visible anywhere in the data.

And yet the ECB delivered a unanimous rate hike.

Now remember what Scott Bessent said from Asheville two weeks ago: “traditionally, you don’t raise into a supply shock unless you see second or third order effects.”

So, the ECB ignored that, and ignored its own history of policy mistakes under similar conditions.

Meanwhile, a reporter in the room pointed out that the ECB’s own June adverse scenario for energy prices assumed European gas at €60.

They moved the goalposts on the macroeconomic projections report they released today. They now see €60 as the baseline scenario for European gas. The adverse scenario assumed €77 and the severe scenario is at €130.

Gas is now at €82 — already above the adverse scenario.

That’s growth destructive, and the scenario analysis does not factor in tightening by the ECB (which they did today).

Now, what’s also interesting in this report, they didn’t model a problem in the sovereign debt market.

They talked about risk sensitivity to these scenarios in corporate bond spreads, bank equity, bank bond spreads, lending spreads, but nothing on sovereign debt vulnerability.

So, if the gas price shock becomes severe, the ECB seems to want the market to believe that their standing threat to backstop the fiscally fragile sovereign bond markets in Europe will be sufficient (such, that it’s not even worth discussing in the report).

But as we’ve discussed for much of the past year, the ECB backstop only works when major global central banks are coordinating (namely the Fed is behind you). And the Warsh-led Fed is unlikely to be there, unless political conditions are met (alignment). 

The European Central Bank decides on rates tomorrow morning.

The interest rate market has fully priced in a quarter point hike for weeks.

A hike in December is also fully priced in. And a hike is priced in for March.

So, that’s 75 basis points of tightening expected over the next six months to respond to a rising headline inflation number. Meanwhile, core inflation in Europe — inflation excluding food and energy — is falling. It’s 2.4%. 

A hike tomorrow would be the second quarter point hike since June. That would further destroy demand in an economy that’s barely growing. And of course the inflation isn’t demand-driven anyway, it’s supply-driven — it’s an energy price shock.

As you can see in the chart below, Dutch natural gas traded to €80 per megawatt hour today. That is 2.5x higher than where it sat the day before the strikes. And it’s a new high for this war.

 

An energy price shock of this proportion is plenty to destroy demand in the eurozone economy. And the ECB is about to pile on.  

With that, let’s take a look at two other episodes where the ECB raised rates into an energy shock.

In July of 2008, euro area inflation was running 4%, the fastest in sixteen years, driven by soaring energy prices. Meanwhile, the financial system was wobbling from an unraveling financial crisis. The Fed had cut rates a few months earlier. Oil prices broke $145 a barrel. The ECB hiked rates in response to energy prices and fear of a wage spiral. 

Within six months, the ECB had cut by 175 basis points.

They did it again in July of 2011. Greece was already in its first bailout, Trichet raised for the second time that year. Same reasoning. Energy prices and the fear of a wage spiral. The Fed and the Bank of England both stood still.

Within months, the ECB was forced to cut, again.

So, that’s two hiking cycles into energy shocks. Two reversals, both inside a year, and not because the economy was performing well. 

The interest rate market isn’t reflecting this history (pricing in two more hikes, after tomorrow), nor is the stock market (benchmark German stocks), which was at record highs just 9 business days ago.

We open the week with more kinetic action around Kharg Island. And oil (WTI) is back in the mid $90s. 

Remember, on August 30, the President posted a video of Kharg Island exploding. It was a fake video made with AI. A week later he posted a second one, captioned “Bye bye, Kharg.”

This past Saturday, explosions were heard near the island again.

And today, more sounds of explosions. Oil goes up. 

Let’s revisit the importance of this island.

It sits twenty miles off the Iranian coast. And it handles over 90% of Iran’s oil exports.

And keep this in mind: On March 13, we destroyed more than ninety military sites on Kharg in a single raid, but left every piece of oil infrastructure standing.

Six months later, that remains the case. The oil infrastructure is all intact.

Why?

You don’t destroy the asset you intend to take.

As we’ve discussed, Trump has been talking about taking Iranian oil since 1987, when he told Barbara Walters that America should go in, grab one of their big oil installations, and keep it.

In 1988 he named the island to The Guardian. In March of this year he told the Financial Times his favorite option is to take the oil in Iran, and on the 30th he suggested seizing the terminal outright.

Which brings us to what happened in Caracas last week. It’s the next stage in the Venezuela model we’ve been discussing. 

On January 3, the United States captured Maduro in a military raid and took control of Venezuela’s oil exports. On August 28, Trump announced American majority control of more than 65 billion barrels of proven Venezuelan reserves, and called it the biggest oil deal in world history.

Three days later the White House published the plan to build what it called “new robust, strategic and defensible supply chains in our hemisphere.”

On September 1, Venezuela’s National Assembly approved it. 

That same night, U.S. Energy Secretary Chris Wright landed in Caracas. And on September 2, the Venezuelan government signed deals to turn over the operation of 17 oil fields holding roughly 65 billion barrels of proven reserves to a private company. And that company granted the United States Department of Defense a 35% stake.

This deal puts the operation of a reserve base 40% larger than everything the United States has proven under its own soil into American hands, with the Pentagon holding a third of the operator.

Now, apply this model to Iran.

Kharg isn’t a target. It looks more like the last piece of the operation. Take the island, bring professional operators into the fields. Control the flow of oil and the flow of revenue, and the regime can’t fund itself back into existence.

And that shifts the global power dynamic of oil. For fifty years, the ability to withhold barrels has been the leverage used to wield global power. OPEC had it. Russia had it. Iran has been trying to use it in the Strait of Hormuz all year.

That oil will very likely (soon) be supplied on American terms.

We looked at this chart below back in July, when the 10-year Italian government bond yield was trading under 4%.  Today it traded 4.25%. 

As you can see it’s tracking (white) step-for-step with the rise in European natural gas prices (orange). That’s because sustained high energy prices feed inflation and higher interest-rate expectations across Europe. And for Europe’s heavily indebted governments (like Italy), higher rates ultimately become a fiscal problem.

This dynamic drives the doom loop for Europe that we’ve discussed over the past six months. Expensive energy drives European inflation. Inflation forces the ECB to hike. Hikes drive up the borrowing costs of Europe’s most indebted governments.

The natural gas price in Europe is a bond market problem.

With that, the ECB meets on the 10th. A rate hike is priced at a virtual certainty, with another by December. And ECB officials are publicly affirming it.

But a rate hike isn’t going to unlock energy supply for Europe that has been stalled, destroyed or regulated away. 

It’s only going to destroy demand in an economy that’s barely growing as it is.

Now compare the G20 in Asheville this week. Treasury Secretary Scott Bessent flew with Fed Chairman Kevin Warsh to North Carolina. And then he opened the Summit with prepared remarks alongside Warsh.

In an interview that morning, on bonds, Bessent said “of course we’re on the same page.” On rates, he said, “traditionally, you don’t raise into a supply shock.”

In my note yesterday, we revisited the path of the Trump 2.0 global economic and security campaign to its ultimate target: China.

As we discussed, the Trump administration’s moves of the past 19 months are about ending China’s multi-decade economic war on the West, which has resulted in economic power and political capture. 

How did they do it? 

They undercut the world on price. China used currency manipulation (a cheap yuan) to build an export monopoly. The world allowed it. They liked cheap stuff.

And they liked what China did with the dollars it collected from the cheap stuff. They plowed it into Treasuries, which supplied cheap credit for U.S. consumers to buy more cheap stuff.

And so the cycle has perpetuated through the years — transferring wealth from the U.S. (and the West) to China. 

That’s the trade imbalance that has broken the global economy, and has funded China’s influence building over the past decade.

With that, let’s talk about the G20 finance ministers meeting in Asheville that concluded today. 

It was like no other G20 meeting. 

The G20 is presided over by the U.S. this year. And from opening statements made with Scott Bessent and Kevin Warsh sitting side-by-side yesterday, it was clear that the decade-long global agenda designed around the low growth, high regulation, massive spending, demoralizing climate and social policy was over. 

This G20 was all about optimism, investment and economic growth.

With business and finance leaders from the world’s 20 largest economies at the table, the U.S. brought in the people leading the AI boom to explain the significance of this new industrial revolution.

They piped in Elon Musk for a discussion. He told the room full of people who have been conditioned to ‘secular stagnation’ that AI will increase the size of the global economy by 20%-30%! 

He said there will be a billion humanoid robots in the next ten years, and they will be 5 times more productive than humans.

By the end of the summit today, nineteen of the twenty members were on board with the Asheville communique.

One was not. China.

So, Bessent issued a “chair’s statement” instead of a communiqué. At the end of it, in small type, it said this: the statement was agreed by all G20 members present except China, which objected to paragraphs 4, 10, 11, and 13.

Four paragraphs. Let’s look at what’s in them.

Paragraph 4 is about energy.

It says the smooth functioning of key value chains, including energy, food, fertilizer and critical minerals, is essential to global growth. And it says free, safe and predictable navigation through the Strait of Hormuz is essential to sustaining that growth.

Remember, the clock is running on the economic isolation of Iran. And every country still buying, shipping, insuring or banking the Iranian trade on notice. That’s China. And China just dissented on the free and safe navigation through the Strait.

Paragraph 10 is about trade imbalances.

It says countries running excessive and persistent surpluses should remove the distortions that hold down their own domestic consumption and leave them overly reliant on exports for growth.

That’s China’s economic model. They dissented. 

Paragraph 11 asks the IMF to build better tools for measuring those imbalances, and to improve its data coverage of non-market policies and practices.

That’s the nineteen members calling on the IMF to do its job, and hold China accountable for unfairly manipulating its trade advantage (and therefore creating global trade imbalances). China dissented. 

Paragraph 13 is about sovereign debt.

It calls for broader coordination among G20 official creditors in restructuring the debts of countries that owe a meaningful share of their external debt to G20 members.

That’s Belt and Road. China is the largest bilateral lender to the developing world, and it has been the obstacle in nearly every sovereign restructuring of the past five years. China dissented. 

Now, let’s go back to February of last year, two weeks into this administration. I said China was priority number one, and that the trade war would likely require global participation — maybe putting China in the trade penalty box.

That was nineteen months ago. Today, at a G20 hosted by the United States, nineteen members put their names to a document about surplus countries and export dependence, and China sat alone on the other side of it.

The trade penalty box could be coming. 

Overnight, the kinetic action returned to the Strait of Hormuz.

Let’s revisit the path that got us here.

We’ll start with this excerpt from my February 2025 note, just a couple of weeks after Trump was sworn in: 

Dealing with China is priority number one … the Trump 2.0 trade war with China will likely require global participation (maybe putting China in the trade penalty box).  

It’s a multi-front fight. It’s fighting to rebalance global trade, and weaken the global reliance on China (weaken China’s economic and political leverage). 

As we discussed at the time, China was at the core of nearly every geopolitical move being made. Mexico and Canada were pressured over fentanyl, which comes from China.

Panama and Greenland were about shipping lanes, and keeping them out of China’s hands. On the day Rubio visited Panama, Panama announced it would exit China’s Belt and Road project.

Then tariffs. 

The tariffs were never about revenue. They were about realignment. Use access to the American consumer as the leverage, and draw the rest of the world back toward the United States (away from China). 

It worked. Country after country came back to the table.

Not China. China retaliated, built workarounds, and has stalled.

Then Venezuela, China’s “all-weather strategic partner.” 

This began the dismantling of energy as a geopolitical weapon — a funding source for global chaos, influence, and a tool for economic disruption.

In a cabinet meeting in May, Trump turned to Marco Rubio and asked what was going on in Venezuela. Rubio laid out the mechanism in public. 

He said, the industry is being “professionalized for the first time ever.”

The crude is sold “in the market at market rates.” And “the money is going to an account in the United States controlled and monitored by Treasury, audited by KPMG. And it’s for the first time ever, the money’s not being stolen. It’s going to the benefit of the Venezuelan people.”

That was the Venezuela model stated by the Secretary of State. A Treasury-controlled account. KPMG audit. Market sales. Revenue restructured away from the regime, toward the people.

Eradicate the regime. Take control of the oil. Remove the regime’s funding and leverage.

That was a clear signal for what was already underway in Iran.

And remember, on Iran, forty-years ago Trump told Barbara Walters that the next time Iran threatened this country, America should go in, grab one of their big oil installations, and keep it.

In 1988, he told The Guardian he’d do a number on Kharg Island, and take it.

This past March, he told the Financial Times that his favorite option is to take the oil in Iran.

And with that, there has never been a peace deal scenario that would change the control architecture of oil in Iran. The Venezuela model has been the model for Iran. Take the oil, professionalize the industry, sell it at market rates, and run the revenue through a Treasury-controlled account, so the old regime can’t reconstitute itself on that money.

Which brings us to the isolation strategy.

Last week, Scott Bessent (U.S. Treasury Secretary) started the clock on the economic isolation of Iran, and put every country still buying, shipping, insuring or banking the Iranian trade on notice.

He said, any entity that facilitates money laundering on behalf of Iran will be removed from the US dollar system.

Who does it put in the crosshairs? China.

China takes as much as 90% of Iran’s oil exports.

As we discussed last week, Venezuela was the model for Iran. And the economic isolation of Iran is now the model for China.

This, as Xi is due for a formal state visit, in America, on September 24th.  

Nvidia reported after the close. As we discussed yesterday, if they follow the history of beating guidance, we’d likely be looking at a company running at a $400 billion annual rate, and growing at a triple-digit rate (again!). 

We got it.

Nvidia reported $96.2 billion in revenue this afternoon, up 106%.

Just four years ago it was a $7 billion quarter. Then $13 billion. Then $30 billion. Then $47 billion. Now $96 billion. Back to triple-digit growth.

Keep in mind, that’s doubling off an already enormous base. It’s unprecedented at this scale.

That said, the CFO led the call by saying they expect 70% revenue growth in fiscal 2028. That’s not demand slowing to a 70% growth rate, it’s a supply issue (again).

The supply constraint is back.

It’s memory. It’s advanced packaging. It’s power. Jensen says the entire supply chain is constrained. 

We’ve watched this pattern for three years now. The buildout looks like it’s found its limit, then it shifts into a higher gear, and then it runs into a new physical wall (chips, storage, power, memory).

And it’s severe enough that Nvidia has committed $279 billion to secure future supply and manufacturing capacity, up from $119 billion just three months ago.

Let’s talk about two other key takeaways from the call that tell us about, not just Nvidia, but about the state of the AI boom and outlook.

1) The demand is broadening.

Everyone sees the AI spending from the big hyperscalers (Google, Meta, Amazon, Microsoft, Oracle) . That business at Nvidia grew 102%.

The other business is the AI clouds, enterprises and sovereign governments. That business grew 138%, and it’s about to become the larger of the two. Jensen’s framing was that the hyperscalers were the beginning, not the destination.

2) The next key takeaway: They changed the way they report on the businesses within Nvidia. 

Five product lines are now two “platforms.”

There’s Data Center. And there’s Edge Computing.

Edge is only 7.5% of revenue today. Yet Nvidia now considers it one of only two “platforms.” Why? Jensen’s answer throughout the call was agentic AI. This is continuous inferencing from, ultimately, billions of AI agents running around the clock.

By making Edge Computing a one of only two platforms in Nvidia, is this Jensen telling us where he thinks the rest of this decade goes?

It seems that way. 

He says “when the world goes to fully agentic, you’re going to have agents running all the time, working with other agents running all the time.” That’s constant compute usage. And the meter is always running — billable compute.

And this works because, as he said, AI is doing productive work, which generates profitable tokens, which becomes more productive work and more profitable tokens with the addition of more computing capacity. That’s the self-reinforcing loop Jensen has been talking about all year — what we’ve called the “boom loop.”

Tomorrow we get PCE, the Fed’s favored inflation gauge. And it comes two days before Kevin Warsh gives his first speech, as Fed Chair, at the Kansas City Fed’s annual economic symposium in Jackson Hole. 

As we discussed in the past, this event has historically served as a platform for central bankers to communicate important signals regarding policy adjustments.

In 2010, Bernanke telegraphed QE2 in his Jackson Hole Speech.  Two years later, he telegraphed QE3 at the event.  In 2014, Mario Draghi (head of the European Central Bank) telegraphed aggressive action from the ECB to battle deflationary pressures — a bond buying program was formally announced just days later. 

More recently, in August 2024, Jerome Powell used it to say the time had come for policy to adjust. The Fed cut in September.

That said, Warsh has spent his first three months removing the Fed’s signaling apparatus. He ended forward guidance. Asked what he’d say in Jackson Hole, he called it “a blank piece of paper.”

So the market will pay attention on Friday to the one venue built for signaling, to hear from a Chairman who has spent the summer dismantling signaling.

The bigger event of the week, comes tomorrow after the close.

Nvidia reports Q2 earnings. 

They guided $91 billion in revenue for the quarter.

The Q1 number was $81.6 billion, which was up 85% year-over-year.

The data center revenue that had become a $4 billion quarterly growth rhythm for a couple of years — surged by $13 billion in Q1. That was 21% quarterly growth, 92% year-over-year.

So, clearly the explosive growth for Nvidia has returned.

And given the history of beating guidance, it’s a good bet that we’ll find tomorrow that Nvidia has returned to triple-digit revenue growth, for the first time in two years.

So, by this time tomorrow, we will likely have a company doing near $400 billion run rate, growing at a triple-digit rate.

Meanwhile the stock closed today at $213, about 10% below its May high, at roughly 23 times forward earnings (on tomorrow’s guidance).

Hold that share price flat and let earnings compound. At 25% growth it’s under 12 times by 2030. At 30%, roughly 10 times. Even at 15%, less than a fifth of what the company just delivered, it’s 15 times.

Now, we talked about the Treasury’s move last week to support the long-end of the bond market. And we talked about what looked like a new (or restored) Treasury-Fed Accord.

For the better part of eighteen years, when long-dated Treasuries needed a buyer, the Fed has been the buyer.

Warsh has been explicit that the use of the Fed balance sheet borders on fiscal policy, and he wants the Fed out of that business.

With that, the move last week by Scott Bessent’s Treasury to infuse demand in the long-end of the Treasury market looked like the Treasury taking over the role of crisis manager.

Stan Druckenmiller published an op-ed in the Wall Street Journal on Monday attacking the Treasury’s decision.

This was his case: it wasn’t liquidity management, it was price management. And it wasn’t prompted by market stress or crisis.

With that, he argued to “let the bond market speak.” Let the bond market do its job of disciplining fiscal profligacy (perpetual deficits).

He failed to mention that the market he wants to speak, hasn’t been able to speak freely since 2008.

The Fed manipulated it for the better part of eighteen years, and remember Powell even restarted monthly asset purchases last December on his way out the door, in size!

And Janet Yellen, Biden’s Treasury Secretary, skewed bond issuance toward bills deliberately, to hold the long end down. It was price management, and it ran through a presidential campaign.

Bessent is dealing with a market where the Fed is withdrawing, foreign dollar access is being made conditional, and the hyperscalers are competing with Treasury for capital. And last week he said, to justify the bond move, “what do I know that the market doesn’t know?”

Last week, President Trump threatened an economic “D-Day” to “crush Iran’s shadow economy.”

Today, the U.S. Treasury Secretary held a press conference to announce the start of the clock on that operation, and to threaten all countries financing the Iranian economy to either “stand with the U.S.” or “share in the isolation of a withering regime.”

Sanctions on Iran aren’t new. What’s new is the audience that falls within the net of isolation by association.

Bessent said, “No nation should expect to enjoy the rewards of our system while helping those who seek to destroy it.” And he said, it’s now “a time for world leaders to make a decision between prosperity and isolation, peace and terror, America and Iran.”

This is addressing whoever is still buying, shipping, insuring and banking the Iranian trade.

Who fits that description?  China. 

China takes as much as 90% of Iran’s oil exports.

With that, Bessent was asked directly whether Chinese banks would be targeted. He wouldn’t say. He did say that “no one is above the reach of US sanctions … we know who they are. They know who they are.”

Now, this “stand with the U.S.” or pay a price may sound familiar, because it was the underpinning of the tariff strategy.

As we discussed in our notes, back in April of last year, the point of the tariffs wasn’t revenue, it was about realignment.

Use access to the American consumer as leverage, and draw the rest of the world back toward the United States.

It worked. But not on China.

That’s because the tariff strategy is ultimately about China — ending its multi-decade economic war on the world. 

Remember what Trump’s Secretary of State, Marco Rubio, said in his confirmation hearing: “if we stay on the road we are on right now, in less than 10 years, virtually everything that matters to us in life will depend on whether China allows us to have it or not.”

So, China hasn’t made a deal on trade. It has retaliated. It has built workarounds. It has delayed.

And now the Trump administration is deploying another instrument, one that uses Iran to put China in the crosshairs.

The penalty for those funding the Iranian regime was stated plainly this afternoon. They “will be removed from the US dollar system.”

So the tariffs quickly realigned most of the world. This threat against Iran enablers is to realign who’s left — or isolate them.

With that, just as Venezuela has been the model for Iran — eradicate the regime, take the oil, remove the leverage — the economic isolation of Iran now presents a model for the Chinese Communist Party to contemplate. 

On that note, Bessent’s language today brought this to mind: In February of last year, at the AI Summit in Paris, Vice President Vance warned a room of world leaders about siding with China on technology/AI.  He said “partnering with such regimes, it never pays off in the long term,” and that doing so “means chaining your nation to an authoritarian master.”

Neither Vance, nor Bessent, explicitly called out China, but the dots are easy to connect. 

Today was another warning shot, but one with enough bite to further weaken Iran, and expose China’s complicity.  

Yesterday we talked about the Treasury’s move to support the long-end of the government bond market — providing “greater liquidity” in the 30-year bond market, pushing yields lower.

This is the Treasury taking over a function the Fed performed for the past eighteen years (managing liquidity and the level of bond yields).

This looks like the execution of a new 1951-like Treasury-Fed Accord.

Remember, we talked about this back in early February (here), just after Kevin Warsh was named Fed Chair.

As we discussed in that note, both Bessent (Treasury Secretary) and Warsh (new Fed Chair) worked for, and are very close with, legendary macro investor Stan Druckenmiller.

Druckenmiller is a mentor to both.  And few in the world understand global liquidity, sovereign debt supply, and how they affect capital flows, risk premiums and market psychology like Druckenmiller.

Fast forward six months, and his proteges are now managing the world’s most important liquidity spigots (one from the fiscal side, one from the monetary side).

On that note, in an FT article back in January, Druckenmiller had used the word “accord” to describe the relationship Warsh and Bessent would have between the Fed and Treasury.

That word “accord” is significant, because it’s in reference to the 1951 Treasury-Fed Accord that established the Fed as an independent central bank.

During World War Two, the Federal Reserve pegged yields on the government bond market. Bills were at three-eighths of one percent. Long bonds at two and a half. The Fed committed to buying whatever quantity was necessary to hold those levels, with newly created money, without limit.

It worked. It financed the war at cheap rates. But when the war ended the peg stayed, and by 1951 inflation was running hot and the Fed was still legally obliged to buy Treasury debt at prices the Treasury wanted.

The 1951 Treasury-Fed Accord ended it.

The Fed was freed from financing the government. It became an independent central bank. And managing the government bond market went back where it belonged, to the Treasury, through the supply of debt.

That arrangement held for roughly fifty-seven years.

It ended with the Global Financial Crisis.

The Fed became the largest buyer of Treasury debt in the world in response to the financial crisis. Through three rounds of quantitative easing, then a fourth in the pandemic, the central bank bought government bonds to hold long-term rates down.

The Fed financed the deficits. The deficits kept growing.

What the 1951 Accord was designed to separate was again entangled.

As we discussed back in February, it appeared that Warsh and Bessent were assembled to take them apart again.

End the Fed’s QE business. Stop the distortion. Give the responsibility back to the fiscal side.

Then yesterday, we saw what may be the execution of that arrangement — the Treasury stepped in to manage liquidity in the long end, taking back the job of managing the bond market through supply.

Is the 1951 Accord restored?

The dollar fell on the news. But that’s the opposite reaction of this policy move.

A central bank that monetizes deficits debases its currency. If the Fed is genuinely out of the deficit-financing business, and the Treasury has to manage the debt on its own balance sheet with real constraints, then the structural change toward fiscal discipline should shore up credibility in the dollar. 

This should be dollar-positive.

As we discussed back in February, if the U.S. chooses structural reform, those who don’t will get punished.

Which brings us to Europe.

The European Central Bank is running the opposite policy.

Its bond market is being held together by the credibility of ECB intervention, and by an instrument built in 2022 that has never actually been used.

This is policy divergence.

One central bank is withdrawing from managing its bond market, and its Treasury is picking up the job openly, with published operations and stated sizes. The other is holding its bond market together with the threat of intervention.

One is separating the fiscal and monetary functions. The other is fusing them tighter.

The currency market should figure it out.