Bescent's "toolbox" struggles against the dual hit of rising oil prices and weak consumption, Goldman Sachs: "The market is filled with the scent of stagflation."

This week, Secretary Yellen has been busy putting out fires in the bond market, but the market seems unresponsive. U.S. Treasury Secretary Yellen has continuously released policy signals, attempting to lower long-term U.S. Treasury yields through methods such as debt buybacks and fiscal consolidation. However, after a brief decline, the yields on 10-year and 30-year Treasuries quickly rebounded. Meanwhile, oil prices surged over 7% in just one week, gold rose by about 3.5%, the dollar weakened, and consumer data from companies like Walmart also indicated signs of cooling. While the bond market remains stubborn, oil prices are rising, and consumer activity is starting to weakenvarious assets are showing simultaneous movements, indicating the market is reassessing the logic of stagflation. Rich Privorotsky, head of a single Delta trading desk at Goldman Sachs, candidly stated that the current cross-asset market is permeated by the scent of stagflation. In his view, while the toolbox at Yellen's disposal is extensive, the challenge of addressing long-term interest rates, fiscal deficits, energy prices, and weak consumer spending simultaneously is increasing. Despite Yellens frequent interventions, long-term Treasuries are still non-compliant. On Thursday, Yellen announced that the Treasury's bond buyback scale could exceed $4 billion for each operation and referred to these actions as debt reversal operations, while emphasizing that the Treasury has a large toolbox. However, the market's response has been lukewarm. Following the announcements of long-term bond buybacks, coordinated yen interventions, and the Treasury's expressed willingness for further actions, the yield on the 10-year Treasury rebounded to around 4.7%, with the 30-year yield rising to about 5.25%. Privorotsky noted that, in his opinion, the weakness of the dollar might be a more significant market signal than whether long-term rates can continue to decline. Currently, the U.S. faces immense pressure from a large Treasury issuance on one hand, while AI and data center construction continue to absorb substantial capital on the other. Both sovereign financing and corporate financing needs are expanding simultaneously, making it difficult for Treasury buybacks alone to fundamentally alter the supply-demand dynamics of long-term bonds. Fiscal consolidation also faces market skepticism. Yellen previously proposed reducing expenditures by hundreds of billions of dollars through mechanisms like anti-fraud task forces, but according to Privorotsky, significant uncertainty remains regarding whether these policies can ultimately be realized, making it challenging for the market to adjust long-term fiscal expectations based solely on promises. Rising oil prices, while consumer spending cools. Beyond the bond market, increasing oil prices are amplifying concerns about stagflation. Whats more concerning is that rising energy costs and cooling consumer demand are happening simultaneously. Walmart's latest data shows that same-store sales growth in the U.S. is only 2.6%, the lowest in six years, while foot traffic growth has dropped from 3% last quarter to 1.5%. Despite the company still raising its annual performance guidance, management warned that once oil prices exceed $4 per gallon, consumers will start to adjust their spending and make trade-offs. Privorotsky described the current U.S. economy as dumbbell-shaped: one end experiences substantial capital absorption by AI and data centers, while the other end sees consumer spending under pressure. Cross-asset performances are also signaling stagflationoil prices are rising, gold is strengthening, the dollar is weakening, and long-term Treasury yields remain elevated. At the same time, the gold/copper ratio is rising, and the U.S. 10-year breakeven inflation rate has increased nearly 10 basis points over the past two weeks, while the stagflation basket has risen a cumulative 6.7% this week. The market is trading not just the fluctuations of individual assets but is witnessing the formation of stagflation logic. Next, the Jackson Hole conference will be a key juncture. Privorotsky believes that whether Warsh sends dovish or hawkish signals, it could put the market in a dilemma: dovish signals might push long-term rates and inflation expectations higher, while hawkish signals could further suppress already cooling consumer spending. The Federal Reserve is facing an increasingly tricky situation: inflation has not yet subsided, yet growth is already under pressure.