In 30 seconds: Brad Setser challenges a new paper defending China's state commercial banks, arguing that BIS and BoP data reveal over $1 trillion in unexplained foreign asset accumulation consistent with covert PBOC-directed currency intervention. Data center construction spending has surged nearly 60% year-over-year and now exceeds pre-COVID office construction peaks, fueling debate over whether AI-related stocks are in a bubble even as hyperscaler earnings increasingly depend on investment income. Markets and economists debate whether the Fed will hike rates again as inflation remains above target, with NY Fed's Williams signaling no urgency while FOMC hawks push back and weak ADP data complicates the picture. Simultaneous conflicts involving Iran and Russia have disrupted global refining and pushed U.S. retail fuel prices up over 40% since January, driving energy stocks to extreme overbought levels while consumer discretionary suffers.
One argument holds that China's state commercial banks are simply doing normal banking: taking in dollar deposits and parking them in offshore assets, with no significant open foreign exchange position. Balding's argument is twofold: the state commercial banks annual reports show a large stock of foreign currency assets, but a static one, and the SCBs don't report a significant open position, so they are just intermediating between dollar deposits and offshore assets. The data, however, does not cooperate. The core problem is arithmetic. Yet the state commercial banks' annual disclosures depict a largely static portfolio of foreign currency assets. The SCBs' annual disclosure of fx assets and liabilities doesn't line up with the PBOC data on banks' foreign assets and liabilities — the levels are different, the changes are different, and there's a big gap in the increase reported over the last 6-8 quarters. In China nothing quite lines up. Start with the funding side. China's domestic foreign exchange deposits sit at roughly $1 trillion, and net of domestic fx loans the figure is about $800 billion. That $800 billion can be matched to external fx assets. There almost has to be $1 trillion in fx assets somewhere, carried either as an open fx position or hedged with the PBOC in some way, given the size of the gap between cumulative settlement and the PBOC's balance sheet. Even the deposit data behaves strangely. The onshore fx deposits series behaves oddly — it goes up when the CNY (not the USD) offers a higher return, which is the opposite of what you'd expect. When the renminbi offers a higher return, deposits should flow out of dollars, not in. Gold: $4,434.60.
Zoom out a bit further and the divergence is starker: annualized real data center investment in 2025 Q2 is 4x 2022 levels, while non-data-center private investment in structures has actually fallen 5% over the same period. Someone has to pay for all that concrete and copper. Strip out "other income," a line item that increasingly flatters cloud-company earnings, and adjusted profit margins for the big spenders sit at about 20%. Adoption, at least, is accelerating. Markets are not so sure: 80% of Daily Shot readers believe AI-related stocks are in a bubble, though a growing share expects the bubble to be sustained for at least the next 12 months. The cognitive dissonance is familiar: you can believe something is overvalued and still expect it to keep going. AVGO reports earnings on 2025-09-02 after the close, with options pricing an 8% move. The weakness seen in 2025 was largely cyclical rather than an AI story. adjusted profit margins (excluding other income) for hyperscalers: 20%.
New York Fed President John Williams maintained his view that 'the trend in inflation' is 'moving slowly down as some of the effects of the tariffs can move into the rearview mirror,' and in his CNBC interview he didn't sound like someone itching to raise rates. That is not exactly a war cry. New York Fed President John Williams indicated he doesn't see clear-cut evidence that the Fed must raise rates, with the likelihood of a September hike closer to a coin toss. Central banks were perfectly fine with 3% inflation, until everyone figured that out. Meanwhile the real economy is sending mixed signals. Consumer spending shows heightened price sensitivity and solid high-end buying. The outlook is positive but mixed amid inflation, policy, and geopolitics concerns. Payrolls came in at 300,000. Since the Fed began announcing policy decisions on the day of FOMC meetings in 1994, it has never hiked within six months of a negative NFP print — making any September hike unprecedented. North of the border, the Bank of Canada executed a hawkish hold. The Bank of Canada held its policy rate at 2.25%; Governor Macklem said inflation is running too high and that a longer Middle East conflict raises the odds of inflation passthrough. the first 10 move will be rate cuts, then maybe something like QE. The Fed has shown it is unwilling to risk a recession for the sake of the last 100 basis points on inflation.
The question floating around trading desks is straightforward: with the Strait of Hormuz disrupted, why isn't oil at $200? Simultaneous wars with Iran and between Russia and Ukraine have disrupted the global refining system. Retail gasoline prices (including taxes) have climbed more than 40% since the start of the year. 81% of Energy stocks are in overbought territory, compared with 21% of the broader S&P 500. Meanwhile, the Consumer Discretionary sector continues to struggle. Yesterday, not a single Consumer Discretionary stock made a new 52-week high. Zero. Not one. At the same time, 10.6% of Consumer Discretionary stocks were printing new 52-week lows. Since 1990, Consumer Discretionary has never finished a year as the worst-performing sector, which is a fun historical footnote right up until it isn't. Since 1965, that top percentile bucket has produced a forward 3-month SPX return of 0% — not negative, but thin. Chevron plans to invest $7B to more than double its oil production in Venezuela over the next five years, from roughly 300 to 600 thousand barrels per day, having secured the rights to develop two new oilfields in the Carabobo region.
Here is what your portfolio did this session.
S&P 500: 7,666.60, up 0.46% on the day
10-Year Treasury yield: 4.80%, flat 0 bp on the day
30-Year Treasury yield: 5.27%, down 0 bp on the day
13-Week T-Bill yield: 3.77%, flat 0 bp on the day
Gold: $4,434.60, up 1.99% on the day
Fed funds rate: 3.75, flat 0.00% on the day
Long bonds (TLT): $81.95, up 0.10% on the day