NEW YORK — Global financial markets are on edge as U.S. Treasury yields surge on the escalating Middle East war and expanding artificial intelligence investment, while the Trump administration talks up semiconductor tariffs day after day. Rising crude prices have already spread inflation concerns, and tariff uncertainty now piles on top of them. The administration appears to be narrowing its tariff targets to South Korea's Samsung Electronics (005930.KS) and SK hynix (000660.KS), conditioning relief on expanded investment in the United States. Such a move could push up memory chip prices and trigger what is being called "chipflation" — inflation driven by rising semiconductor prices. Higher inflation expectations would send Treasury yields even higher, swelling interest costs for governments, big technology companies investing in AI and ordinary households alike. Unstable chip prices could feed into weaker corporate investment, softer consumer spending and deteriorating public finances. Whether the administration follows through on such a risky bet to rally supporters before the November midterm elections bears watching.
U.S. 10-Year Yield Hits 34-Month Intraday High; "Failing Grade for G20 Finance Chiefs"
In the New York bond market on the 2nd, the yield on the 10-year U.S. Treasury note, the global benchmark, climbed as high as 4.818% intraday, its highest level in two years and 10 months since Nov. 1, 2023. The two-year yield, sensitive to monetary policy, rose to 4.410%, its highest since January last year. The 30-year yield, a reference for mortgage rates, jumped to 5.296%, approaching its previous peak in the 5.3% range. Yields later stabilized somewhat as bargain hunting drew buyers into the market late in the session. The two-year yield ended down 0.023 percentage points at 4.371%, the 10-year yield down 0.014 percentage points at 4.782%, and the 30-year yield down 0.007 percentage points at 5.260%. The surge eased, but anxiety remains.
The bond market showed little reaction to data indicating that U.S. private-sector hiring slowed last month. Slower job growth typically pushes yields lower on expectations that the Federal Reserve will favor easing over tightening. Private employers added 38,000 jobs in August from July, according to Automatic Data Processing, the smallest gain since January. The figure also fell short of the 47,000 expected by economists polled by Dow Jones. The Labor Department is scheduled to release its official nonfarm payrolls report on the 4th.
As the bond market calmed late in the session, the perceived odds of a rate increase eased. Federal funds futures priced the probability that the Fed will raise rates at its Federal Open Market Committee meeting on the 15th and 16th at 62.3%, down from 67.2% the previous day, according to CME's FedWatch tool. The probability of no change rose to 37.7% from 32.8%.
With government debt and fiscal deficits ballooning worldwide, the broad selloff in bonds has extended well beyond the U.S. market. On the 1st, the yield on Japan's 10-year government bond rose as high as 3% intraday, its highest in 30 years since October 1996. The move reflected concerns about Prime Minister Sanae Takaichi's large-scale spending plans combined with expectations of further rate increases by the Bank of Japan. Japanese government budget requests for the next fiscal year, running from April 2027 to March 2028, totaled 143 trillion yen (about 1,224.3 trillion won), a record high for the fourth consecutive year.
In Britain the same day, the 30-year gilt yield rose as high as 5.919% intraday, the highest since May 1998. The 10-year yield reached 5.294% on the 2nd, its highest since August 2007. Germany's 10-year bund yield also rose as high as 3.395% on the 2nd, the highest since April 2011. France's 10-year yield topped 4.275% intraday, its highest since November 2008. The Wall Street Journal wrote that the global bond market had effectively handed world leaders a failing grade, saying the Group of 20 finance ministers and central bank governors meeting held in Asheville, North Carolina, from late last month failed to offer clear solutions for easing fiscal deficits, inflation and geopolitical risk. The newspaper noted that U.S. gross domestic product grew 2.1% over the past year, while the federal deficit is expected to exceed 6% of GDP in fiscal 2026, which runs from Oct. 1 last year through Sept. 30 this year.
Oil Rises for Third Session on Middle East Exchanges; Trump Floats "Trump Strait"
The most direct force driving yields higher recently is concern about inflation. Big technology companies are issuing corporate bonds at record volumes to fund AI investments such as data center construction, and crude prices have been climbing steadily. The Middle East war, which began on Feb. 28, is still seen as having no exit in sight. Against that backdrop, even Federal Reserve Chair Kevin Warsh, who took office in May with President Donald Trump's confidence, strongly signaled in his keynote address at the Fed's economic policy symposium in Jackson Hole, Wyoming, on the 28th of last month that a rate increase could be considered.
Crude prices rose for a third straight session on the 2nd as military exchanges between the United States and Iran intensified. Brent crude futures for November delivery settled 1.04% higher at $95.63 a barrel on the ICE Futures exchange in London, while U.S. West Texas Intermediate futures for October delivery finished 0.88% higher at $91.01 a barrel on the New York Mercantile Exchange. Brent closed at its highest since July 24 and WTI since July 23.
U.S. forces struck radar and mine-laying capabilities along Iran's southern coast on the 1st, and Iran retaliated by attacking U.S. military bases in the region. Asked by reporters at the White House on the 2nd how long renewed strikes on Iran would continue, Trump said he did not know how much longer Iran could hold out but that it did not matter, adding that it would not last too long. He stressed that the United States was ready to resume strikes whenever it wanted. The answer left open both a quick end to the current campaign and a resumption at any time. On his social media platform Truth Social the same day, Trump wrote that with the Strait of Hormuz now under U.S. control, he might rename it the "TRUMP STRAIT," saying it would run hotter than ever, like America. Secretary of State Marco Rubio said in an interview with Fox News Radio's "The Brian Kilmeade Show" the same day that the United States would keep striking targets posing an immediate threat to U.S. forces and international shipping in the Strait of Hormuz, stressing that the strait would remain open and would not fall under Iranian control.
Reuters reported that the administration plans to keep its military response limited and focus on preventing escalation until the U.S. midterm elections on Nov. 3, saying it wants to avoid having the war become a central campaign issue. Vice President JD Vance and Rubio were cited as key figures arguing against escalation. According to the report, the administration is placing more weight on economic pressure such as sanctions than on military action. Reuters said recent U.S. strikes on Iran were carried out purely in retaliation, adding that the administration has been dragged into a quagmire because it cannot ignore Iran's continued attacks on U.S. bases in the Middle East and on energy facilities of Gulf allies.
Inflation Fears Spread Before Midterms; Lutnick Signals "High-Cost, Targeted Chip Tariffs" on SK, Samsung
With inflation issues such as rising living costs and higher borrowing rates increasingly likely to dominate the midterm elections, the Trump administration has pulled out the semiconductor tariff card at an awkward moment. The move carries political symbolism in that it draws large amounts of foreign capital into the country, but it offers no help on prices. Imposing tariffs on memory chips now over hesitation about U.S. investment would sharply raise prices for electronics and other goods while driving up costs for big technology firms.
Commerce Secretary Howard Lutnick said in an interview with CNBC during a G20 innovation ministers meeting in Chapel Hill, North Carolina, on the 2nd that semiconductor tariffs would be a targeted and thoughtful policy. He said the policy amounts to telling companies that if they produce in the United States they pay no tariff, and if they do not, they should be prepared to pay a high price — confirming that the structure links U.S. semiconductor manufacturing investment to tariffs.
Lutnick said the administration had granted tariff relief to companies that produce innovative medicines in the United States and implement most-favored-nation pricing, and would do the same for semiconductors. He cited TSMC's $265 billion plant in Arizona and Micron's $250 billion memory chip plant as examples of Trump's tariff policy at work. He added that the administration had secured $1.2 trillion in investment commitments for semiconductor production in the United States, saying the U.S. share of global chip output was under 2% when the administration took office and is now heading toward 40%, and would reach 50% by the time it leaves if Intel also succeeds. Lutnick also said Taiwan's government would announce an additional $20 billion to $30 billion investment plan in the United States next week. In a subsequent interview with Bloomberg Television, he agreed when asked whether SK hynix and Samsung Electronics had effectively been put on notice.
Politico, a U.S. political news outlet, reported on the 27th of last month that the administration was discussing a sharp expansion of the range of products subject to semiconductor tariffs. The plan would cover not only chips themselves but also finished goods such as laptops, game consoles and data center servers. Tariff rates and quota coverage would vary by country. According to sources, Lutnick is considering linking tariff relief for foreign companies to their semiconductor manufacturing investment in the United States to promote domestic production, allowing a certain volume of duty-free imports tied to the scale of U.S. output.
That resembles the terms applied in the U.S.-Taiwan trade agreement in January. The United States then lowered its reciprocal tariff on Taiwan to 15% from 20% in return for Taiwan's $250 billion semiconductor investment plan. TSMC and others agreed to receive partial tariff exemptions in proportion to their U.S. chip production. The same month, Trump signed a proclamation imposing a 25% tariff on semiconductors imported into the United States and then re-exported to other countries, such as Nvidia's H200 AI chip. The White House said at the time that Trump could soon impose broader tariffs on imports of semiconductors and derivative products to encourage domestic manufacturing. U.S. Trade Representative Jamieson Greer also said in May, when Micron decided to expand U.S. capacity, that across-the-board tariffs on semiconductors would come at an appropriate time.
Living Costs Rising and AI Tech Costs May Surge; Fed Says "Tariff Effects Persist"
The problem is that the pass-through of tariffs to prices, which had appeared to ease considerably after the U.S. Supreme Court ruled reciprocal tariffs unlawful on Feb. 20 this year, is still weighing on the U.S. economy. The more inflationary pressures build, the greater the shock to bond markets in the United States and worldwide.
The Fed's August economic conditions report, known as the Beige Book, released on the 2nd, also listed tariffs among the inflationary factors businesses are feeling. The Fed said upward pressure on input costs in manufacturing and construction had risen noticeably in several districts. Prices rose moderately in eight of the 12 Federal Reserve districts and modestly in two, according to the report. Prices increased slightly in one district, while strong gains were reported in the remaining one. Compared with the previous survey period, the pace of price increases was unchanged in eight districts and slowed in three. Price growth accelerated in one district.
By sector, the Fed said reports of higher energy, transportation and raw material prices were widespread, with metals and petrochemical products showing especially pronounced increases. Retail and manufacturing contacts across several districts reported continuing effects from tariffs. Businesses also reported significant cost pressure from rising medical and insurance expenses. Consumer goods companies in several districts noted that increased customer price sensitivity was limiting their ability to pass higher input costs on to consumers. The Fed said business contacts reported greater uncertainty about the effects of higher energy prices, policy and international conflicts.
Overall U.S. economic activity was assessed as growing moderately. Ten of the 12 districts reported slight or moderate growth, according to the Fed, while activity was unchanged in the other two. Consumer spending rose slightly overall, and auto sales were generally sluggish. In construction, residential building declined while nonresidential building increased on the back of data center projects.
Employment rose very slightly overall. Hiring increased moderately in three districts and slightly in four, while five reported no change. Wage growth was moderate or modest in most districts.
The Beige Book is an economic conditions report compiled by the 12 regional Federal Reserve banks through contacts with banks, businesses and experts in their districts. It is usually released two weeks before the FOMC meeting that sets interest rates. This edition reflects survey results collected by district from the previous report in July through the 24th of last month.
Debate over U.S. inflation is expected to intensify further after the midterm election period. If tariffs are added to an unresolved Middle East war and AI investment pressures, the direction of the global economy becomes harder to gauge. There are optimists as well. New York Fed President John Williams said in a CNBC interview on the 2nd that the path of monetary policy remains to be seen, while arguing that inflation is easing as tariff effects diminish and higher energy prices have not spread to other services. The New York Fed president is regarded as the Fed's effective second-in-command as the only regional bank head with a permanent vote on the FOMC.
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