GDP stronger than number suggests

The U.S. economy grew at a 1.5% annualized rate in the second quarter, down from 2.1% in Q1 and below the 2.1% consensus estimate. Consumer spending accelerated to 3.2%, while equipment investment jumped 15.2%, driven partly by continued spending on AI infrastructure. The weakness was concentrated in trade and inventories: imports rose 11.5%, net exports subtracted 1.01 percentage points from GDP and inventories subtracted another 0.67 percentage point. Real final sales to private domestic purchasers, which excludes trade, inventories and government spending, accelerated to 3.9% from 1.7%. Inflation remained the less encouraging part of the report, with the PCE price index rising 5.1% and core PCE increasing 3.4%.

• Trump’s tariff headlines continue to create significant noise in the economic data
• Companies are pulling imports forward and moving inventories around based on the next expected policy change
• Trade and inventories subtracted nearly 1.7 percentage points from GDP
• Strip out those distortions and private domestic demand grew 3.9%, more than twice the headline rate
• The economy is stronger than the 1.5% number suggests, but inflation is also considerably hotter
• The takeaway is simple: this report gives the Fed very little reason to cut rates

Are the bond vigilantes returning?

The Federal Reserve left rates unchanged at 3.50%–3.75%, but the decision passed by only 9–3, with Beth Hammack, Neel Kashkari and Lorie Logan voting for a 25-basis-point increase. Markets briefly priced a 77% probability of a September hike before that probability fell to 57% following Chair Kevin Warsh’s press conference. The more important reaction occurred in Treasuries: the curve steepened after the meeting, and another bond selloff on Friday pushed the 10-year yield to 4.73% and the 30-year to 5.26%. The 30-year is now trading at its highest yield since 2007.   By Friday, futures markets were again pricing a 69% probability of a September hike.

• The Fed held rates steady, but three members voted for a hike
• The 2-year is approximately 65 basis points above the top of the Fed’s current range, signaling that the market still expects additional hikes
• The 30-year crossed 5.25%, a level not seen since before the financial crisis
• The short end is worried about the next Fed hike; the long end is worried about inflation, deficits and the Fed’s credibility
• Higher rates across the curve are not good for stocks, housing or the government’s rapidly growing interest expense
• The broader point: the Fed controls the overnight rate, but it does not control the bond market

AI hedge fund blow up

Situational Awareness, the AI-focused hedge fund founded by former OpenAI researcher Leopold Aschenbrenner, gained 439% during the first half of 2026 before losing approximately 67% in July. The fund had grown from a few hundred million dollars at launch to more than $20 billion, using leverage to amplify concentrated positions in AI-related companies including Broadcom, Intel, CoreWeave, Bloom Energy and Sandisk. As losses mounted, the fund sold most of its public-equity portfolio to Citadel, with several major prime brokers helping facilitate the transaction. Situational reportedly retains approximately $10 billion of assets, including private-company investments such as Anthropic, and remains up around 80% for the year. The collapse occurred during what Goldman Sachs described as the worst monthly drawdown on record for global hedge funds, as crowded AI positions were unwound across the market.

• A few weeks ago, we discussed how crowded positioning was causing violent rotations between sectors
• This fund, among others, is likely one of the drivers of the aforementioned market activity
• Once the rotation began, leverage turned falling prices into margin calls and margin calls into forced selling
• This yet another example of how short term moves in the market are not always indicative of the longer term trends

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