(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Mike Dolan

Aug 14 (Reuters) - Even though we're slipping inexorably

into the summer holiday doldrums on world markets, bond anxiety

was once again a theme of the early part of this week,

threatening to spoil the party for stock markets basking in the

glow of bumper, AI-infused second-quarter earnings.

All's well that ends well, however - at least for this week. Two

less-than-scary updates on U.S. consumer and producer price

inflation for last month appeared to be enough to take the sting

from jumping Treasury yields. The largely expected tick lower in

both annual inflation gauges offers Federal Reserve officials

some cover if they want to avoid an interest rate rise as soon

as next month.

The Fed futures market scaled back chances of a hike in

September to just one-in-three from what was a coin toss before

the price reports. Encouraged also by decent demand at new debt

auctions of some $125 billion this week, Treasury yields unwound

most of their recent rise, with the two-year yield hitting its

lowest in a month.

Problem solved? Well, not quite.

For a start, Treasury was forced to sell new 10-year notes

at their highest rate at auction in 19 years this week and

30-year bonds at their highest rate in 25 years on Thursday.

Meanwhile, the average 30-year fixed mortgage rate is running as

high as 6.7%.

Hopes that July's high oil and energy costs would quickly

dissipate on moves to end the Iran war have run aground again

this month. Brent crude prices probed $90 per barrel this week -

and average U.S. retail gas prices are still above $4 per gallon

- as it became increasingly clear that the two sides in the war

are still far apart.

Iran continues to assert control over the Hormuz strait and

sporadic attacks continue in the Gulf and Red Sea, while the

U.S. said on Thursday it could maintain a blockade on Iran's

ports indefinitely. Importantly, transits through Hormuz fell

this week and less crude may be escaping the Gulf than the U.S.

believes.

If that were the only issue aggravating inflation, it may be

tempting to look through it.

But after the week's relatively well-behaved inflation reports,

the Fed now has to look to the personal consumption expenditures

(PCE) price measure that it explicitly targets. With key

components from this week's data mapped into that, the Cleveland

Fed's inflation "nowcaster" still has PCE inflation running at

3.7% for both July and August - with core PCE running at 3.3%.

So, not only have these PCE measures been above the Fed's 2%

target for almost six years, they have both been above 3% for

all of this year so far.

The doves cling to hopes that tariff-related goods price

rises are about to fall out of inflation indexes, downward PCE

data revisions are on the way, the labor market is softening and

AI promises productivity miracles.

The hawks see overly loose financial conditions that suggest the

Fed is no longer restricting activity, rising corporate

leverage, tech sector product tightness, a falling jobless rate

and - above all - fraying credibility in the Fed's willingness

to get inflation back to its target.

Cleveland Fed boss Beth Hammack, who voted to hike at the last

meeting, said the Fed needed to act now to achieve its target.

"If it takes us another three or four years to get there, is

that OK?" she asked rhetorically on Thursday. Boston Fed chief

Susan Collins, who's not a voting policymaker this year, told

the Financial Times she would be prepared to back a rate move

this month.

But the real psychodrama hanging over the Fed happened at the

tail end of last week, when President Donald Trump sent a letter

to Fed Governor Lisa Cook that demanded she clear her name over

disputed mortgage fraud allegations or be fired.

Even though the Supreme Court ruled in June that the president

could not fire a Fed governor without proof of wrongdoing, the

timing of Trump's new deadline is widely seen as reopening

pressure on the central bank and casts fresh doubts over its

independence from politics.

Finally, one more thing hanging over Treasuries is the chance

that prolonged Japanese intervention to prop up its ailing yen

could see it sell U.S. bonds to fund that. That story went quiet

this week after the recent historic joint action from Washington

and Tokyo to shore up the currency, but there's pressure

building on the Bank of Japan to reinforce the action with

higher interest rates.

Reuters sources said on Friday that the BOJ would hike next

month and possibly accelerate tightening thereafter.

Even if debt markets are still wobbly, stocks had a sunnier week

- recapturing record highs on Wall Street as overall annual

earnings growth in the second quarter topped 50% for S&P 500

companies - and even hit 23% in Europe.

Once again, the eye-catchers stateside were companies at the

center of the AI boom. Shares in both CoreWeave and Super Micro

Computer surged about 20% on Wednesday, a day after their

earnings beats underscored the scale of the AI infrastructure

buildout.

With equity indexes back in rude health and volatility

gauges subdued, speculation about long-awaited AI IPOs has gone

up a gear again. The Financial Times reported that Anthropic

investors are hoping and praying for a listing with a valuation

as high as $2 trillion in October.

If that transpired, it would be the biggest IPO ever,

eclipsing the value of SpaceX after its June offering - much

like the sun was momentarily eclipsed in Europe this week!

And the macroeconomic impact of the AI transformation and capex

whoosh - noticeable in inflation and jobs data, even if still

relatively small - is not confined to the U.S.

Britain challenged the long-lingering narrative about its

struggling economy with an unexpectedly strong GDP reading for

June and quarterly growth figures that showed it was the

fastest-growing G7 economy for the second quarter in a row this

year.

With annualized growth of 2% through the first half,

Britain's Office for National Statistics said the information

and communications sector contributed to almost half of the 0.4%

gain in the second quarter.

Barring new developments in the Gulf, next week will likely

see the summer lull deepen, with the Fed's Jackson Hole

symposium and Nvidia's earnings not coming until the week after.

Until then, markets will pore over the minutes of the Fed's

split meeting last month and a smorgasbord of economic updates

from U.S. industry, business surveys and housing, as well as a

sweep of Chinese macro data and inflation numbers from across

Europe.

For more data-driven insights on markets and commodities, check

out Reuters Open Interest. You can learn:

* Why do hyperscaler defaults still seem like a distant

prospect?

* What key buyer is getting in on the latest "gold rush" and

why?

* What dilemma lies at the heart of the Trump

administration's view on interest rates?

* How is Europe's renewables boom redefining its

relationship with gas?

* How is automation rewiring U.S. transport?

* Why are China's surging coal imports likely to taper off?

* What could rising populism mean for inflation?

* How is the U.S. power system distributed geographically?

* Why have LME aluminium stocks just hit a 36-year low?

* How might the second "China shock" impact China's own

companies?

* Which country is singlehandedly balancing Asia's crude

demand?

* What does copper's latest "panic attack" say about its

sensitivity to supply disruptions?

I'd love to hear from you, so please reach out to me at .

Want to receive the Morning Bid in your inbox every weekday

morning? Sign up for the newsletter here. You can find ROI on

the Reuters website, and you can follow us on LinkedIn and X.

Opinions expressed are those of the authors. They do not reflect

the views of Reuters News, which, under the Trust Principles, is

committed to integrity, independence, and freedom from bias.