While stock markets are fretting over the Federal Reserve’s next move, they may be missing the bigger picture on inflation and face a lose-lose situation because of a blindside threat.

Whether the central bank raises interest rates for the first time in three years at its next meeting remains a coin toss—but Japan could be the game changer. 

Consumer price index and producer price index data this week provide a window into inflation before the Fed’s closely watched measure, the core personal consumption expenditures (PCE) index, due later this month. 

If inflation data, especially core PCE, run hot, it could lead the Fed to hike rates, which would heap pressure on stocks—and especially highflying tech names.

But if U.S. inflation looks to be moderating, and the central bank holds rates steady, that brings another worry.

It looks increasingly likely that the Bank of Japan will raise rates in September to combat a depreciating yen as well as inflation. The Asian country is less able to deal with energy-price spikes than the U.S., and surging oil remains problematic as any deal with Iran on the vital Strait of Hormuz shipping route looks unlikely to come soon.

This has tremendous potential to affect U.S. stocks because of the “carry trade.” Which is when investors borrow yen at low rates, convert yen to dollars, and buy higher-yielding assets such as Treasuries—or even U.S. tech stocks.

This trade depends on a significant differential in Japanese and U.S. yields. But Japan’s 30-year government bond is already trading near 4%, approaching the 5.2% of its U.S. counterpart, with the five-year Japanese yield rising to a record high on Wednesday.

If inflation means the Fed hikes rates in September, stocks will feel the pinch. But if U.S. inflation moderates and the central bank holds rates—while the Bank of Japan raises—the carry trade will be threatened. When that happened under similar circumstances in August 2024, the S&P 500 fell 6.1% in three days.

It’s just one more thing to muddy the waters for investors trying to parse a complex inflation backdrop with still-euphoric tech-stock performance.

—Jack Denton

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Global oil prices are nearing a key trading threshold heading into a dearth of headline drivers for broader markets, and that could mean faster inflation pressures, higher Treasury bond yields, and renewed stock market volatility ahead. The administration’s struggle to reopen the Strait of Hormuz is exacerbating uncertainty.

Brent crude hovers near $90 a barrel, while West Texas Intermediate futures, the U.S. benchmark, are up more than 10% over the past week and are more than 25% higher than when the Iran conflict began on Feb. 28. Both measures reflect the uncertainty around the Strait of Hormuz.

• ING’s head of commodity strategy Warren Patterson that significant hurdles remain before any broader agreement can be reached, as the Trump administration shifts from military escalation to economic pressure. But U.S. crude stockpiles are dwindling to dangerous levels.

• The Strategic Petroleum Reserve’s holdings fell by 6.1 million barrels last week, to an overall tally of just under 300 million barrels, according to Energy Department figures. That’s the lowest level since 1983 and less than half of the SPR’s 714 million barrel capacity.

• That reduces the U.S.’s ability to respond to further supply shocks, a big concern given that global oil flows through the Strait of Hormuz have been far lower than prewar levels for over six months. Deutsche Bank’s Henry Allen also cites tariffs and El Niño as inflation risks.

What’s Next: If the strait stays closed, gas prices could climb to the “highest level ever recorded this late in the calendar year,” said Patrick De Haan, GasBuddy’s head of petroleum analysis. Rising gasoline prices “will also exert growing political pressure on Trump approaching the midterms,” said Stephen Coltman, head of macro at 21shares.

—Martin Baccardax and Janet H. Cho

The number of people leaving the U.S. workforce is hitting historic levels, driven in part by retirements and Trump administration immigration policies. The effects of artificial intelligence on current macro employment conditions remain minimal, though they could help offset some of the looming labor shortages in the future.

• Since January, the labor-force participation rate declined by 0.7 percentage points, the steepest January-to-July drop in the data’s history, except the Covid shutdown. The measure tracks the percentage of people aged 16 and older who are working or actively looking for jobs over the past four weeks.

• It excludes active-duty military personnel, people in prisons or nursing homes, and people who are unemployed or have stopped looking for work. The U.S. labor-force participation rate ticked down again in July to 61.4% and is down nearly a percentage point over the past year.

• Demographic shifts are coming to fruition. Over the past year, labor participation among workers aged 55 and older has fallen substantially, from 38.1% in July 2025 to just 36.9% last month. That’s about a 1.2 percentage point decline, which isn’t that far off from the 1.7 percentage point pandemic decline.

• The pickup in retirements, particularly those leaving a bit earlier than expected, traces to the wealth effects from record highs in the stock market and home values, says San Francisco Fed Vice President Adam Shapiro says. Ageism and higher wages paid to older workers are also likely playing a role.

What’s Next: The Congressional Budget Office predicts that by the end of this decade, the number of people over the age of 65 will outnumber those under 18 for the first time in U.S. history. That indicates immigration will need to account for all population growth and future labor supply growth. For more on this read here.

—Megan Leonhardt

There’s still some life in the artificial-intelligence trade. Lumentum blew past analysts’ earnings expectations after Tuesday’s closing bell, extending a blazing hot run for the optical networking company.

• Lumentum posted adjusted earnings of $3.23 a share for its fiscal fourth quarter, above analysts’ consensus estimates of $2.97. Revenue soared 109% from a year ago to $1.01 billion, ahead of Wall Street’s call for $988 million.

• The strong results provide further evidence that optical technologies, which connect infrastructure within and between data centers, have become a crucial part of the AI boom.

• “As AI compute workloads increase in both speed and bandwidth, data center architects are turning to optical links as a primary means of connectivity,” CEO Michael Hurlston said.

• Lumentum shares have soared 586% over the past 12 months. They racked up more gains last week after a report said the Federal Communications Commission was developing plans to ban imports of Chinese optical transceivers.

What’s Next: Demand for Lumentum’s products looks likely to continue soaring. The company expects adjusted earnings per share of $4.05 to $4.35 on revenue of $1.25 billion at the midpoint in the first quarter of fiscal 2027. Analysts had forecast adjusted earnings of $3.61 a share on $1.16 billion in revenue.

—Nate Wolf and George Glover

Gold’s bounceback is mostly because of five buyers scooping up tons of the precious metal. Four of them are foreign central banks. The fifth is cryptocurrency’s Tether, which has been making massive buys for the same reasons as the central banks: to diversify and to hedge against inflation.

• Tether’s crypto stablecoin is pegged to the dollar. Through June, Tether bought more than 27 metric tons of gold, as did Kazakhstan. Only Poland, Uzbekistan, and China bought more. Tether’s purchases escalated in the second quarter and might have helped pushed the price higher, according to Jefferies.

• Gold now hovers around $4420 an ounce—a 12% rebound from this year’s low under $4000 an ounce in early July. Tether’s CEO, Paolo Ardoino, has acknowledged that the crypto platform’s massive buys could help to prop up the metal in times of volatility.

• Tether also issues a tokenized version of gold, converting ownership of the metal into digital rights on a blockchain. The Jefferies analysts argue that Tether Gold should stabilize the price, too. Stablecoin reserve management and broader tokenization of assets could become important demand sources, they said.

• Tether Gold’s second-quarter holdings rose 9.5% from the first quarter. Ardoino says Tether Gold holders aren’t just buying the tokenized version of the metal when gold is rising. They are increasing their ownership of physical gold “through a product that is fully backed, transparent, portable, and accessible on-chain.”

What’s Next: It’s also worth noting that Tether is still amassing gold despite volatility in cryptos. Bitcoin has tumbled more than 25% this year and other digital currencies such as Ethereum and Solana are each down nearly 40%.