The Daily Spark

This week, we not only got a strong employment report, we also saw a strong uptrend in the ISM Services Prices Paid to levels last seen during the 2021 to 2022 inflation surge, see charts below. This points to upside risks to inflation, including the CPI data next week, and we now expect the FOMC to raise interest rates at its September meeting.

Germany has the least-funded pension system of any major advanced economy. Funded pension assets are just 7% of GDP, against 149% in Sweden and 185% in Canada, see chart below. German household wealth sits mostly in deposits.

Demographics and the desire for scaled pools of domestic capital are now forcing change.

Pension reform could channel 2% of salaries into long-term savings, 1% from employers and 1% from employees. Phased in from 2028 and completed by 2031, this points to roughly €30 billion a year flowing into Pillar 1.

Add parallel reforms to private pensions from 2027 and to occupational schemes, and total inflows could reach around €90 billion annually once fully implemented, roughly 2% of German GDP.

The bottom line is that Germany is starting to build a recurring institutional flow of capital that will deepen German capital markets.

Three things to watch: whether workers make voluntary top-ups, whether the public fund manages the money internally or outsources to external managers and whether occupational coverage broadens beyond the quarter of SMEs it reaches today.

Written by Huw van Steenis, London

There is still no evidence that AI is replacing workers: a new survey from the New York Fed carried out in August shows that 34% of service firms and 22% of manufacturers using AI are retraining staff, while only 4% and 0% report layoffs. This is consistent with our core view that AI is putting downward pressure on wages in AI-exposed occupations without a significant negative impact on employment. For more discussion see here.

The term premium measures the extra yield investors demand for holding a long-dated bond beyond what expectations for Fed policy alone would justify, which makes it a key market-based gauge of fiscal sustainability and Fed credibility.

Speaking at the last Treasury Market Conference, Treasury Secretary Bessent noted that the US 10-year term premium is basically unchanged. The chart below shows that this is still the case.

Specifically:

1) The New York Fed’s measure of the US 10-year term premium has moved sideways over the past 12 months. On this measure, there has been no deterioration over the past year in how the market prices US fiscal sustainability or Fed credibility.

2) The US term premium currently sits below the term premiums of Japan and Germany. This suggests that the market is less worried about the US fiscal situation compared with the fiscal situation in Germany and Japan.

The bottom line is that this chart pushes back on the idea that the US fiscal situation is having a uniquely large impact on long-term rates, or that Fed credibility is worse today than 12 months ago.

Put differently, the Fed went into 2026 expecting several cuts, and now the FOMC is leaning toward hiking. With this backdrop, it is not surprising that long rates are higher.

We have updated our 127-page US housing outlook, available here.

There are 10 conclusions:

1. High mortgage rates at 6.7% combined with a median home price of $400,000 are holding down traffic of prospective homebuyers, see the first chart.
2. 56% of US households can only afford a home priced below $300,000, well under the current median sales price, see the second chart.
3. The share of first-time homebuyers is at the lowest level in decades, and the median first-time buyer is now 40 years old, up from 30 in 2008, see the third chart.
4. Nobody is moving. The structural decline in the share of the US population changing address continues, and the share of households planning to move over the next 12 months has fallen to a record low of approximately 7%, see the fourth chart.
5. Household formation has slowed sharply as immigration has declined, removing a key source of underlying housing demand, see the fifth chart.
6. The typical American home is now 42 years old, and we are not building fast enough to replace the aging stock, see the sixth chart.
7. US homes are getting smaller, with the median size of new single-family homes declining over the past decade as builders chase the price points buyers can still reach, see the seventh chart.
8. House price inflation has stalled near 1% overall, but it is turning higher again for the most expensive homes, where buyers are least dependent on mortgage financing, see the eighth chart.
9. Households' equity in real estate totals $35 trillion, an average of roughly $400,000 per owner-occupied home, see the ninth chart.
10. Delinquency rates on multifamily housing have climbed above their post-GFC peak to the highest level since at least 2004, see the tenth chart.

The Big Mac index measures currency valuation by comparing the price of an identical burger across countries. By that measure, the Brazilian real and Egyptian pound look deeply undervalued against the dollar, by 20% to 55%, see charts below.

But swap the burger for an iPhone 17 Pro with 256GB, and the picture inverts. The same phone costs 90% more in Brazil and 55% more in Egypt than it does in the US.

The difference is what goes into each product.

A burger is assembled from local labor, local rent and local beef, none of which can be arbitraged across borders, while an iPhone is a genuinely global good built from one supply chain at one dollar cost.

The bottom line is that the iPhone index is the better read on currency valuation, because the Big Mac's core weakness is the one Balassa and Samuelson identified 60 years ago. Productivity gains in rich countries lift wages economy-wide, including in the kitchen, so poor countries look cheap by construction rather than because their currencies are genuinely undervalued.

Some loans let the borrower add interest to the principal rather than pay it in cash, an arrangement known as payment-in-kind (PIK). The yield on PIK debt is the rate lenders earn on those loans, and it normally sits above the yield on cash-pay loans because borrowers who need the PIK option tend to be weaker credits. PIK debt yields in listed BDCs have started to rise, with software sector headwinds driving the repricing, see chart below.

The risks are rising that long rates six months from now could be a lot lower than where they are today.

Long rates are high today because of inflation and fiscal problems. But these forces could end up being dominated in early 2027 by what happens to AI, see the first chart below.

If AI succeeds and tech companies generate trillions in revenue, AI will be massively deflationary and push rates lower.

If AI does not work out, the bubble bursts and the Nasdaq is down 50% as investors rotate out of equities into Treasuries and long rates fall dramatically.

Over the next six months, the market will make up its mind about which AI scenario is playing out.

The bottom line is that financial markets are driven by narratives. The narrative in rates today is all about inflation and fiscal problems. But the narrative going into 2027 is going to be all about either the success or failure of AI. And in both scenarios, long rates are going to be lower.

For 30 years, the 10-year Treasury yield fell almost entirely on the handful of days around Fed meetings, and did essentially nothing the rest of the time, see chart below.

That stopped in 2022 after the Fed began to raise interest rates. The 10-year has since risen roughly four percentage points, but almost none of that came on Fed days. The reason is that each hike was largely priced by the time the Committee met, so the FOMC announcement and press conference carried little news for the long end, and the move higher instead came from higher-than-expected CPI prints, stronger payrolls, increasing Treasury supply and a rising term premium, none of which sit on the FOMC calendar.

This raises the question of whether FOMC meetings are still the most important drivers of long rates. With Fed Chair Kevin Warsh having dropped forward guidance, the most likely scenario is that rates become more market-driven and move more outside of FOMC meetings. In other words, this looks less like a post-hiking-cycle anomaly and more like the new regime.

The bottom line is that we should not expect forward guidance from Warsh today at the Jackson Hole Economic Symposium, but anything he says about framework and the economy, in particular where he sees inflation, unemployment and the neutral rate, could move the long end anyway.

Today's Spark comes with a welcome. Huw van Steenis has joined Apollo in London. He brings decades of experience across European banking and markets, and will be writing here on Europe, the UK and the ongoing evolution of private markets.

We start by looking at how the UK's corporate funding model has changed, see charts below.

Twenty years ago, banks provided 57% of UK corporate debt. Today, investors are the largest source, at 56%.

All the real growth has come from capital markets. Adjusted for inflation, bank lending to UK companies has fallen 10% since 2005, while market-based finance has grown around 50%.

The menu is also much broader. Twenty years ago, market finance meant bonds. Today, public bonds are 40% of UK corporate debt, with private bonds, direct and broadly syndicated loans, and other non-bank lending adding a further 16%. Most of it is investment grade.

Bank lending has gone global. Overseas banks have lifted their share of UK corporate bank lending from 17% before the 2008 financial crisis to 27% today.

The bottom line is that UK companies can now tap a deeper and more diverse pool of capital than at any point in two decades. More sources of funding mean more resilience, better access and less dependence on any single part of the financial system.