Gasoline and diesel prices may rise soon. U.S. refineries are running at 97.4% capacity, yet gasoline inventories dropped 2.5 million barrels and distillate stocks fell 2.2 million barrels, the steepest weekly decline since early 2025. Tight supply could push pump prices higher within weeks, possibly lifting September’s inflation data and delaying Fed rate adjustments.
What’s moving markets
Two key themes are shaping the economy: relentless AI spending and a sudden shortage of refined oil products.
Nvidia’s earnings, $59.7 billion in net income, with AI chips driving 70% revenue growth, pushed Nasdaq futures up 1.1% overnight, extending tech’s momentum. But beneath the headlines, a tighter squeeze is building: U.S. gasoline inventories fell 2.5 million barrels last week, while distillate (diesel and jet fuel) stocks dropped 2.2 million barrels, the largest weekly decline in 18 months. Refineries are at 97.4% capacity, yet supplies keep shrinking. No storm or OPEC cut explains this, it’s demand outpacing production, and consumers will feel the pinch. Gasoline prices could climb 5-7% in the next six weeks, potentially lifting September’s inflation reading and giving the Fed more reason to hold rates where they are.
The dollar, meanwhile, is gaining ground amid geopolitical uncertainty. The DXY index edged up 0.2% to 99.15 as Iran-U.S. tensions escalated, with CIA alerts to Moscow and protests in Tehran. The dollar’s strength now reflects more than just U.S. rates, it’s the go-to asset in a volatile world. The catch: foreign central banks are selling Treasuries to defend their currencies, driving U.S. yields higher and tightening financial conditions without Fed action.
The big story
The refined-product shortage hiding in plain sight
This week’s Energy Information Administration report revealed a critical imbalance: U.S. gasoline inventories fell 2.5 million barrels, while distillate (diesel and jet fuel) stocks dropped 2.2 million barrels, the biggest weekly decline since early 2025. Refineries are running at 97.4% capacity, meaning they’re nearly maxed out. This isn’t a temporary blip from a hurricane or an OPEC move, it’s demand outstripping supply, with faster economic consequences than many expect.
Why this affects prices:. Gasoline and diesel costs are poised to rise. The price gap between the two has already shrunk from 45 cents per gallon in June to 28 cents today. When this spread tightens, refiners have less incentive to process heavy crude into diesel, leading them to cut production or switch to lighter crudes, both of which reduce overall supply. If gasoline and diesel prices climb 5-7% over the next six weeks (as they did in late 2022), September’s inflation report could show a 0.4-0.5% month-over-month jump, pushing the annual rate back above 3.5%.
Inflation → Fed Policy: A hot September report could delay rate cuts until December.
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Fed Policy → Markets: Extended high rates keep mortgage costs near 6.65%, raise corporate borrowing expenses, and weigh on stock valuations.
Markets aren’t fully pricing this in. The 10-year TIPS breakeven, a measure of inflation expectations, sits at 2.32%, suggesting traders believe the Fed will ignore this pressure. But the last time product stocks fell this sharply (late 2022), inflation surged 0.6% in a month, and the Fed responded with another 0.75-point hike.
Key signals to watch:
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EIA’s weekly product stock data over the next three weeks. Gasoline below 200 million barrels or distillate under 100 million barrels would force a reassessment of inflation risks.
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10-year TIPS breakeven. A move above 2.45% would signal bond markets expect a Fed reaction.
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Fed Chair Warsh’s Jackson Hole speech (today, 10 a.m. ET). If he highlights persistent inflation in services or fuels, the 2-year yield (now 4.17%) could jump.
This isn’t about crude oil, WTI is flat at $82. It’s about the fuels we use every day, and the system is running low on buffer.
The big picture
The S&P 500 ended Wednesday nearly unchanged (-0.02%), but the action was under the surface. Tech and industrials led (XLK +0.61%, XLI +1.09%), while consumer discretionary (XLY -0.67%) and healthcare (XLV -1.0%) lagged. The Nasdaq, heavy on AI, inched up 0.05%, but futures tell the real story: Nasdaq futures rose 1.1% overnight, driven by Nvidia’s earnings and Oracle’s 2.8% gain, which lifted software stocks.
Bonds are flashing caution. The 10-year Treasury yield holds at 4.64%, the 30-year at 5.17%, levels last seen in 2007. The yield curve remains upward-sloping (10-year minus 2-year spread: 47 basis points), but watch for signs of flattening. Credit markets stay calm: investment-grade spreads are at 0.81%, high-yield at 2.70%, both below historical norms.
Crypto is the outlier in risk-on mode. Bitcoin climbed 1.2% to $79,986, Ethereum rose 1.1% to $2,535, extending monthly gains (BTC +25%, ETH +34%). Solana led altcoins with a 2.2% rise to $104.40. The tell? Stablecoin liquidity is growing: Circle issued $5 billion in USDC last week, and Tether’s activity suggests new capital is entering digital assets.
The bigger picture: Stocks are betting on AI’s growth, bonds are pricing in stubborn inflation, and commodities face geopolitical risks alongside demand shocks. The dollar’s strength ties it all together, tightening global financial conditions while keeping U.S. assets attractive. But the refined-product squeeze is the wildcard. If gasoline prices spike in September, the Fed’s rate-cut timeline could stretch, challenging the “soft landing” story.
Around the world
Middle East tensions are simmering, though markets remain muted. Iran and Oman are discussing a temporary reopening of the Strait of Hormuz, a critical oil route largely blocked since February. Brent crude dipped 1% to $86.94 on the news, but the move feels temporary, only five tankers passed through the Strait this weekend, down from a pre-war average of 130 per day.
China’s slowdown is reshaping commodities in unexpected ways. Copper prices rose 0.7% to $6.64 per pound, not from strong demand but from supply constraints: a squeeze in London’s market and U.S. tariff threats have limited availability.
Europe’s bond markets are under strain. The Wall Street Journal reports that heavily indebted nations, France, Italy, the U.K., and Japan, face rising pressure as investors demand higher yields. The spread between German and Italian 10-year bonds has widened to 1.8 percentage points, a level not seen since the eurozone debt crisis.
In Asia, South Korea’s equity market continues its decline, with the Kospi index down 20% from its peak, wiping out $2.5 trillion in market value.
The common thread: Liquidity is the new oil. Whether it’s the dollar’s safe-haven demand, the European Central Bank’s bond market pressures, or South Korea’s equity rout, capital flows are determining winners and losers.
Companies in focus
Nvidia’s earnings beat expectations, but financing risks emerge.. Q2 net income hit $59.7 billion, with AI chip revenue up 70% year-over-year. The company forecast another 70% revenue jump next year, lifting shares 1.5% after hours. But filings show Nvidia’s $12 billion in customer financing, loans at 7-9% interest, effectively props up demand.
Oracle’s cloud growth lifts software stocks.. Shares rose 2.8% on strong cloud revenue, pulling the sector higher.
ARM lands AI chip orders from Meta and OpenAI.. ARM shares jumped 3.9% after announcing $2 billion in committed orders for its new AGI CPU.
Eli Lilly’s weight-loss drug demand softens.. Shares fell 3.6% on reports of slowing interest in GLP-1 drugs like Zepbound.
Uber’s growth slows as riders cut back.. Shares declined 2.3% after ride-hailing revenue growth decelerated.
From Washington
All eyes are on Jackson Hole today, where Fed Chair Kevin Warsh speaks at 10 a.m. ET. With core inflation at 3.3%, well above the Fed’s 2% target, and refined-product shortages threatening to push prices higher, Warsh’s tone will shape whether markets brace for prolonged rates or an eventual cut.
The Treasury market is also in focus with a $44 billion 7-year note auction today. Strong demand could ease yield concerns, while weak demand might push the 10-year yield toward 4.75%.
One detail to note: The Fed’s balance sheet is shrinking again. After a brief pause in quantitative tightening, the central bank has resumed letting $95 billion in bonds roll off monthly.
Under the hood
FOCUS: Refined-product stock draws tighten gasoline-diesel spread, forcing refiners to adjust crude runs and reset inflation expectations
Wednesday’s EIA data showed a critical shift: U.S. refinery utilization hit 97.4% (up 0.2 percentage points from last week), while gasoline stocks fell 2.54 million barrels and distillate stocks dropped 2.23 million barrels, the largest weekly declines since early 2025. This isn’t seasonal noise; it’s a structural gap between demand and refinery capacity. Gasoline demand is 3.2% above the five-year average, and distillate demand (diesel and jet fuel) is up 4.1%, driven by trucking and air travel rebounds.
The impact: As the gasoline-diesel spread narrows, refiners lose the incentive to process heavy crude into diesel. They either cut production or switch to lighter crudes, both reduce total supply. Markets haven’t fully priced this in. The 10-year TIPS breakeven sits at 2.32%, suggesting traders expect the Fed to overlook this pressure. But the last time product stocks fell this sharply (late 2022), inflation jumped 0.6% in a month, and the Fed hiked rates by 0.75 points.
Key indicators to watch:
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EIA’s weekly product stock data over the next three weeks. Gasoline below 200 million barrels or distillate under 100 million barrels would force a reassessment of inflation risks.
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10-year TIPS breakeven. A rise above 2.45% would signal bond markets expect a Fed response.
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Fed Chair Warsh’s Jackson Hole speech (today, 10 a.m. ET). If he flags persistent inflation in services or fuels, the 2-year yield (now 4.17%) could climb.
Worth learning today: Real vs. nominal
Yesterday, we looked at how markets would react to the USD Core PCE Price Index (forecast: 0.2%, prior: 0.1%). The actual number matched expectations at 0.2%, yet the 10-year Treasury yield still rose to 4.64%. Why? Because bonds care about real yield, the return after inflation.
The concrete example
Buy a 10-year Treasury today at 4.64%. If inflation runs at 3.3% (latest core PCE), your real yield, the actual gain in purchasing power, is only 1.34%.
How it works
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Nominal yield = The bond’s stated rate (e.g., 4.64% on the 10-year Treasury).
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Inflation = The rate at which prices rise, eroding your money’s value.
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Real yield = Nominal yield minus inflation. This is your true earnings after adjusting for higher prices.
When inflation expectations rise, bond investors demand higher nominal yields to offset the loss in real returns. That’s why the 10-year yield climbed even with an on-target PCE print, the market is pricing in persistent inflation, which eats into real yields.
**Why this matters to your money *now***
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Savings and CDs: That 4.5% APY on your high-yield account? With 3.3% inflation, your real return is just 1.2%.
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Bonds: Rising real yields make bonds more attractive, but if inflation surprises to the upside, your purchasing power could shrink.
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Stocks: Companies with pricing power (e.g., Coca-Cola, Microsoft) can pass on higher costs, protecting real earnings.
Concept 42 of 83 in the Fair Value course.
Tomorrow’s focus:.CAD GDP m/m (August 28; forecast 0.2%, prior 0.3%) is tomorrow’s key release. If Canada’s GDP misses, which asset takes the biggest hit, the Canadian dollar (USD/CAD), Canadian stocks (TSX), or U.S. Treasuries, and through what channel? Consider trade flows, commodity prices, and central bank reactions. We’ll break it down in tomorrow’s edition.
What to watch this week
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Today, August 27:
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10:00 AM ET, Fed Chair Warsh speaks (Jackson Hole). — Every word will be parsed for clues on the Fed’s inflation stance and rate-cut timing.
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1:00 PM ET, 7-Year Note Auction. — Weak demand could push the 10-year yield toward 4.75%.
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Friday, August 28:
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8:30 AM ET, CAD GDP m/m (forecast 0.2%, prior 0.3%). — A miss could weaken the loonie (USD/CAD) and pressure Canadian equities.
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10:00 AM ET, Prelim Benchmark Payrolls Revision. — A sharp downward revision could prompt a reassessment of U.S. labor market strength.
Not financial advice.Data sources: Bloomberg, FactSet, EIA, Federal Reserve, Bank of Canada, Wall Street Journal. Not financial advice.
