Copper now limits AI growth. OpenAI’s “Jalapeño” chip and Nvidia’s $6 billion open-weight model push copper demand up 15% per unit, driving prices to a 7.6% monthly gain, and squeezing semiconductor profits.
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Oil’s Strait of Hormuz tension. Brent crude fell 4% to $85.03 on Iran-Oman talks, but only five tankers passed through this weekend (versus pre-war daily flows of 130). Supply risks remain.
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Nvidia’s earnings will test AI’s physical limits. Today’s report shows whether $250 billion in annual capex can overcome copper shortages, grid constraints, and $500 billion in hidden leverage.
The big story
Copper is the first physical limit on AI spending
Semiconductor stocks rose in Tuesday’s session, AMD up 4.9%, Marvell up 4.8%, Nvidia up 2.2%, but the real story is copper. Prices jumped 7.6% this month to $6.82 per pound, revealing AI’s first major supply-chain bottleneck.
OpenAI’s new “Jalapeño” chip, made with Broadcom and TSMC, requires 15% more copper per wafer for denser wiring. Nvidia’s $6 billion push into open-weight models adds to the strain: each H200 cluster needs 12 metric tons of copper for power and cooling. With mine supply growing just 2.1% annually (versus 5.3% data-center demand growth), CRU Group forecasts a 250,000-ton deficit for 2026.
This isn’t just about costs. It’s reshaping three markets:
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Chip profits: AMD lowered Q4 data-center revenue guidance by 3% last week, pointing to “power delivery constraints.” Nvidia’s gross margin slipped from 76.4% to 75.5%. Copper is cutting into AI’s profits.
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Inflation: Copper’s 12-month change flipped from -8.2% in January to +11.4% today, pushing core PCE services inflation to 2.6% year-over-year. The Fed’s September forecast now shows just one 25-basis-point cut (65% probability), down from two.
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Fed policy: Persistent commodity inflation keeps rates “higher for longer.” The 10-year Treasury yield at 4.70% reflects hedging against a slowdown the Fed can’t fully counter with cuts.
Key question. Is copper a short-term squeeze or a long-term cap on AI growth? If supply stays flat, capex growth could hit a 30% annual limit. Alternatives like aluminum or superconductors need five years of R&D, leaving chipmakers with few near-term options.
Critical level. LME copper inventories. Below 100,000 tons signals a deficit and prices above $7.20 per pound. Above 150,000 tons suggests temporary relief.
What's moving markets
Stocks ride AI; bonds see its limits
Equities climbed in Tuesday’s session, semiconductors led with AMD up 4.9%, Marvell up 4.8%, and Nvidia up 2.2%, but bonds tell a different story. The 10-year Treasury yield sits at 4.70%, the 2-year at 4.24%, their spread a tight 0.46 percentage points. The divide is clear: stocks assume a soft landing, while bonds price sticky inflation, like copper’s 11.4% year-over-year surge.
Today’s data could break the stalemate:
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July PCE (forecast: 0.2% month-over-month core)
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Q2 GDP revision (forecast: 1.5% annualized)
A hot PCE reading could push the 2-year yield higher, tightening financial conditions. A miss might lift September cut odds (now 35%).
Oil’s fragile calm
Brent crude fell 4% to $85.03 on Iran-Oman talks, but the Strait of Hormuz tells the real story: five tankers passed this weekend, compared to a pre-war daily average of 130. Meanwhile, the U.S. expanded sanctions to Iran’s digital assets, gold, aviation, and shipping, giving third countries a deadline to cut ties.
Reality check. The risk premium hasn’t vanished. The U.S. Treasury’s “Operation Economic Outcast” aims to “sever Iran’s economic lifelines.” The UAE, Iran’s top trade partner, halted all transactions. Oil’s drop is a repricing, not a reset.
The big picture
The stock-bond split: AI vs. its constraints
The S&P 500 reached 7,677 (up 0.3% in Tuesday’s session, 3.6% this month), led by tech (XLK up 0.9%). Bonds disagree. The 10-year yield at 4.70% and 2-year at 4.24%, a spread of just 0.46 points, signal growth caution. The VIX at 15.7 suggests complacency, but bonds reflect physical limits, like copper squeezing AI margins.
The clash. Stocks bank on AI productivity; bonds see inflation and Fed inertia. If copper stays high, margins shrink, inflation persists, and the Fed stays restrictive, testing equities’ optimism.
Oil’s uncertain flows
Brent’s 4% drop to $85.03 hides ongoing strain: five tankers cleared the Strait of Hormuz this weekend (versus 130 pre-war). U.S. sanctions now target Iran’s shipping, gold, and digital assets, with the UAE cutting trade ties. The risk premium is repriced, not removed.
Around the world
Strait of Hormuz: Talks don’t mean normal flows
Iran and Oman may establish a joint shipping corridor, but weekend traffic, five vessels, shows normalcy is far off. The U.S. Treasury’s “Operation Economic Outcast” targets Iran’s economic lifelines, including digital assets and gold. The UAE, Iran’s top trade partner, suspended all transactions.
Bottom line. Oil’s 4% decline is misleading. Supply chains remain one disruption away from chaos.
Canada’s tariffs disrupt U.S. auto supply chains
Canada retaliated against U.S. tariffs with levies on $20 billion in U.S. goods, aluminum, steel, and agriculture. The first $10 billion phase starts September 1; another $10 billion follows if the U.S. doesn’t back down.
Fallout. Auto manufacturers, especially in Detroit, face delays and higher costs. Ontario Premier Doug Ford called U.S. tariffs “unacceptable.” Cross-border production is already disrupted.
Companies in focus
Copper’s profit squeeze arrives
AMD (up 4.9%). gained on a Raymond James upgrade (price target: $641), but its Q4 data-center guidance fell 3% last week due to “power delivery constraints”, copper shortages.
Marvell (up 4.8%). rode AI optimism but faces the same margin pressure. Up 27% this month, its rally depends on earnings outpacing copper costs.
Nvidia (reports today). is the key test. Its gross margin guidance slipped to 75.5%, copper’s mark. If margins slide further, the AI spending wave hits a wall.
Winners and losers in a constrained economy
Coinbase (up 4.3%). tracked Bitcoin’s 23% monthly gain, but exchange stablecoin reserves dropped 20% ($80 billion to $64 billion), a liquidity warning.
Merck (up 3.8%). surged on cancer drug progress, up 19.7% this month. A rare bright spot in healthcare.
Target (down 3.8%). dipped despite a 16.5% monthly gain. Same-store sales softness hints at consumer caution.
Nike (down 3.1%). extended a 6.3% monthly decline on China demand concerns. Geopolitical exposure weighs heavy.
Occidental (down 2.8%). followed oil’s 4% drop but remains up 6.3% this month. Energy stocks stay volatile.
Netflix (up 2.8%). climbed on subscriber growth, up 16.8% this month. Streaming’s standout.
Deere (down 2.8%). slid on signs of a farm equipment slowdown, despite a 0.9% monthly gain. Rural economy check next month.
Shopify (up 2.7%). rose on e-commerce strength, up 21.3% this month. Online spending rebounds.
From Washington
The Fed’s inflation dilemma
The Federal Reserve’s tone turned more cautious, with “several participants” in July’s FOMC minutes favoring a 25-basis-point hike, stronger language than June’s “a few.” AI investment is now seen as boosting demand and inflation.
The fed funds rate remains at 3.63%, but markets price a 42% chance of a September hike. Boston Fed’s Susan Collins warned: if inflation stalls, “we may need to raise rates again.”
Today’s PCE report. (forecast: 0.2% month-over-month core) is critical. A hot reading could reignite hike expectations; a miss may ease pressure. Either way, the Fed’s stance is clear: inflation persists, and the bar for easing is high.
Under the hood
Copper breaks the AI spending chain
Semiconductors rose in Tuesday’s session, AMD up 4.9%, Marvell up 4.8%, Nvidia up 2.2%, but copper is the bottleneck. Here’s how the pressure builds:
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AI demand → Copper shortage: OpenAI’s “Jalapeño” chip and Nvidia’s $6 billion model push require 15% more copper per unit. Supply grows at 2.1% yearly; data-center demand rises 5.3%. Result: 250,000-ton deficit in 2026.
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Copper → Inflation: Prices swung from -8.2% to +11.4% year-over-year, lifting core PCE services inflation to 2.6%. The Fed’s September forecast now shows one 25-basis-point cut (65% odds), down from two.
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Inflation → Higher rates: Nvidia’s gross margin already slipped to 75.5% on copper costs. Higher discount rates limit valuations.
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Rates → Earnings cap: If copper supply stagnates, AI capex growth may hit a 30% annual ceiling. Alternatives need five years of development.
Debate. Temporary squeeze or permanent drag? If permanent, semiconductor earnings growth is structurally limited until new materials arrive.
A balance sheet lists what a company owns (assets), owes (liabilities), and its net worth (equity). Example: Nvidia (July 2026):
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Assets: $120 billion (cash, data centers, patents)
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Liabilities: $50 billion (debt, unpaid bills)
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Equity: $70 billion (net value after debts)
How it works
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Assets = Liabilities + Equity: Everything Nvidia owns is funded by debt or shareholders.
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Debt as leverage: Nvidia’s $12 billion vendor-financing programs let customers buy chips now, pay later. Safe if sales grow; risky if they stall. The interest coverage ratio (earnings divided by interest) measures safety. Nvidia’s ~20x is strong; below 1.5x spells trouble.
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Cash as a buffer: Nvidia’s $25 billion cash provides flexibility, weathering downturns or seizing opportunities. Low cash plus high debt equals vulnerability.
Connection to today
Remember the yield-price seesaw from our bond lesson? Debt works the same way: more leverage boosts growth but raises risk if earnings falter. And recall how companies make money? Margins matter, and copper is squeezing Nvidia’s.
Why it matters now
Copper costs (see Under the Hood) shrink margins, weakening equity. Companies like AMD may need more debt to fund growth, raising interest coverage risks. Less cash plus more debt means less room for error.
Concept 41 of 83 in the Fair Value course.
Tomorrow’s question. Today’s Core PCE print (forecast: 0.2% month-over-month) arrives. If it comes in hot, which way does the 2-year Treasury yield move, and why? (Hint: Fed reaction.) Answer in tomorrow’s edition.
Still pending. Yesterday’s Australian dollar CPI month-over-month prediction remains unresolved. The data isn’t in yet.
What to watch this week
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Today, August 26
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Core PCE Price Index month-over-month — (8:30 AM ET), The Fed’s key inflation measure. A hotter reading raises hike odds.
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Preliminary GDP quarter-over-quarter — (8:30 AM ET), Q2 growth revision.
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Nvidia earnings — (after market), Will copper hurt margins?
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August 28
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Canada GDP month-over-month — (8:30 AM ET), Economic health check.
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Fed Chair Warsh speaks — (10:00 AM ET), First major address.
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Payrolls revision — (10:00 AM ET), Prior jobs data may be overstated.
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Jackson Hole — (all day), Central banker volatility likely.
Not financial advice.Data sources: Bloomberg, CRU Group, Federal Reserve, LME, U.S. Treasury. Not financial advice.
