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As Tariff-Driven Inflation Cools, the Fed's Hawkish Bias Wavers

For much of this year, the market's central anxiety was not when the Federal Reserve would start cutting rates, but whether tariff pass-through would force the central bank back into a hiking cycle. That worry built steadily in the first half of the year as tariff costs worked their way into consumer prices and raw material costs climbed. The latest U.S. July CPI report showed both headline and core inflation decelerating from the prior month, with core price growth cooling back to the same level last seen in January and February this year. The conversation has now shifted from whether the Fed will hike again to how long this pause can hold, and that pivot is the structural signal worth watching most closely right now. The main forces behind this cooling are continued easing in energy price pressure and a broad market view that most of the tariff cost pass-through into consumer prices has already worked its way into the data, while a modest year-over-year decline in real average hourly earnings in July has cooled consumer momentum and further undercut the case for renewed tightening. Yet the cooling is not uniform: prices for computer software and peripheral equipment rose more than a fifth from a year earlier to a record high, reflecting upstream cost pressure from AI data centers scrambling for memory chips, a reminder that tech-related goods remain a corner the tariff relief story has yet to reach. The Fed itself is showing internal division, with some officials at last month's meeting already arguing for a hike, and a September decision that falls awkwardly close to the sensitive window around the year's midterm elections is pushing policymakers toward a more cautious pace. Whether the inflation risk has truly passed remains a genuine point of disagreement in the market. Looking one to three months ahead, a September hold remains the dominant market expectation, and hawkish bets have eased only modestly from where they stood before the data, meaning most traders are still pricing in some risk of a policy path skewing slightly hawkish. If the labor market keeps softening and consumer momentum stays weak over the next six to twelve months, the doves could gain further ground, opening the door to a policy pivot next year. This is not an all-clear signal, however: Washington's recent reliance on drawing down oil inventories to cushion price spikes is not a sustainable fix, and any renewed climb in oil prices could reaccelerate energy inflation later this year, giving the hawkish narrative room to resurface.

U.S. Keeps Coupon Treasury Issuance Steady as “T-bill and Chill” Deepens Reliance on Short-Term Debt and Refinancing Risks

U.S. government financing needs continue to rise, but the Treasury has chosen to hold off on expanding medium- and long-term debt issuance. In its quarterly refunding announcement released on August 5, 2026, the U.S. Treasury said it expects to maintain the current auction sizes of nominal coupon securities and Floating Rate Notes (FRNs) for at least the next several quarters, with additional financing needs to be met primarily through Treasury bills (T-bills) maturing within one year. “T-bill and chill” is a term used by market traders to describe this issuance strategy and is not an official Treasury policy name. With coupon security auction sizes temporarily held steady, a larger share of marginal financing needs is being absorbed by T-bills, while medium- and long-term Treasury issuance continues at the existing pace. As of August 5, 2026, total U.S. public debt stood at approximately US$39.83 trillion, including about US$32.10 trillion in debt held by the public, putting the US$40 trillion threshold within close reach. Greater reliance on short-term financing helps limit immediate pressure on the long end of the Treasury market, but it also shortens the maturity profile of government debt, requiring more frequent refinancing and making interest costs more responsive to Federal Reserve policy and money-market conditions. Rising Borrowing Needs Push More Financing Toward T-bills The Treasury’s unchanged issuance guidance covers nominal coupon securities ranging from 2-year to 30-year maturities, as well as 2-year FRNs. The August quarterly refunding totals US$125 billion, comprising US$58 billion of 3-year notes, US$42 billion of 10-year notes, and US$25 billion of 30-year bonds. After refinancing approximately US$96.3 billion of privately held securities maturing around the same period, the operation is expected to raise about US$28.7 billion in new cash. Quarterly refunding accounts for only part of the government’s overall borrowing needs. The Treasury estimates that it will need to borrow US$739 billion in privately held net marketable debt from July through September 2026, US$68 billion more than projected in May, mainly due to lower expected net cash inflows. Borrowing needs for October through December are estimated at US$628 billion. Treasury estimates provided to the Treasury Borrowing Advisory Committee show that, with auction sizes for nominal coupon securities, FRNs, and Treasury Inflation-Protected Securities (TIPS) held unchanged, T-bills would absorb a substantial share of incremental financing requirements. Period Privately Held Net Marketable Borrowing Net Non-Bill Marketable Issuance Assumed Buybacks Implied T-bill Financing Jul.–Sep. 2026 US$739 billion US$375 billion US$45 billion US$409 billion Oct.–Dec. 2026 US$628 billion US$361 billion US$50 billion US$317 billion Note: Non-bill marketable securities include nominal coupon securities, FRNs, and TIPS. Implied T-bill financing is calculated by the Treasury based on current auction-size assumptions and does not represent a predetermined issuance target. Strong Demand for Short-Term Debt Temporarily Eases Long-End Supply Pressure The Treasury’s preference for T-bills partly reflects the cost of long-term financing and the market’s capacity to absorb additional duration. Ahead of the quarterly refunding meeting, Treasury yields had risen significantly as markets repriced energy prices, inflation risks, and the Federal Reserve policy outlook. The Treasury Borrowing Advisory Committee (TBAC) noted that 10-year and 2-year Treasury yields had risen to approximately 4.6% and 4.2%, respectively, while markets also assigned a higher probability to future rate hikes. Read More at Datatrack Increasing the supply of 10-year or 30-year Treasuries when long-term yields are already elevated could require higher yields to attract sufficient demand and could raise mortgage, corporate bond, and other long-term financing costs through Treasury benchmark pricing. By comparison, T-bills have short maturities and high liquidity and are widely held by money market funds, banks, and corporate cash-management departments, making additional supply easier for short-term funding markets to absorb. T-bills also provide greater flexibility for cash management. The Treasury can frequently adjust auction sizes across different maturities in response to tax receipts, government spending, debt maturities, and cash balances. For example, the Treasury expects to reduce some short-term bill issuance in September as corporate and non-withheld tax payments flow in, before increasing issuance again in October as seasonal spending rises. T-bills Reach 22.2% of Marketable Debt, Increasing Refinancing and Repricing Risks Treasury materials show that T-bills accounted for approximately 22.2% of outstanding marketable Treasury debt as of July 31, 2026, above the upper end of the 15%–20% medium- to long-term range recommended by TBAC in 2020. The denominator for this ratio includes T-bills, nominal coupon notes and bonds, TIPS, and FRNs. It therefore differs from total public debt, which is approaching US$40 trillion and also includes intragovernmental holdings. A T-bill share above 20% does not imply that the United States is facing an immediate liquidity or default crisis. The expansion of money market funds, increased Federal Reserve holdings of T-bills, and strong demand for highly liquid assets continue to support the market’s capacity to absorb additional supply. The more relevant issue is that a shorter maturity structure forces the government to issue new debt more frequently to repay maturing principal. Fixed-rate 20-year or 30-year Treasuries can lock in borrowing costs for decades, while T-bills mature within one year and therefore reprice much more quickly according to prevailing market conditions. If the Federal Reserve raises rates or short-term funding costs increase, yields on newly issued T-bills would rise rapidly. If the Fed cuts rates, Treasury borrowing costs could also fall more quickly. “T-bill and chill” therefore gives the Treasury greater issuance flexibility at the cost of more frequent refinancing and greater volatility in interest expenses. Read More at Datatrack Changes in money market fund flows, bank reserves, or Federal Reserve balance-sheet policy could also affect demand. If such demand weakens, the Treasury may need to offer higher yields to maintain sufficient participation in bill auctions. The strategy reduces immediate long-end supply pressure while shifting more risk toward short-term rates and money-market liquidity. Issuance Language Shifts to “Changes,” Leaving Room for Higher Coupon Issuance in 2027 The Treasury maintained its guidance that nominal coupon and FRN auction sizes are expected to remain unchanged for at least the next several quarters, but its wording regarding future issuance changed. The May quarterly statement referred to evaluating potential future “increases” in auction sizes, while the August statement adopted the more neutral term “changes.” “Changes” could encompass increases, reductions, or a redistribution of issuance across maturities, providing the Treasury with greater policy flexibility than the previous wording. The shift does not indicate that the Treasury has already decided to alter long-term issuance. A more appropriate interpretation is that the Treasury is reducing the constraints created by its forward guidance and preserving room for potential issuance adjustments in fiscal 2027. Treasury meeting materials indicate that current auction sizes should be sufficient to meet financing needs through the remainder of fiscal 2026. However, based on the median primary dealer forecast for privately held net marketable borrowing, and assuming current coupon security auction sizes and privately held T-bill supply remain unchanged, the cumulative financing gap in fiscal 2027 and 2028 could reach approximately US$1.45 trillion. TBAC therefore believes that the Treasury may need to increase coupon issuance in fiscal 2027 and should update its forward guidance before making actual changes, giving the market sufficient time to absorb additional supply. Market participants expect that, if issuance ultimately needs to rise, the Treasury may initially adjust shorter points on the yield curve, such as 2-year, 3-year, or 5-year notes, to limit the direct impact on long-term term premiums. The Treasury has not yet announced specific maturities or the size of any future increases. Short-Term Financing Delays Long-End Pressure but Does Not Reduce Overall Funding Needs “T-bill and chill” allows the Treasury to use strong demand for short-term assets to absorb additional borrowing while avoiding a sudden increase in long-term debt supply when long-end yields are already elevated. It also makes it easier to manage seasonal fluctuations in tax receipts and government spending. However, the strategy addresses the timing and maturity composition of issuance without reducing the fiscal deficit or changing the government’s ultimate funding requirement. If borrowing needs continue to rise while coupon auction sizes remain unchanged for an extended period, the share of T-bills will continue to increase. If the Treasury eventually needs to close financing gaps after 2027, delaying adjustments could require larger and more concentrated increases in coupon issuance, potentially amplifying supply pressure in the Treasury market. The United States’ growing reliance on short-term debt represents a trade-off in maturity risk: higher refinancing frequency and greater sensitivity to short-term rates are being exchanged for lower immediate supply pressure at the long end of the yield curve. Whether this strategy can be sustained will depend on continued strong demand for T-bills, whether the Federal Reserve policy rate can decline, and whether the fiscal deficit gradually narrows. The next quarterly refunding announcement is scheduled for November 4, 2026, when markets will reassess the T-bill share and any signals of coupon issuance adjustments for fiscal 2027.

South Korea Raises Rates for the First Time in Three and a Half Years as the AI Chip Boom and Household Debt Drive Monetary Tightening

The Bank of Korea raised its benchmark interest rate by 25 basis points on July 16, 2026, from 2.50% to 2.75%, marking its first rate increase since January 2023. All seven members of the Monetary Policy Board unanimously supported the decision. The central bank said that stronger exports and investment had improved economic growth, inflation could remain above the 2% target for some time, and financial stability risks related to housing prices in the Seoul metropolitan area, household debt, and exchange-rate volatility continued to rise. It therefore remained necessary to maintain a policy stance consistent with further rate increases. The distinctive feature of this policy shift is that the AI chip boom has simultaneously increased South Korea’s capacity to withstand higher interest rates and intensified demand-side inflation and financial imbalances. Rapid growth in semiconductor exports, corporate earnings, and capital expenditure has reduced concerns that higher interest rates will significantly weaken the broader economy. At the same time, rising household lending and housing prices have made it more difficult for the central bank to maintain an accommodative policy environment. Indicator Latest Data Policy Implication Benchmark interest rate 2.75% Raised by 25 basis points on July 16 Real GDP preliminary estimate for 2Q26 Up 0.6% QoQ and 3.7% YoY Economic expansion remains intact CPI in July 2026 Up 2.8% YoY Lower than in June but still above target Core CPI in July 2026 Up 2.6% YoY Domestic price pressures remain persistent Preliminary semiconductor exports in July 2026 US$41.01 billion, up approximately 179% YoY AI and memory demand support exports Household credit outstanding at the end of 1Q26 KRW 1,993.1 trillion Debt stock remains close to KRW 2,000 trillion Preliminary current account balance in June 2026 US$49.73 billion surplus External financial buffers have expanded Data are current as of August 6, 2026. GDP, export, and current account figures are preliminary and may be revised. Read More at Datatrack Policy Reverses After Four Rate Cuts as Economic Growth and Financial Risks Both Support Tightening The Bank of Korea cut interest rates four times between October 2024 and May 2025, lowering the benchmark rate from 3.50% to 2.50%, before leaving it unchanged for more than a year. The July 2026 rate increase represents a shift in policy priorities from supporting economic activity toward controlling inflation and financial imbalances. The central bank has also not characterized the move as a one-off adjustment. Central banks generally face a trade-off between containing inflation and sustaining economic growth, but the policy conflict is currently less pronounced in South Korea. Real GDP increased by 0.6% quarter over quarter and 3.7% year over year in the second quarter, while real gross domestic income rose by 3.6% quarter over quarter, indicating that stronger export prices and improved terms of trade are raising domestic income. The central bank believes that the benefits of the semiconductor upcycle are gradually spreading from exports and corporate earnings to investment, income, and consumption, potentially increasing demand-side inflationary pressure. Chip Exports Strengthen External Accounts but Also Increase Sensitivity to the AI Cycle Continued global investment in AI infrastructure is supporting South Korean exports of memory and computer products. Exports reached US$98.89 billion in July 2026, up 62.8% year over year. Semiconductor exports totaled US$41.01 billion, increasing by approximately 179% and reaching around 2.8 times their level a year earlier. Computer exports also rose sharply on strong demand for enterprise storage products, while the monthly trade surplus reached US$30.32 billion. The current account surplus expanded to US$49.73 billion in June, setting a new monthly record. Large export and current account surpluses help reduce external financing needs and provide a buffer for the won and energy import costs, while giving the central bank more room to address domestic inflation and asset-market risks. However, the concentration of export growth in semiconductors also makes South Korea’s economy more dependent on global AI capital expenditure and memory prices. When chip demand remains strong, corporate income and investment can spread to domestic demand. If data center investment slows, exports, income, and capital expenditure could weaken at the same time. Headline Inflation Has Eased, but Core Inflation Continues to Support Further Rate Increases When the central bank decided to raise interest rates, CPI inflation stood at 3.2% year over year in June, while core CPI inflation was 2.5%. Oil and agricultural product prices increased cost pressures, while the earlier weakness of the won also raised import prices. At the same time, the central bank was concerned that stronger income and consumption generated by the semiconductor boom could cause inflation to spread from cost-related factors to domestic demand. The latest data show that CPI inflation fell to 2.8% year over year in July and declined by 0.2% from the previous month, mainly because of lower petroleum product prices and fuel-price measures. However, core CPI excluding food and energy rose from 2.5% to 2.6%, its highest level since December 2023, indicating that price pressures related to services and domestic demand remain persistent. The decline in headline inflation over a single month therefore reduces the urgency of consecutive rate increases but is not sufficient to reverse the tightening direction. Minutes released on August 4 showed that some board members believed one rate increase might not be enough to bring inflation back to target and that further preventive action should be considered depending on changes in growth, inflation, and financial risks. The Household Debt Ratio Has Improved, but Debt Levels and Housing Risks Continue to Rise South Korea’s household debt-to-GDP ratio fell to 85.3% in the first quarter of 2026, down 2.9 percentage points from the previous quarter, but the improvement mainly reflected rapid growth in nominal GDP. Household credit outstanding still increased by KRW 14 trillion over the same period to KRW 1,993.1 trillion, while household loans rose by KRW 12.9 trillion to KRW 1,865.8 trillion. A lower debt ratio does not mean that households are substantially repaying their principal. In the second quarter, both housing-related loans and other household loans increased significantly, while housing price growth in Seoul and surrounding areas continued to accelerate. The central bank said that household loans from financial institutions had recently been increasing by around KRW 8 trillion to KRW 9 trillion per month, reflecting continued strength in home-purchase and other borrowing demand. Household debt therefore creates two-way pressure on monetary policy. Higher interest rates can restrain new borrowing, housing prices, and leveraged investment, but they also increase the interest burden on borrowers with existing mortgages and personal credit loans, reducing household consumption. Although the central bank has reasons to continue tightening, the pace of rate increases must avoid causing a sudden deterioration in debt-servicing burdens. Further Tightening Remains Likely, but Its Timing Depends on Inflation, Housing, and the Chip Cycle The Bank of Korea’s next interest-rate meeting will be held on August 27. The decline in headline inflation in July gives the central bank room to wait for more data. However, higher core inflation, faster growth in household lending and housing prices in the Seoul metropolitan area, and the transmission of the semiconductor upcycle into domestic demand all support retaining the option of another consecutive rate increase. The future policy path can be assessed through four indicators: whether core and services inflation ease, the pace of housing price and household loan growth in the Seoul metropolitan area, international oil prices and the won exchange rate, and whether semiconductor export growth can be sustained. If core inflation, housing prices, lending, or depreciation pressure on the won rises again, the probability of an earlier rate increase will increase. If chip exports and domestic demand weaken significantly, the interval between rate increases may lengthen. The Bank of Korea has stated that it will determine the timing and scale of additional rate increases based on the latest data and will not pre-commit to a fixed policy path. This rate increase shows that the Bank of Korea is using the period of strong AI chip activity to address inflation, housing prices, and household leverage in advance. The chip boom has given South Korea greater capacity to withstand higher interest rates, but economic growth and income have also become more concentrated in a single industry cycle. The key question ahead is whether semiconductor earnings can translate into broader income and domestic demand growth while preventing capital from continuing to flow excessively into real estate and leveraged investment.

Brazil’s Nominal Fiscal Deficit Approaches 10% of GDP as High Interest Rates and Debt Costs Create a Self-Reinforcing Cycle

Brazil’s fiscal pressure intensified further in the first half of 2026. The latest data from the Central Bank of Brazil show that the consolidated public sector recorded a nominal fiscal deficit of BRL 1.318 trillion in the 12 months through June, equivalent to 9.99% of gross domestic product (GDP). This was higher than 9.62% in the 12 months through May and represented a significant increase from 7.3% in June 2025. It was the highest level since April 2021 and was approaching the double-digit deficits recorded during the COVID-19 pandemic, when emergency spending surged. However, a deficit approaching 10% of GDP does not mean that the Brazilian government spent an amount equivalent to 10% of GDP more than it collected during the period. The nominal deficit comprises the primary balance before interest payments and the nominal interest accrued on government debt. In the 12 months through June, interest payments amounted to 8.80% of GDP, while the primary deficit accounted for only 1.19%. This means that approximately 88% of the nominal deficit came from interest costs. Brazil’s most pressing fiscal problem is therefore the financing burden generated by a large debt stock in a high-interest-rate environment. Nearly 90% of the Nominal Deficit Comes From Interest, so the Fiscal Shortfall Cannot Be Attributed Entirely to New Spending The consolidated public sector measured by the Central Bank of Brazil includes the central government, state and local governments, and state-owned enterprises. In the 12 months through June 2026, the consolidated public sector recorded a primary deficit of BRL 157.2 billion, equivalent to 1.19% of GDP. Accrued nominal interest reached BRL 1.161 trillion, or 8.80% of GDP, bringing the nominal deficit to BRL 1.318 trillion. Fiscal Indicator Latest Data Significance Nominal deficit over the past 12 months BRL 1.318 trillion, or 9.99% of GDP Includes the primary balance and debt interest Primary deficit over the past 12 months BRL 157.2 billion, or 1.19% of GDP Reflects the government balance before interest payments Accrued nominal interest over the past 12 months BRL 1.161 trillion, or 8.80% of GDP The main component of the nominal deficit Nominal deficit in June 2026 BRL 166.0 billion Combined primary deficit and interest payments General government gross debt in June 2026 BRL 10.8 trillion, or 81.9% of GDP An important measure of the government’s overall debt burden Public sector net debt in June 2026 BRL 9.0 trillion, or 68.5% of GDP Public debt after deducting certain public-sector assets Note: The deficit figures above use the Central Bank of Brazil’s consolidated public-sector “below-the-line” methodology. Under the Brazilian National Treasury’s “above-the-line” methodology, the central government recorded a primary deficit of BRL 48.2 billion in June. The Central Bank’s consolidated public-sector primary deficit was BRL 55.3 billion. The two figures differ in both coverage and statistical methodology and therefore should not be compared simply by calculating the difference between them. In June alone, accrued nominal interest for the consolidated public sector reached BRL 110.7 billion, rising sharply from BRL 61.0 billion in the same month of 2025. The primary deficit was BRL 55.3 billion, bringing the monthly nominal deficit to BRL 166.0 billion. In addition to interest rates remaining elevated, the Central Bank’s foreign exchange swap operations shifted from a gain of BRL 20.9 billion in June 2025 to a loss of BRL 9.3 billion in June 2026, further increasing interest expenses for the month. The Debt Structure Allows Policy Rates to Pass Quickly Into Government Financing Costs The Central Bank of Brazil began cutting interest rates in March 2026 and delivered its fourth consecutive reduction of 0.25 percentage points on August 5, lowering the Selic benchmark rate from 14.25% to 14.00%. However, 14.00% remains a high interest-rate level, and reductions in the policy rate will not be reflected immediately or proportionately in total interest expenses because the repricing and refinancing of government debt occur with a time lag. The fiscal impact of high interest rates is closely related to the structure of Brazil’s federal public debt. As of June, federal public debt totaled BRL 9.268 trillion. Floating-rate instruments, which mainly move with the Selic rate, accounted for 49.32% of the total. Another 25.90% was linked to price indexes, while fixed-rate securities represented 21.04%. When interest rates and inflation remain elevated, the interest costs of the government’s existing debt also increase. In addition, approximately 20.1% of federal public debt will mature within the next 12 months, corresponding to repayment needs of around BRL 1.86 trillion. Among domestic federal government securities maturing within one year, floating-rate securities account for 40.4%. The government can use its liquidity reserves to repay part of the debt or issue new securities to refinance it. If new debt must continue to offer high yields, the elevated cost of funding will gradually be transmitted to the overall debt stock. This pressure is already reflected in debt-cost data published by the National Treasury. In the 12 months through June, the average cost of federal public debt rose from 12.31% in May to 12.68%, while the average cost of the outstanding stock of domestic federal government securities increased from 13.09% to 13.19%. Over the same period, the average cost of domestic federal government securities issued through public offerings was 14.20%, higher than the cost of the existing domestic debt stock. This indicates that new financing could continue to push up the government’s overall interest burden for some time. Interest Accumulation Is Outpacing the Diluting Effect of Economic Growth on the Debt Ratio Brazil’s general government gross debt rose to BRL 10.8 trillion in June, equivalent to 81.9% of GDP, an increase of 0.9 percentage points from May. Accrued interest raised the debt ratio by 0.8 percentage points during the month, while net debt issuance added another 0.6 percentage points. Nominal GDP growth reduced the ratio by 0.5 percentage points, but this was insufficient to offset the first two factors. Over the first six months of 2026, the general government gross debt-to-GDP ratio increased by a cumulative 3.3 percentage points. Accrued interest raised the ratio by 4.9 percentage points, while net debt issuance added 1.3 percentage points. Nominal GDP growth reduced it by 2.7 percentage points, and exchange-rate movements also provided a small offset. Nevertheless, the overall debt burden continued to increase. This shows that while economic growth can expand the denominator of the debt-to-GDP ratio, it has not been sufficient to keep pace with interest accumulation and new debt issuance. Federal public debt and general government gross debt are not the same indicator. Federal public debt mainly reflects the Brazilian National Treasury’s domestic and external market debt and totaled BRL 9.268 trillion in June. General government gross debt covers the federal government, the social security system, and state and local governments and totaled BRL 10.8 trillion. Both indicators show that debt continues to increase, but they have different coverage and should not be used interchangeably. Fiscal Concerns, Risk Premiums, and High Interest Rates Form a Self-Reinforcing Mechanism Brazil’s current fiscal difficulties are the result of interactions among fiscal policy, financial markets, and monetary policy. When government spending increases, the primary deficit persists, or the credibility of fiscal targets weakens, investors may become concerned that public debt cannot be stabilized over the medium term and consequently demand higher government bond yields. A rising fiscal risk premium may also put depreciation pressure on the Brazilian real, increasing import costs and inflation expectations. When inflation expectations remain elevated, the Central Bank has less room to cut interest rates quickly. A high Selic rate and elevated market yields then increase the cost of floating-rate debt and raise the price of issuing new securities and refinancing maturing debt, causing the nominal deficit and debt stock to continue increasing. The rise in debt subsequently reinforces market concerns about the fiscal outlook, creating a self-reinforcing cycle of rising fiscal risk, persistently high interest rates, increasing interest expenses, and continued debt accumulation. The Central Bank of Brazil has also repeatedly emphasized in its monetary policy communications that fiscal policy affects not only aggregate demand in the short term but also the term premium along the yield curve through expectations concerning debt sustainability. If fiscal discipline weakens, directed credit expands, or doubts emerge about debt stabilization, the economy’s neutral interest rate could rise, reducing the effectiveness of monetary policy in controlling inflation. The Economy Remains Resilient, but Growth Cannot Replace Fiscal Adjustment Brazil’s GDP grew by a seasonally adjusted 1.1% quarter over quarter and 1.8% year over year in the first quarter of 2026, reaching BRL 3.3 trillion. Agriculture expanded by 2.0% from the previous quarter, while industry and services grew by 1.0% and 0.5%, respectively. Household consumption and gross fixed capital formation increased by 1.0% and 3.5%. In July, Brazil’s Ministry of Finance maintained its forecast for full-year GDP growth in 2026 at 2.3%. Read More at Datatrack Economic growth helps increase tax revenue and nominal GDP, reducing the debt-to-GDP ratio, but it cannot automatically resolve fiscal problems. When the effective interest rate on government debt exceeds nominal GDP growth and the primary balance does not generate a surplus sufficient to offset part of the interest burden, the debt ratio will remain under upward pressure. Brazil’s Ministry of Finance also raised its 2026 forecast for the Broad National Consumer Price Index (IPCA) from 4.5% to 5.1%. The elevated inflation forecast means that even though the Central Bank has begun cutting rates, it will be difficult to return the policy rate rapidly to a lower level. If the government further expands subsidies, preferential financing, or tax cuts to support the economy, these measures may ease the impact of high interest rates on companies and households in the short term. However, they could also increase demand, slow fiscal consolidation, and constrain the scope for additional rate cuts. Improvement in the Primary Balance Will Determine When the Debt Cycle Can Reverse The Central Bank’s further rate cut in August will gradually reduce the cost of floating-rate debt and new financing, but debt repricing takes time, meaning that the government’s average financing costs could remain elevated in the near term. The key question is whether the primary balance can improve and whether the government can reduce the risk premium demanded by markets by controlling expenditure growth and improving the credibility of its fiscal targets. If fiscal adjustment, inflation control, and market confidence improve simultaneously, the Central Bank will have greater room to continue reducing interest rates, and debt costs can gradually decline. Conversely, continued interest accumulation could keep the nominal deficit and debt ratio elevated. Whether Brazil can break out of the cycle of high interest rates, high interest costs, and high debt will ultimately depend on whether the primary balance can shift to a level sufficient to stabilize the debt.

U.S. Plans to Invest US$874 Million to Strengthen the AI Computing Supply Chain, With Photonics, Memory, and Advanced Packaging Emerging as the Next Frontiers of Chip Competition

U.S. semiconductor policy is expanding beyond the buildout of domestic wafer manufacturing capacity to include data transmission, memory access, advanced packaging, materials, and supply chain security across AI computing systems. On July 29, 2026, the U.S. Department of Commerce announced that it had signed letters of intent with seven companies and planned to provide up to US$874 million in federal incentives under the CHIPS and Science Act to accelerate semiconductor research and development for next-generation computing and artificial intelligence. The funding remains at the letter-of-intent stage. The seven companies must complete the Department of Commerce’s due diligence and formal review process before signing final agreements, and the amounts ultimately approved and disbursed could be lower than the stated ceilings. The Department of Commerce will also receive minority, non-controlling equity stakes in the companies, distinguishing these projects from conventional one-way subsidies. The Three Largest Projects Receive Nearly 80% of the Funding, Directly Targeting AI System Bottlenecks The seven projects cover integrated photonics, AI memory, advanced packaging, new computing architectures, dielectric materials, supply chain verification, and optical interconnect components. GlobalFoundries, Kepler Computing Inc. (hereafter referred to as Kepler), and Multibeam Corporation are expected to receive a combined US$685 million, accounting for approximately 78.4% of the total. This shows that policy resources are primarily concentrated on three major AI computing bottlenecks: data transmission, memory access, and chip integration. Company Proposed Incentive Ceiling Main R&D Focus Problem the Project Seeks to Address GlobalFoundries US$300 million Silicon photonics, near-packaged optics, and co-packaged optics Increase AI chip interconnect bandwidth and reduce data transmission power consumption Kepler Computing Inc. US$245 million New AI memory combining 3D integration and ferroelectric technology Improve memory bandwidth, access performance, and energy efficiency Multibeam US$140 million Multi-chip assembly, stacking, and interconnection using thousands of wires Strengthen Chiplet and heterogeneous integration capabilities Extropic US$75 million Thermodynamic sampling units Use less energy for probabilistic computing, simulation, and optimization Thintronics US$50 million Ultra-low-loss interlayer dielectric materials Reduce signal loss in high-speed interconnects and advanced packaging OBSIDIA Semiconductors US$34 million Non-invasive component verification technology Identify counterfeit or maliciously modified electronic components Aeluma US$30 million Large-format, indium-phosphide-free substrate technology Support photodetectors, laser components, and AI optical interconnects Note: The amounts above are the maximum proposed amounts stated in the letters of intent and are not final approvals or disbursed funds. Silicon Photonics and Optical Interconnects Become the Largest Single Investment Area GlobalFoundries is expected to receive up to US$300 million, making it the largest individual project in the package. Through this funding, the U.S. Department of Commerce aims to accelerate the development of near-packaged optics (NPO) and co-packaged optics (CPO) in the United States by two to three years. Traditional AI servers mainly use electrical signals to transmit data among processors, memory, and switches. As transmission distances, bandwidth requirements, and computing cluster sizes increase, copper interconnects face growing pressure from signal attenuation, power consumption, and heat dissipation. Silicon photonics instead uses optical signals to transmit data and places optical components close to computing chips, shortening the electrical signal path while improving bandwidth density and energy efficiency. GlobalFoundries’ project covers next-generation silicon photonics wafers, new optical materials, 3D hybrid bonding, and advanced packaging. The related research and development will be conducted at the company’s facilities in Malta, New York, and Burlington, Vermont. The company stated that under a separate agreement, the Department of Commerce is expected to acquire an equity stake of approximately 1%, although the final ownership arrangement and incentive terms remain subject to confirmation in the final agreement. Optical interconnects have therefore moved beyond being merely a communications component issue and have become a core technology affecting AI data center computing density, heat dissipation, and electricity costs. As the energy consumed by moving data continues to rise, overall system performance may remain constrained by interconnect bandwidth and power consumption even when processor computing power improves. Memory and Advanced Packaging Determine Whether Computing Capacity Can Be Fully Utilized The second-largest project is expected to go to Kepler, with proposed incentives of up to US$245 million. The company plans to use 3D integration and ferroelectric technology to develop a new type of high-performance AI memory. The computing requirements of large AI models are increasing rapidly, but system performance does not depend solely on the theoretical computing power of GPUs or other accelerators. If memory capacity, bandwidth, and data access speeds fail to improve at the same pace, processors may be unable to operate at full capacity while waiting for data, creating the so-called “memory wall.” The U.S. government therefore hopes to cultivate new material and architectural approaches beyond existing high-bandwidth memory, reducing the time and energy costs associated with data movement. Multibeam is expected to receive up to US$140 million to develop multi-chip assembly, stacking, and high-density wire interconnection technologies. As the cost of advanced process nodes continues to rise, AI processors are increasingly relying on Chiplet designs and heterogeneous integration. Computing, memory, communications, and input-output functions are manufactured separately and then combined into a complete system through advanced packaging. Interconnect density, manufacturing yield, and heat dissipation in packaging will therefore directly affect product performance and mass-production costs. Materials, New Computing Architectures, and Supply Chain Verification Fill Upstream Gaps The remaining four projects address materials, optical components, new computing architectures, and supply chain security. Thintronics will develop ultra-low-loss interlayer dielectric materials to reduce signal loss in high-speed interconnects and advanced packaging. Aeluma will develop large-format, indium-phosphide-free substrate technology to support the production of photodetectors and laser components. Extropic plans to use natural thermal fluctuations to develop thermodynamic sampling units, with the aim of completing AI, simulation, and optimization tasks at lower power consumption. OBSIDIA Semiconductors will develop non-invasive component verification technology to identify counterfeit or maliciously modified electronic components. As AI chips are increasingly deployed in data centers, defense systems, and critical infrastructure, component origin, manufacturing history, and authenticity are becoming part of supply chain security. The CHIPS Act Shifts From Fab Construction Subsidies Toward Investment in Critical Technologies The initial policy focus of the CHIPS and Science Act was to attract companies to build or expand wafer fabs in the United States through subsidies, loans, and tax credits. Approximately US$39 billion was allocated to incentives for manufacturing facilities and equipment, while another roughly US$11 billion was directed toward the semiconductor R&D ecosystem. The US$874 million package is not primarily intended to expand existing wafer production capacity. Instead, it supports technologies that are not yet fully mature but could shape the architecture of next-generation AI systems. This indicates that implementation of the CHIPS and Science Act is extending beyond manufacturing capacity expansion toward critical research and development capabilities. The government’s acquisition of minority, non-controlling equity stakes also moves the role of public funding closer to strategic investment rather than one-way subsidies. If supported companies successfully commercialize their technologies, increase in valuation, or are acquired, the government’s equity holdings could generate returns for taxpayers. However, this model also makes policy implementation more complex. The government will need to manage equity valuation, exit mechanisms, and conflicts of interest while avoiding overlap among subsidy review, industry regulation, and shareholder interests. Commercialization Progress Will Determine the Actual Impact of the Policy Investment Most of the projects remain in the research or early commercialization stages. Their actual impact will depend on manufacturing yields, costs, system integration, customer validation, and mass-production capabilities. Subsequent reviews could also change the funding amounts, equity arrangements, or implementation terms of individual projects. Compared with the construction of large wafer fabs, the US$874 million funding package is limited in scale, but its investment direction sends a clear policy signal. As the standalone performance of advanced processors continues to improve, the focus of competition is gradually shifting toward chip-to-chip communications, memory access, packaging integration, and energy efficiency. The United States hopes to use government capital to shorten the development timelines of these critical technologies and retain domestic capabilities in photonics, memory, packaging, materials, and verification.