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

Get more of the journalism you love. Choose Barron's as a preferred source in Google.

Spike in Global Crude Prices Threatens to Reignite Inflation

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

Number of People Leaving U.S. Workforce Hits Historic Levels

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

Lumentum's Red-Hot Earnings Revive the AI Trade

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

This Crypto Platform Is Buying Gold Like a Central Bank

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%.

-- Paul R. La Monica

Quantinuum's Story May Not Be In the Earnings Numbers

Quantinuum beat expectations in its first quarterly report as a public company but the real story may not be in the numbers. As an early-stage company, its revenue is heavily tied to individual contracts and milestone deliveries. Its cloud computing services drove the quarter's beat, signaling recurring demand.

   -- Revenue nearly quadrupled to $8 million for the second quarter. The 
      company has yet to turn a profit -- operating losses swelled to $555 
      million from $51 million a year ago -- but Quantinuum's deepening ties 
      with federal agencies and corporations validate its standing as an 
      industry leader. 
 
   -- The company announced that it had struck a partnership with Oracle to 
      integrate quantum hardware with classical machines inside Oracle's data 
      centers. Quantinuum CEO Rajeeb Hazra has championed this hybrid model as 
      the future of the industry, and the deal will provide compelling proof of 
      it in action. 
 
   -- Deploying Quantinuum's third-generation Helios quantum computer inside 
      Oracle Cloud Infrastructure gives the companies the opportunity to create 
      a "deeply integrated environment for hybrid workloads, explore enterprise 
      use cases with customers, and accelerate commercial adoption," Hazra 
      said. 
 
   -- Quantinuum in May was selected to receive $100 million in federal funding 
      in exchange for a direct equity stake in the company. The company's IPO 
      in June came more quickly than expected, and investors are pinning 
      long-term value to technical milestones expected by the end of the 
      decade. 

What's Next: Quantinuum's management issued an upbeat full-year outlook, with revenue between $28 million and $32 million. The midpoint of the range was comfortably above the $26.5 million Wall Street had anticipated.

-- Mackenzie Tatananni

Dear Quentin,

I read with interest the letter from a female retiree regarding Social Security (" We are more likely to be living in poverty: Social Security is a lifeline for women, so why are we ignored?") and I would like to offer a piece of advice for women who are or have been married. Because the federal government recognizes same-sex marriage, this advice should apply to both opposite-sex and same-sex couples.

If your spouse or ex-spouse retires before you do, you may be eligible to collect spousal benefits. Once a person has retired, their spouse -- or ex-spouse, if the marriage lasted at least 10 years and the ex-spouse has not remarried -- may be entitled to receive up to 50% of the worker's benefit beginning at age 62, even if they are still working. (There are additional rules, so it's important to review the eligibility requirements.)

My Social Security payments are higher than my husband's benefits. He was downsized, and when his unemployment benefits ran out, he began collecting Social Security one year before reaching his full retirement age. This additional income enabled me to delay claiming my own Social Security benefits until 70. I was able to claim several months of retroactive benefits, so it still worked out quite well for me.

-- Happy Female Retiree

Read the Moneyist's response here.

-- Quentin Fottrell

-- Newsletter edited by Liz Moyer, Patrick O'Donnell, Rupert Steiner