Good morning. Currency markets are holding steady ahead of the release of the Federal Reserve’s preferred inflation measure, the core personal consumption expenditures index—an update that could shape expectations for interest rates ahead of Kevin Warsh’s closely-watched Jackson Hole speech on Friday. Oil prices are edging lower, helping to ease pressure on long-term yields, after Iran and Oman said they were discussing opening a “joint temporary navigational corridor” through the Strait of Hormuz—an agreement that could loosen global supply conditions and alleviate inflation pressures in energy-dependent economies. And after the bell, Nvidia’s second-quarter results will offer a read on whether the artificial-intelligence boom has enough momentum to keep market valuations aloft into the autumn months.

The Canadian dollar is trading modestly softer after Ottawa announced retaliatory tariffs on roughly $20bn in annual imports from the US and rolled out aid for businesses and workers. The counter-tariffs—of 15%, 25% and 50%, spread across hundreds of product categories—are set to take effect after Labour Day. The move enjoys solid public support and is seen as a necessary way to apply leverage against an embattled administration, particularly in the battleground states that will decide November’s mid-terms. By imposing costs on trade-sensitive parts of the American economy, Canada hopes to deter further aggression and tilt the odds towards a negotiated settlement.

This gamble may pay off. But the fast-escalating trade war will raise the cost of living for Canadians, leave many businesses facing a dire operating environment and narrow the Bank of Canada’s room for manoeuvre. Tariffs could push prices up and growth down nearly simultaneously, making it difficult to maintain appropriate policy settings—but we suspect risks are tilting to the downside, with slower business investment, higher unemployment, and widening economic slack ultimately limiting the scope for a sustained increase in inflation. We expect the Bank to stay on hold next week, leaving rates unchanged for a sixth straight meeting, with the accompanying communications edging in a more dovish direction as uncertainty rises. With markets still pricing in at least two hikes over the next year, we think the loonie could be exposed to some downside in the near term.

The dollar is still trading near a three-month low, down by roughly 1% this month after last week’s failed attempt to cap long-end bond yields. Positioning is turning more bearish, with market participants rebalancing away from long bets as the autumn months approach. This, we think, reflects three overlapping anxieties: mounting concern about the trajectory of American public debt as competition for capital intensifies; doubt that US institutions are willing to preserve the risk-adjusted appeal of Treasurys; and a fear that the forces which tamed debt in the past will be hard to summon again.

Carrying costs are soaring. Interest outlays as a share of gross domestic product—the outstanding stock of US government debt multiplied by the rates payable on it—will almost certainly exceed anything in the post-war era this year. Washington is borrowing at a record clip in an increasingly-crowded market, competing for capital against other governments and the hyperscaler technology firms, even as official inflows into American debt markets slow. After a series of bipartisan tax cut measures, the government’s tax revenues have shrunk as a share of gross domestic product since peaking around the turn of the century, while spending has climbed—driven largely by the demographics of health care and retirement, and by defence—and today’s politicians show little appetite for closing the gap.

Institutional confidence is ebbing. Recent policy choices have sown doubt about how the Fed will respond to recurring, supply-driven inflation and whether the Treasury will let long-term interest rates compensate investors for risk.

Investors are not confident that a growth boom will ride to the rescue. Contrary to the stories politicians like to tell, post-war consolidation owed less to balanced budgets than to luck: a baby boom and a bull market coinciding with the Fed’s financial repression in the mid-20th century, and in the 1990s a peace dividend alongside a technology boom. There is little evidence to suggest the trick will be repeated this time, with a massive productivity and revenue surge arriving in time to steady the debt.

For now, investors are merely anxious, not alarmed—and other economic fundamentals could soon replace debt worries as a market driver. But the ructions of the past two weeks—and of the past year—portend a future in which interest rates and the dollar move in unexpected ways. Volatility in currency markets is almost certain to rise.