Bond market blues

Global week in review: Rising bond yields

US equities fell back last week as AI funding jitters, along with rising oil prices and long-term bond yields, unnerved investors. The $US weakened, however, while gold prices moved higher.

Source: Betashares, Bloomberg.

The war in Iran remains in a stand-off, with America blocking Iranian ports and Iran blocking the Strait of Hormuz. Oil prices are moving higher as a consequence. The inflation risks of higher oil prices along with rising government and AI-related debt is pushing up long-term bond yields. US 30-year Treasury yields have reached their highest levels since the mid-2000s.

So far at least, global equities have withstood the rise in bond yields this year, thanks to strong underlying corporate earnings. That said, rising bond yields and concerns about the sustainability of AI-related earnings have resulted in easing equity price to earnings valuations.

To potentially cap the rise in long-term yields, US Treasury Secretary Scott Bessent tried a little intervention last week – buying up bonds – though with limited success. As with currency or even equity market intervention (recall China’s 2015 actions), intervention of this kind seldom works, especially over the long run when inconsistent with underlying fundamentals.

Rising bond yields and concerns over debt levels seems to have sparked new life in the currency “debasement” trade, with gold and Bitcoin doing well last week.

In other news, minutes from the recent Fed meeting suggest most members might be inclined to raise interest rates if inflation fails to fall much further. That said, members remained hopeful that inflation will ease, with tariff and energy increases potentially fading. Since the minutes, we’ve had generally more benign US inflation readings and a soft labour market report, suggesting the risks of a US rate rise as early as next month are low. Pressure on the Fed to act, however, will intensify if oil prices remain high and/or Trump tries to massively jack up tariffs again.

As regards tariffs, it was interesting to see Canada call off trade talks and essentially dare Trump to “do his worst” in terms of tariff increases. Canada said it would retaliate in kind and seek alternate trade partners while also supporting local business hurt by tariff increases. This could be a case of countries starting to look through the tariff threat, especially as it is clear higher tariffs are only hurting the US economy.  

Global week ahead: US inflation

The key data point next week will be the US personal consumption expenditure deflator (PCED) for July.

Following another benign reading for the core consumer price index (CPI) in July, chances are the PCED measure of underlying inflation will also be benign with a gain of 0.2%. Despite higher energy costs, US core inflation (which excludes food and energy) has gradually slowed in recent months – helped by an easing in labour market tightness, slower housing inflation and the waning influence of last year’s tariff increases.

A 0.2% gain should support the market view that the Fed won’t raise interest rates next month, despite some lingering inflation concerns given the recent back-up in global oil prices.

Global equity trends: Technology still under pressure

Technology underperformed again last week, with concerns around rising debt levels to fund the data centre rollout. With technology underperforming since mid-year, and more value-orientated sectors such as financials and energy taking up the baton.

*All but value factors. Local currency basis. Source: Betashares, Bloomberg.

Australia week in review: Soft employment

Australian stocks eased last week again, reflecting the negative global backdrop and underwhelming local earnings reports. That was despite a soft July labour market report which further reduced the risks of a near-term RBA rate hike.

Source: Betashares, Bloomberg.

Although month-to-month changes in employment can be inherently volatile, the July labour market estimate of a 16k drop in employment – along with the rise in the unemployment rate to 4.5% – is consistent with an ongoing glacial easing in labour market pressures. A further slowing in private sector wage growth in last week’s June quarter wage price index report provided more evidence of easing labour market pressures, which hopefully will help bring down sticky domestic service sector inflation over coming months.

Subject to next week’s monthly CPI report, easing labour market pressures argue in favour of the RBA leaving rates on hold again at the late-September policy meeting.

Steady rates would be a welcome reprieve for local earnings.

Indeed, the overall tone of the latest earnings reporting season is fairly underwhelming so far – which is perhaps not a surprise given the weakening economic backdrop. Based on LSEG estimates, there has been a modest 1% downgrade to the expected level of both FY’26 and FY’27 earnings since the start of the month. Headline profit growth for FY’26 of 11% looks impressive, but 80% of this reflects the 34% surge in material (mining) sector profits. At this stage, moreover, the 10% expected growth in earnings for FY’25 seems hopelessly optimistic given the backdrop of a slowing economy.   

Local equity market trends: Financials hit

Financials came under pressure last week as the reality of slowing credit growth due to the housing downturn hit home. Resources and small caps, however, performed relatively better.

Source: Betashares, Bloomberg.

Australia week ahead: July CPI report

Due to policy-induced volatility in fuel and electricity prices, the key focus this week is likely to remain on the trimmed-mean underlying measure of inflation. The market anticipates another 0.3% monthly increase in the trimmed-mean, which would allow annual underlying inflation to ease from 3.6% to 3.5%.

Market services and housing inflation will be of particular interest as these tend to be more reactive to domestic capacity pressures. In June, both enjoyed relatively modest monthly gains of 0.2% and 0.3% respectively.

There are cross-currents facing both. On the one hand, domestic demand and underlying private wage growth are slowing, yet on the other hand cost pressures persist – such as a rise in energy prices and even the recent minimum award wage increase. Recent Federal Government property tax changes could also place upward pressure on rents and new house prices, to the extent it discourages investors from offering rental properties and encourages them to buy new properties rather than existing.

Of course, there’s a risk that a hot CPI report next week could pressure the RBA to raise rates next month, though chances are it would probably want to see two bad monthly CPI reports in a row before acting.

In this regard, it’s worth noting the RBA won’t have the advantage of seeing the August CPI before it decides on interest rates next month on Tuesday, 29 September – as the CPI report is released exactly one day after. All this suggests the next likely window for the RBA to raise rates won’t be until 3 November.

There are also reports this week on construction activity and business investment – early building blocks for the Q2 GDP report. Construction should grow modestly, with rising residential and private non-residential construction offsetting a plateauing in formerly strong public infrastructure. The capital expenditure report should also be robust, underpinning by our own data centre boom.

With business investment likely to keep growing well, the RBA is counting on a slowdown in consumer spending – and to a degree home building eventually – to help slow economic growth and bring down inflation.

Have a great week!