August employment rose a solid 40,000, more than reversing July's 16,000 fall, yet the unemployment rate still ticked up from 4.4% to 4.6%, because participation and immigration are lifting labour supply faster than demand is absorbing it. The Governor had said days earlier that 4.5% was "a bit tight" and that 4.5% to 5% would take enough heat out of the labour market to ease inflation pressure. On Thursday the economy moved into her band. The Bank announces on Tuesday afternoon and a rise is now universally expected; the August monthly CPI follows on Wednesday, where consensus is looking for a 0.3% monthly trimmed mean, down from an unusually strong 0.5% in July. Maybe the labour market could be doing the RBA's work but at  

Markets have already made up their mind. The Australian dollar fell 1.4% over the week and touched 0.70, its lowest since early August, before recovering to just over 70.2 US cents on Friday. The cause was mostly American: flash PMIs (Purchasing Managers Index) surged which pushed  bond market yields yet higher. The US ten-year added 16 basis points over the week to close at 5.16%, having touched 5.22% intraday, the highest since September 2007. The thirty-year reached 5.49%, a level not seen since 2004.

What is most striking is what did not happen. Equities rose anyway: the S&P 500 gained 1.2% on the week and the Nasdaq 2%, despite being the part of the market supposedly most sensitive to rates which underscores a growing sense that yields are going up as much because of a strong US economy as profligate government spending and deficit worries. The Atlanta Fed's nowcast has third-quarter growth near 5% and expectations of corporate profitability are also on the rise.

We think Andrew Hunt also adds to the picture in subtler ways noting that from a macro perspective he is bearish on US government bonds on nearly every count he can name, a seasonal surge in US net supply, corporate issuance growing 15–20% with a wall of refinancing behind it, the Bank of Japan persisting with quantitative tightening, Asian export price inflation above its historical sell-signal level, and collapsing trust in politically constrained governments. What stops him acting on it is the other side of the ledger: Asia's swelling current account surpluses are recycled offshore by state investors, covering the US current account deficit and much of the budget deficit, and those flows have to go somewhere. On his arithmetic you would need the ten-year heading to 6% before shorting it made sense. So his base case is a grind rather than a spike — yields drift higher, the Fed keeps tightening "boiling the proverbial frog", and the crack only comes when equity funding dries up. He is clear we are not there yet.

Oil remains the unresolved variable. Iran offered to reopen the Strait within seven days  in exchange for a ceasefire, sanctions relief and an end to the naval blockade; Trump rejected it over the weekend, though he has since said negotiators will talk again this week. Brent ended around US104 after touching US106.50 on Friday. Traffic is improving at the margin,m21 ships through the Strait in 24 hours against roughly 11 a day the week before, but that is still well short of the 73 a day before the crisis.

Three things are worth watching. The first is that Tuesday's rise is fully priced, so the signal is in the language, not the decision, whether the Bank leaves the door open to November. The second is that unemployment reaching 4.6% is, uncomfortably, the mechanism working as intended: the Bank has said it needs some slack to get inflation down, and it is now getting it. Third, whether yields at twenty-year highs are about to break something, Hunt's answer we think is a considered one: a grind is more probable than a spike, because the flows still have to find a home. Advisers may wish to consider framing higher yields as compensation rather than damage, a ten-year above 5% being a real starting return for defensive assets in a way it has not been for fifteen years. For homeowners there is less of a silver lining as a booming US economy and a less productive Australian one means that mortgage relief is only likely to be accompanied by economic weakness.

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