The Reserve Bank lifted the cash rate 25 basis points to 4.60% on Tuesday, a unanimous nine-nil decision and the highest setting since 2011. The statement was hawkish — inflation stronger than expected, energy prices above the August assumption, the Bank's flagged upside risks materialising — but the Governor then confirmed the board had discussed holding, described policy as restrictive and expressed the hope that this year's four increases would prove enough. Wednesday's August CPI validated a softer reading: headline rose to 4.0% against consensus of 4.1%, and the monthly trimmed mean printed 0.2% against 0.3%, leaving the annual rate unchanged at 3.6%. The surprise was modest but broadly based, with petrol up 14.8% on the month driving the headline number. The significance is retrospective, it recasts July's strong print as residual seasonality rather than acceleration. November pricing eased accordingly. The Australian dollar wore it, breaking below 70 US cents to finish near 69.2 against 72 cents on 8 September. Friday's US payrolls then came in at just 29,000 against 90,000 expected, with the prior month revised down to 133,000 and unemployment up to 4.2%.

Step back to the quarter and the striking thing is how little all this motion delivered. Australian equities ran roughly 6% above their 30 June level by mid-August and finished the quarter approximately where they started. The Nasdaq fell close to 10% into late July before recovering to end modestly ahead. Emerging markets traced much the same path. Yet beneath that noise one thing moved decisively and in one direction: the Australian ten-year went from roughly 4.8% to about 5.4%, and the US ten-year from around 4.45% to 5.25%. Equities went sideways but in a volatile range; bonds grinded lower yields spiked over successive sessions.

Diversified multi-asset funds, active and passive, followed a similar pattern finishing flat to 2% down depending on the risk profile but it was the most conservative funds that finished the weakest fuelling the narrative that the so-called '60/40' portfolio is dead. This reflects the view that the traditional diversifier of the last 40 years, government bonds, might be a less reliable backstop in future. There are inflationary scenarios where this might be true but in the recent past it reflects tension between geopolitical headwinds and fundamentally strong, if polarised, growth in the US. 

The push and the pull

This is what has been driving choppy sideways equity markets as the same headlines have good and worrying implications for markets. On the supportive side, activity has been genuinely resilient: US second-quarter GDP was revised up to 2.2%, consumer spending is running at its fastest pace in over a year driven by the AI infrastructure build out, arguably at the expense of the rest of the US economy and arguably the rest of the world via higher rate expectations.  Meanwhile US Core PCE was revised down to 3.0% with the three-month annualised rate at 2.0%, and Chinese fiscal stimulus is finally showingin the PMIs. On the other side, oil spent most of the quarter above US$100 with US crude inventories at twelve-year lows and refined product, not crude, the binding constraint; the ISM manufacturing prices-paid index jumped from 71.1 to 77.9; and sovereign issuance has become its own source of pressure, with a French budget proposing to cut the deficit widening the French–German spread to 130–140 basis points because nobody believed the growth assumptions behind it.

So strong growth is simultaneously the bull case for earnings and the bear case for the discount rate. Every constructive data point lifts the denominator as fast as the numerator. That is the mechanism behind a quarter that moved a great deal and arrived nowhere, and there is little reason for it to resolve soon.

Where the pressure is actually showing

Two related developments may deserve more attention than they have thus far received. The first is credit. High-yield spreads widened for eight consecutive sessions late in the quarter, a move of more than 50 basis points and the first wobble of this cycle — though from historically tight levels, which makes it a repricing rather than a sign of systematic stress. More structurally, a meaningful quantity of data-centre debt now sits inside the private credit complex, increasingly distributed through semi-liquid vehicles carrying implied redemption rights. The concern is not so much the asset class but the liquidity terms: a mismatch between quarterly redemption promises and genuinely illiquid underlying paper only reveals itself when investors try to leave together.

The second is crowding out is running at two levels at once. At the debt level, hyperscaler issuance has become sovereign in scale, following Google's local issue of a record breaking Kangaroo bond into the Australian market, Yankee bonds issued into European currencies has roughly tripled year on year, taking around 8% of eurozone investment-grade issuance and over 20% of Swiss franc issuance, with projected long-dated supply comparable in magnitude to government programmes. AI capex is now competing with treasuries for the same buyers in every currency, which is part of why the long end sold off everywhere simultaneously. At the economic level, with the build-out estimated at roughly 3% of US GDP a year for about a decade, capital and construction labour are being reallocated towards data centres, and the clearing mechanism is a higher mortgage rate — the US thirty-year sits at 7.28%, its biggest jump since October 2022. That is also the cleanest explanation for Friday's payrolls: growth that does not translate into jobs. This is a similar dynamic to that which has been seen over a longer cycle in Australia where strong activity in the resources sector has crowded out other parts of the economy with the bitter sweet consequences of lopsided wealth accumulation and, eventually, stalling productivity.   

Looking forward rate hikes here and abroad are 'in the price' and the rest of the year will likely be data-dependent. A ten-year above 5% represents a stronger  'real yield' than we have seen for decades but this will only really benefit portfolios if inflation pressures moderate, in turn likely due to weakened growth trends. Reflexively, this will likely be a consequence, at least in part, of higher rates. There are also cogent scenarios where inflation pressures persist alongside weakening economic growth underlying the theme that even long-term investors can't take much for granted and indecisive markets reflect  genuine long-term uncertainties that may be resolved in the next few months. This is one of the reasons we are not rushing our ongoing Strategic Asset Allocation review. In the short-term, long-term yields pushing towards 6% would be indicative of a less investor friendly secular regime.