The domestic story was a central bank talking almost entirely about inflation while the economy beneath it cooled further. NAB's August business survey put conditions at minus one, down from plus four — the first negative reading in six years — with trading and profitability down sharply. David Bassanese notes that both the NAB survey and Westpac's consumer sentiment index now sit below their long-run averages, with consumer confidence well below trend: sub-trend on both measures at once, rather than simply a retreat from a high. House prices fell for a fifth straight month and the major banks reported credit demand down 15–20%. None of it has moved the Reserve Bank. Assistant Governor Sarah Hunter said the Board "may well have to raise rates" if inflation runs stronger than forecast; Deputy Governor Andrew Hauser, fresh from touring US data centres, said the trip left him more worried about AI-driven inflation and reported that people around the country are "furious about inflation". Australian 10-year yields ground higher to around 5.35–5.37%, and the dollar touched a multi-month high near 72.2 US cents before slipping below 71.6 on Friday.

Offshore, the week belonged to oil and bonds. Brent ran from the mid-US$90s to an intraday US$110 on continued escalation around Iran, and on Saudi output falling a further 1.9 million barrels a day, before easing to close just below US$105. Treasury yields followed: the US 10-year touched 4.97%, the 30-year reached its highest since 2007, and two-year yields were their highest in more than two years as the curve flattened sharply. Friday's core US CPI printed near 0.3% month-on-month against a 0.2% consensus, and market-implied odds of a Federal Reserve hike this week moved from around 60% to near 90%. The ECB delivered its own 25 basis point increase — Christine Lagarde called it "a no-brainer" — and a Bank of Japan move is widely expected this week. As we discuss with Fortlake's Christian Baylis, central bankers are clearly focused on, and worried about, structural issues while consumers and the politicians that are seeking their votes are more concerned about the near term impact of cost of living pressures and teetering house prices.   

Underneath all of this sits a shift in who is borrowing. AI-related capital expenditure is increasingly funded in bond markets: Citi's Stuart Kaiser puts global AI capex near US$1 trillion next year and close to US$4 trillion by 2030, with hyperscaler credit spreads roughly tripling over twelve months yet still sitting at only around 66 basis points. This is yet another reason for upwards pressure on government bond rates — an enormous and largely price-insensitive new claimant on capital, arriving alongside already sizeable government deficits, while the spread paid for lending to it remains historically thin. It is one reason long yields are grinding higher rather than mean-reverting, something we also touch on in our conversation with Christian: when both the risk-free rate and the credit spread are working against you, making the defensive part of the portfolio truly defensive can be difficult.

All that said equity moves were comparatively contained, and the damage was in rates, not shares which is unusual. If this upwards pressure on bond rates continues it may start to affect equity markets to a greater degree so it will be interesting to see this week how the market reacts to an imminent Federal Reserve's decision and the commentary around it while the Bank of Japan is also likely to increase rates.