Australia: Economic growth vs housing weakness

The June-quarter GDP print gave the Reserve Bank little reason to pause. Growth of 0.4% for the quarter beat a 0.3% consensus, taking the annual rate to 2.1% against 1.8% expected. Household consumption rose 0.4%, with discretionary spending up 1.4%, vehicle purchases, EVs prominent among them, rose more than 10% and alone added 0.3 percentage points, comfortably offsetting a 0.3% fall in essential spending. That sits alongside a housing market still moving the other way: prices fell for a fifth consecutive month in August, Sydney down 6.7% since January, and housing credit growth of 0.5% in July was the slowest in a year. Australian ten-year yields finished the week just below 5.19%, having touched 5.23% mid-week; the Australian dollar firmed to around 72 US cents, near its highest since mid-May; and the ASX 200 lost about 1% over the week before recovering which leaving it a few percent bellow its 6 August high.

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Global: the Gulf reignites, and bond yields follow

Offshore, the conflict in the Gulf flared again after a month of relative calm. US strikes on an island in the Strait of Hormuz, Iranian strikes on targets in the UAE and Jordan, an attempted mining of the Strait and attacks on tankers pushed Brent from around US$91 to nearly US$96 intraweek; it closed Friday at US$96.30, with Iran flagging a "prohibited zone" near the Strait and the risk of a test of US$100 this week. Bond markets took the disruption badly. US ten-year Treasury yields pushed above 4.8%, the highest since 2008, before easing to about 4.78% by Friday; UK gilts touched 5.22%, reviving talk of 1980s-style "bond market vigilantes"; and a Japanese ten-year auction cleared above 3% for the first time since 1996.

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The Fed: a payrolls beat, a divided committee, and an unusual intervention

While Chair Kevin Warsh's Jackson Hole speech was viewed as hawkish on elevated inflation, New York Fed President John Williams and then Governor Christopher Waller struck notably calmer notes mid-week, Waller suggesting a September hike may not be needed if inflation kept easing. That view was tested on Friday: non-farm payrolls rose 162,000 against 55,000 expected, with a further 55,000 of upward revisions — July's initially reported 23,000 fall is now a 21,000 gain — while unemployment held at 4.1% and wage growth stayed benign at 3.1%. Pricing for a 25 basis point hike on 18 September moved from around 50% to roughly 62%, leaving this week's US CPI and PPI as the deciding factor. Separately, President Trump publicly pressed the Fed to cut rates to between 0.5% and 1%, linking the demand to tariff threats against surplus countries — this was a pointed intervention with Fed officials in their pre-meeting blackout.

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Noise, or the foothills of a new regime?

There is a respectable case that this is noise, if painful noise. Much of the move in long yields has tracked oil almost tick for tick, and one analysis circulating this week put the rolling correlation between the two at its highest in four decades. On that reading, the bond market is a hostage of the Gulf: a durable ceasefire takes oil down and yields with it, and central banks return to something closer to normal policy considerations. Nothing structural has to be true for that story to work.

The alternative reading is that oil is the trigger, not the cause. US federal debt sits near 123% of GDP, a level last seen in 1946, with deficits above 6% of GDP and real yields close to zero on trailing inflation. Bond markets in Japan and the UK are under the same pressure as the US, which is hard to square with a purely Middle Eastern explanation. And the last time inflation drove both equities and bonds down together in real terms, in 2022, the standard 70/30 portfolio was found wanting and many are now much more aware that traditional portfolio construction is equipped to deal with a growth shock rather than an inflation shock.

The immediate message is unchanged: this week's US inflation data will settle the near-term rates debate more than any speech. The more useful long-term question is not whether yields peak at 4.8% or 5%. It is whether a portfolio built for the 1982–2020 regime — disinflation, positive real yields, bonds as a reliable hedge — is still built for the one we may be entering. In this week’s What We Are Working on article we start to pick apart what these issues might mean for portfolios over the long-term.