Australia had a thin data week and a noisy global one. Westpac's consumer confidence index fell from 84.4 to 80.4, with mortgages costing more after the Reserve Bank's recent tightening, a reminder of where the shift in interest rate environment is biting the most. The dollar tried and failed to clear 70 US cents, finishing near 69.8. The local ten-year moved the opposite way to most of the world, easing from about 5.44% on futures to 5.33% by Friday, and the ASX 200 added 0.6%. The Firmus float closed its book short of the $44 billion sought and was subsequently pulled which was a useful read on the appetite for large, debt-dependent listings which may prove to be a bellwether event, at least locally.

One story, not three?

There is some polemic in markets about what has sent US yields to multi-decade highs, these vary from fiscal profligacy undermining the cost at which the US can borrow, the economic flip side of a surging economy or by product tariffs and lately events in the gulf. Meanwhile, local factors are attributed to other markets suffering from the same rise in long-term rates, most notably France over the last week when the latest budget unsuccessfully tried to balance the desires of local voters with the country's fiscally stretched economy. Andrew Hunt thinks these moves are more related than the headlines would have us believe and that global liquidity is the common denominator.

In France the conventional reading is overtly political: the budget, Le Pen's deficit pledge, the Banque de France refusing ECB intervention. Hunt's reading is that a rising government funding requirement has collided with weakening domestic liquidity growth, and that the deeper issue is who has been funding the deficit, in recent years overwhelmingly foreign investors including the official sector, who are now stepping back. His wildcard is the tell: a Fed-inspired rally in US Treasuries would, in his words, refloat French bonds too. France is a symptom, and the cure may not be in Paris.

The same lens applies to the US. Heavy Treasury issuance may be crowding out borrowers globally rather than only domestically, and recent bank data shows credit growth directed overwhelmingly at other financial institutions rather than the real economy. Markets steadied late in the week on liquidity rather than news, something we think is watching as it is one factor that is potentially not priced into markets and therefore a bit of a wild card. On the other hand the other factors mentioned above probably are and a muddle through scenario, discussed in this week's What We Are Working On Piece is predicated on an impasse in the Strait of Hormuz as well as one between voters, markets and politicians.  

Where to from here?

Two observations may be worth carrying into client conversations. First, it is a mistake to treat each supply shock as a one-off. Oil, diesel, shipping and the Gulf are not unrelated events but the texture of a period in which supply constraints keep arriving, which is why headline inflation refuses to behave and why the bond vigilantes have found their voice. Second, the AI build-out, now something over three per cent of US GDP, is being financed substantially with debt rather than equity. That makes the risk of financial distress in the ecosystem higher than the equity-market narrative implies, and is more useful to watch than the weekly chip-stock move.

Against that, markets have held up for perhaps no mysterious reason. Demand is fine, the economy is capacity-constrained, and corporates therefore have pricing power. It is not a comfortable time to be a consumer, which is what the Westpac print says, but it has been a good time to be an investor, and the US market has already de-rated from roughly 23 times earnings to 19 this year. 

The week ahead

The NAB business survey and the minutes of the RBA's October meeting on Tuesday; US CPI on Wednesday, with core expected at 0.2% after 0.3%; Australian labour force on Thursday, consensus around +20,000 with unemployment steady at 4.6%; and the US third-quarter earnings season opening with the major banks. We will be especially keen to see a broadening of earnings strength as a possible sign that AI driven efficiency gains are seeping out into the rest of the economy.