Weekly Market Update: Strong US Growth Pushes Bond Yields Higher as Rate Risks Persist (24 August 2026)

“Prediction is very difficult, especially if it's about the future" 

- Niels Bohr

Cartoon of the Week

Source: www.hedgeye.com

Funds Snapshot

Movers & Shakers (week ending 14th August):

Stocks (ASX 200 ↓0.62%, S&P 500 ↓1.43%, NASDAQ ↓2.03%)

Bond Yields (ACGB3Y 4.57%, ↑ 5 bps / ACGB10Y 5.06%, ↑ 5 bps)

Bond Curves (A$ 3s10s +49 bps, unchanged)

Credit Spreads (Major Bank 5Y Senior +65 bps, ↑ 2 bps / Tier 2 +127 bps, ↑ 4 bps)

Oil (Brent US$94.39/bbl, ↑6.63%)

Gold (US$4,603/oz, ↑5.18%)

Executive Summary

• Last week's growth scare unwound almost entirely. The US S&P Global composite PMI jumped to 56.0 against a 54.0 forecast, with services at 56.8, contradicting the weak retail sales that had unsettled markets seven days earlier. Europe's PMIs also beat.

• The relief came at a price. Stronger data pushed US two-year yields up 6.7 bps and the ten-year to 4.73% — effectively its highest level in a year — and equities paid for it. The NASDAQ fell ↓2.1%, the S&P 500 ↓1.4%.

• Australia received the opposite news. Employment fell ↓16K against a forecast ↑12K, unemployment rose to 4.5% from 4.4%, yet consumer inflation expectations climbed to 4.9%. Australian bonds still sold off.

• For investors, the message is unchanged but sharper: with the ASX flat over twelve months and investment grade credit near 5.1%, income is being rewarded and equity risk is not. Do we sound like a broken record?

Market Overview

The dominant narrative: good news is bad news — and Australia got the bad news without the good

• Two weeks ago the concern was the US consumer had stalled. Last week that concern was substantially retired, and markets discovered they did not enjoy the alternative.

• The US S&P Global composite PMI printed 56.0 for August against a 54.0 consensus, up from 54.5. Services drove it at 56.8 versus 54.0 expected. That is not a marginal beat; it is a survey pointing to an economy expanding at a healthy clip. Manufacturing was the exception, easing to 53.2 from 53.9, but the composite tells the story. The Conference Board's Leading Index also turned positive at +0.2% after a negative prior reading.

• Supporting evidence arrived from the US labour market. Initial jobless claims came in at 206K against a 210K forecast — better than expected. But the detail is less comfortable than the headline: the four-week moving average rose to 204K from around 200K, and continuing claims increased to 1.8m. The weekly number improved; the trend did not. We would describe the US labour market as gradually loosening rather than deteriorating.

• Why this mattered for markets: when growth data is strong and a central bank is already reluctant to ease, strong data removes the prospect of rate relief. Bond yields rise. And when bond yields rise, the discount rate applied to future company earnings rises with them, which compresses equity valuations — most severely for companies whose earnings sit furthest in the future. That is precisely the pattern we saw, with the NASDAQ falling ↓2.1% against the S&P 500's ↓1.4%.

• On the inflation front, Europe presented the cleanest picture of the three major regions. Eurozone CPI was confirmed at +2.9% YoY with core at +2.5% YoY — above target but stable. More importantly, forward-looking measures improved: ECB one-year consumer inflation expectations eased to +2.9% YoY from +3.0% YoY, and three-year expectations fell to +2.7% YoY from +2.8% YoY, close to target. Negotiated wages cooled to +2.44% YoY and labour costs to +3.1% YoY. Europe is achieving something the US and Australia are not — disinflation in expectations, not just in outturns.

• Australia moved in the wrong direction. Consumer inflation expectations rose to +4.9%YoY in August from +4.7% YoY. This matters more than it might appear. The RBA's August Statement was explicit that short-term inflation expectations, while easing, remained higher than earlier in the year. They have now stopped easing and started rising.

• Central banks - the RBA held at 4.35% on 11 August, and its Statement carried a materially more hawkish tone than a simple hold implies. The Board noted three cash rate increases this year, described policy as only "somewhat restrictive," projected inflation would not return to around the midpoint of the target band until late 2027, and stated explicitly that it would raise rates further if upside risks materialise. The decision was unanimous.

• The employment report was a genuine miss — a fall of ↓16K where the market expected a gain of ↑12K, with unemployment rising to 4.5% from 4.4% and participation slipping. The RBA's own Statement had said labour market conditions "have eased by a little more than expected" and that leading indicators pointed to "only limited easing in the near term." This print eased considerably more than that framing anticipated.

• One important nuance that just a cursory look will miss: the composition was better than the headline. Full-time employment rose ↑16K while part-time employment fell ↓32K. Full-time roles carry higher hours and income, so a shift toward full-time within a falling total is a genuine mitigant. This is a soft report, not a collapse, and we would caution against over-reading a single month of a notoriously volatile series.

• Wages were benign — the Wage Price Index rose ↑0.8% QoQ and ↑3.2% YoY, both exactly in line. Wage-driven inflation is not the problem. Rising consumer inflation expectations, sitting at +4.9% YoY while wages run at +3.2% YoY, are a different and more awkward issue.

• Investor sentiment softened but did not break. The VIX rose 0.88 points to 15.13 — higher, but still low by any historical standard and below where it sat a quarter and a year ago. European sentiment was firm, with the ZEW expectations survey jumping to 31.4 from 23.4. The most telling sentiment indicator was in credit, where spreads widened only fractionally in a week when equities fell and bond yields hit one-year highs. We discuss this below, because we think it is the single most useful observation in this week's data.

Equity Markets

• The week was an almost exact reversal of the prior one. The Nikkei, which gained ↑4.7% the prior week, fell ↓3.9% last week. The Hang Seng, which fell ↓2.1%, rose ↑3.6%. When two markets swing that sharply in opposite directions across consecutive weeks without a corresponding shift in fundamentals, the most likely explanation is positioning and profit-taking rather than a change in outlook. We flag that as inference — we have no flow or positioning data — but the symmetry is difficult to attribute to anything else.

• The US decline has a clearer cause. Strong PMIs pushed yields higher, and higher yields compress equity valuations. The NASDAQ's underperformance is consistent with this: at 28.8x forward earnings, more of its value sits in distant cash flows, which are more sensitive to the discount rate. This is textbook duration risk expressing itself in equities rather than bonds.

• Australia held up comparatively well, falling ↓0.6% against the S&P 500's ↓1.4%. Given the employment miss, that is a reasonable outcome, and the ASX's lower weighting to long-duration technology likely helped in a week defined by rising yields.

• The valuation observation that matters most. The ASX 200 has returned +0.4% over the past twelve months. Cash paid 4.35%. An investor who took full equity market risk for a year captured essentially nothing in price terms, while an investor who took none earned the cash rate. Dividends and franking improve the equity picture materially — but as a statement about where risk was rewarded, the comparison is stark.

• The Australian equity risk premium has compressed further, from roughly 33 bps a week ago to 27 bps last week. In the US it remains negative. Investors buying the S&P 500 today accept a forward- earnings yield fractionally below what a risk-free Treasury pays.

• Two caveats we owe clients. Franking credits meaningfully improve the after-tax return on Australian equity income, so the raw comparison understates the domestic equity case. And a compressed risk premium is a statement about prospective long-run returns, not a timing signal — thin premia can persist for years. But the direction is unambiguous, and it has moved the wrong way again this week.

• Europe remains the valuation outlier among developed markets at 15.9x forward earnings, a 6.3% earnings yield, and — uniquely — improving PMIs alongside inflation expectations falling toward target. Hong Kong at 11.8x is cheaper still, but this week demonstrated that its price action is presently disconnected from its fundamentals

Fixed Income & Credit

• The most instructive fact from last week is that Australian bond yields rose after a weaker than expected employment report. Employment fell ↓16K, unemployment rose to 4.5%, and the market's response was to sell bonds across the curve. That is not irrational and understanding why matters. Bond yields reflect both the expected path of policy and expected inflation. A weak jobs report argues for a lower policy path. But three things pushed the other way: consumer inflation expectations rose to 4.9%, the RBA has an explicit and recently restated hiking bias, and US yields rose sharply on strong American data. Australian bonds do not price in isolation, and last week the global and inflation signals overwhelmed the domestic growth signal.

• The message for investors is that the Australian bond market is currently more worried about inflation persistence than about a slowing economy. Until that changes, weak activity data may not deliver the bond rally that intuition suggests.

• Consider the environment credit faced last week: global equities fell across almost every major market, volatility rose, US ten-year yields reached a one-year high, Australian employment contracted, and Chinese activity deteriorated. Australian investment grade credit spreads widened by less than one basis point, and Tier 2 hardly moved at all.

• That is a meaningful demonstration of the asset class's defensive characteristics. Credit spreads compensate investors for default risk, and nothing this week changed the probability that Australian major banks and investment grade corporates will repay their debts. Equity prices react to earnings expectations and discount rates; investment grade credit reacts primarily to solvency. When the news is about growth rates and valuations rather than balance sheets, credit holds.

• Some detail worth noting. Major bank senior paper widened 2 bps from 63 bps to 65 bps, moving off the one-year tight it reached last week because of technicals (supply) rather than fundamentals. We regard this as healthy rather than concerning — a market at its absolute tights offers no compensation for anything going wrong, and a small step back builds a modest cushion.

• Tier 2 held steady at 127 bps, still 16 bps above its one-year tight of 111 bps. The subordination premium — the extra spread for holding subordinated over senior bank paper — narrowed to 62 bps from 64 bps, now marginally below its one-year average of around 64 bps. Tier 2 remains the better positioned of the two within its own trading range, though that advantage has narrowed as senior widened.

Outlook

• The central case - the most probable configuration from here is one of resilient but decelerating global growth, inflation that is improving unevenly by region, and central banks — particularly the RBA — that are more reluctant to ease than markets would prefer.

• The RBA is the central question for local investors, and last week sharpened it considerably. The August Statement was hawkish: three hikes this year, policy described as only "somewhat restrictive," inflation not expected back at the midpoint until late 2027, and an explicit readiness to hike again. A week later, employment fell and unemployment rose to 4.5%.

• The Board now faces genuinely conflicting evidence. Wages at +3.2% YoY are benign. Employment is contracting. But consumer inflation expectations rose to +4.9% YoY, and the RBA's own framework treats embedded expectations as the principal danger. We would not attempt to predict the outcome. We would say that the probability of near-term easing appears lower than a weak jobs print alone would suggest, and the probability of further tightening is not zero.

• Two events this week will materially inform this. The RBA Minutes on 25 August will reveal how the Board weighed these risks. Far more importantly, July CPI is released on 26 August, with consensus expecting headline inflation to fall to +3.3% YoY from +3.8% YoY and the trimmed mean to ease to +3.5% YoY from +3.6% YoY, both still well above the 2–3% target band.