Weekly Market Update: Stronger Growth Pushes Bond Yields Higher as Inflation Risks Build (7 September 2026)
“Expert: a man who makes three correct guesses consecutively.”
- Laurence J. Peter
Cartoon of the Week
Source: www.heraldsun.com.au
Funds Snapshot
Movers & Shakers (week ending 14th August):
Stocks (ASX 200 ↓ 0.95%, S&P 500 ↑ 0.09%, NASDAQ ↑ 0.40%)
Bond Yields (ACGB3Y 4.75%, ↑ 9 bps / ACGB10Y 5.17%, ↑ 8 bps)
Bond Curves (A$ 3s10s +43 bps, ↓ 1 bp)
Credit Spreads (Major Bank 5Y Senior +67 bps ↓1 bop/ Tier 2 +127 bps, ↔)
Oil (Brent US$96.28/bbl, ↑ 7.80%)
Gold (US$4,429/oz, ↓ 0.56%)
Executive Summary
Australia's June quarter GDP grew +0.4% YoY, lifting annual growth to +2.1% YoY against a +1.8% YoY consensus. US payrolls added 162,000 jobs against 55,000 expected, with prior months revised up by 55,000. The growth scare that shadowed August has faded, and with it much of the case for near-term rate cuts.
Yields rose accordingly. Australian yields rose 8 – 9 bps across the whole curve, and the US ten-year rose 6 bps. Unlike the prior week, the long end moved too. That reflects a repricing of inflation and growth, not merely the timing of the next central bank meeting. Brent crude rose 7.8%, complicating the inflation picture further.
Equities finally took notice, with the ASX 200 down 0.95%. For income investors the arithmetic keeps improving: investment grade floating rate credit now yields approximately 5.20%.
Market Overview
The growth scare fades, and the inflation problem gets harder
Last week we flagged genuine downside risk to the June quarter GDP print. It did not materialise, and we should say so plainly. GDP grew +0.4% for the quarter against +0.3% expected, with annual growth at +2.1% against a +1.8% consensus. The composition matters more than the headline: net exports added +0.1 percentage point, inventories subtracted, and company operating profits rose +1.8% after a revised -1.5% fall. With business investment contracting, growth had to come from somewhere, and the prior week's household spending figure of +7.0% tells you where.
Australia's problem is therefore simpler than we described a week ago, and not obviously better. It is not a stagflation problem; it is an inflation problem in an economy that is still growing. The Melbourne Institute's monthly gauge accelerated to +4.8% annually from +4.0%, private sector credit grew +8.4%, and the composite PMI rose to 52.7. Credit expanding at more than eight per cent alongside a services sector in solid expansion is not what a genuinely restrictive policy setting produces. The counterweight sits in housing supply, with building approvals down -3.6% and private house approvals down -4.2%.
The US delivered the week's largest surprise. Payrolls rose 162,000 against 55,000 expected, with the prior two months revised up a combined 55,000 and the three-month average lifting to 71,000. Unemployment held at 4.1% and underemployment fell to 7.7%. The internals were softer: ADP recorded 38,000, job openings fell to 7.27 million, the quits rate slipped to 1.9%, and services employment contracted at 47.8. The most accurate description is a low-hiring, low-firing labour market that produced one strong month.
The inflation-relevant American data was arguably more important. ISM services prices paid rose to 72.6 against 70.0 expected and manufacturing prices paid held at 71.1, both at levels historically consistent with accelerating rather than decelerating services inflation.
Europe requires us to qualify a view. Last week we described it as the exception, converging on target. Headline inflation has jumped to +3.3% from +2.9% and producer prices to +5.8%, though core did ease to +2.4% and retail sales fell -0.6%. China stabilised rather than recovered, with official surveys still in contraction at 49.5 composite while private surveys expanded at 52.1. Sentiment stayed calm throughout, with the VIX up just 0.10 points to 14.53. Whatever markets concluded this week, they did not conclude it anxiously.
Equity Markets
It was a divided week, and the split has a straightforward explanation: the good growth news was American. The S&P 500 rose +0.09% and the NASDAQ +0.40%, while the ASX 200 lost -0.95%, the STOXX -0.81%, the Nikkei -2.09% and the CSI 300 -1.33%. The Hang Seng was a modest exception at +0.26% higher. A US payrolls print beating by more than 100,000 jobs supports US earnings directly, offsetting the discount rate effect of higher yields. Elsewhere, investors received the higher-for-longer message without the growth compensation.
Australia is the clearest illustration of higher rates doing what higher rates do. A GDP beat and an accelerating inflation gauge weakened the case for RBA easing, ten-year yields rose 8 bps, and the index fell. What makes the local market particularly exposed is the absence of any valuation cushion.
The ASX 200 trades on 18.8x forward earnings for an earnings yield of 5.33%, against a ten-year government bond at 5.17%. The equity risk premium is therefore approximately 16 bps, a fourth consecutive week of compression from roughly 33 to 27 to 18 and now 16. That is the compensation an investor currently receives for accepting the volatility, drawdown risk and earnings uncertainty of the Australian share market in place of a government bond, and we would characterise it as thin by any historical standard. The twelve-month record reinforces the point: a 2.0% price return and a 3.41% dividend yield against a 4.35% cash rate that carried no volatility at all. Franking improves that comparison materially for domestic investors, but it does not change the observation.
Valuation dispersion across global markets is now unusually wide — the NASDAQ on 30.0x forward earnings, the S&P 500 on 21.5x, the Nikkei on 21.0x, the ASX 200 on 18.8x, the STOXX on 15.7x, the CSI 300 on 14.7x and the Hang Seng on 11.6x. The NASDAQ at thirty times has the most to lose from a sustained rise in long yields, and the ten-year Treasury rose 6 bps this week to within 2 bps of its one-year high. It rose anyway, on the strength of the employment data. We flag that tension rather than pretend to resolve it, because it will resolve one way or the other.
Europe at 15.7x, with a 6.36% earnings yield, remains the better-valued developed market, though this week's inflation and retail sales figures weakened the supporting macroeconomic case. The Hang Seng at 11.6x is the cheapest major market, and cheap for identifiable reasons given China's official surveys remain in contraction. Both are valuation observations rather than recommendations.
Fixed Income & Credit
Australian government bonds and the RBA – yields rose across the entire curve: three-year bonds up 9 bps to 4.75%, five-year up 9 bps to 4.79% and ten-year up 8 bps to 5.17%, with swaps moving almost identically. The character of the move is the important part. The prior week's sell-off was a front-end bear flattening that repriced the next few RBA meetings. Last week the whole curve moved together, and the three-to-ten-year curve narrowed only 2 bps to 43. A near-parallel shift says the market is repricing the level of rates across the entire horizon, and the expected path of inflation with it, rather than the timing of the next decision. That is more consequential for holders of fixed rate bonds, because a parallel shift hits long duration hardest in price terms.
The market's view of what comes next from the RBA is visible in prices: three-month BBSW at 4.59% sits 24 bps above cash, up from 20 bps and 1 bp below its one-year high, while three-year swap at 4.75% is 40 bps above. Neither is consistent with a market expecting easing. We will not forecast the decision, but we observe that a portfolio positioned for near-term easing is now positioned against consistent market pricing, and that this week's data moved decisively against it.
US Treasuries – the two-year rose 2 bps to 4.37% while the ten-year rose 6 bps to 4.78%, steepening the two-to-ten-year curve to 42 bps from roughly 37 bps. The two-year barely moved on an employment report beating by more than 100,000 jobs because it had already completed its repricing — at 4.37% it sits within 3 bps of its one-year high with cuts largely priced out. The long end absorbed the message instead, with stronger growth, services prices paid at 72.6 and crude up 21% over the month arguing for higher inflation compensation and term premium.
A bear steepening driven by the long end is a materially different signal from the prior week's bear flattening. Flattening said tighter policy now and weaker growth later. Steepening says growth is holding and inflation risk is being repriced further out. We place more weight on this week's move because it is corroborated by the ISM price series and the oil price, rather than resting on curve shape alone.
Investment grade credit and Australian bank paper - spreads widened modestly for a fourth consecutive week, though the moves remain small: floating rate credit 1 bp wider to 60.5 bps, fixed rate 1.4 bps to 78.9 bps, major bank five-year senior -1 bp to 67 bps, and Tier 2 unchanged at 127 bps. Context is important. The floating index is still 1.6 bps inside its one-year average and only 4.5 bps above its tight; senior at 67 bps is 6.5 bs inside its average. These are tight spreads drifting gently off their tights, not a credit market showing stress.
The subordination premium now stands at 60 bps against a one-year average of approximately 64 bps. We noted in late August that the relative value case for reaching down the capital structure had largely been captured, and that view is unchanged: senior has continued to cheapen while Tier 2 has not moved. At approximately 6.32% all-in, Tier 2 remains attractive in absolute terms against a 4.35% cash rate — the point is narrower, that the case now rests on absolute yield rather than relative value.
One technical observation. Fixed rate credit widened more than floating this week and now trades 18 bps points wide of it. In a week when the entire curve shifted higher, spread product carrying duration cheapened more than spread product without it. That is a rates effect rather than a credit quality effect. Nothing in this week's data points to deterioration in the capacity of Australian banks or investment grade corporates to service their debts.
What this means for income-focused investors? The arithmetic continues to move in favour of front-end and floating rate exposure. BBSW at 4.59% is close to a one-year high, and it is the reference rate off which floating rate coupons reset. Investment grade floating rate credit is currently generating approximately 5.20% all-in at an index credit quality of around AA-.
The comparison worth making is against equities. The ASX 200 earnings yield is 5.33%. An investment grade floating rate portfolio yields approximately 5.20% with a fraction of the volatility, no earnings uncertainty and a substantially higher position in the capital structure. 13 bps is not adequate compensation for accepting equity risk.
Fixed rate investors had a poor week. An 8 bps rise in ten-year yields costs roughly 0.6% in price on a ten-year bond, and that cost was incurred across the curve rather than at a single point. This is the mechanical cost of holding duration while yields rise, and it is why we have consistently preferred floating rate exposure through this phase.
Outlook
The central case. Growth is holding up better than markets feared a month ago in both Australia and the US, inflation is proving more persistent than assumed, and policy rates stay at or above current levels for longer in both economies. We attach the highest probability to this scenario, with the caveat that the phrase holding up is doing considerable work in a world where crude has risen 21% in a month.
Key risks. The clearest adverse scenario is energy-driven: crude holds around current levels, headline inflation re-accelerates across developed markets, expectations follow, and central banks tighten into economies growing only modestly. That combination is unfavourable for equities and fixed rate bonds simultaneously, which is the correlation problem that made 2022 so uncomfortable for balanced portfolios. Second, an Australian inflation surprise — the Melbourne Institute gauge at 4.8%, household spending at 7.0%, credit growth at 8.4% and a GDP beat all point one way, and a September quarter CPI confirming it shifts the discussion from when the RBA cuts to whether it hikes. Third, and in the opposite direction, the US labour market internals: if ADP, job openings and the quits rate prove the more accurate signal, growth expectations reset lower and the long-end sell-off reverses. That is the scenario in which duration pays, and the principal argument against abandoning fixed rate exposure entirely.
Key opportunities. Front-end and floating rate income remains the clearest, with investment grade floating credit at approximately 5.20% for AA- quality and Tier 2 at approximately 6.32% all-in — yields unavailable for most of the past decade, delivered without duration risk. Second, government bonds at 5.17% in Australia and 4.78% in the US now offer entry levels at which duration functions as a genuine hedge rather than a drag. Third, equity valuation dispersion is wide, and non-US developed markets are priced considerably more forgivingly.
Central banks. We will not forecast decisions, but the direction of travel in this week's data made RBA easing less likely rather than more. The Federal Reserve confronts strong payrolls alongside services prices paid at 72.6, which argues against near-term easing. The ECB faces the least comfortable position, with headline inflation at +3.3%, core at +2.4% and retail sales contracting — the beginning of a genuine growth-versus-inflation trade-off.
Inflation and growth. Inflation risk has shifted higher again and the source has changed: Australian services inflation and sticky US core PCE both remain, but energy has been added on top, and energy affects every economy simultaneously rather than sequentially. Europe's headline reversal is the first visible evidence. Growth is better than expected and more evenly distributed than we described last week, though we would characterise it as adequate rather than robust — and adequate growth alongside firming inflation favours income over capital growth.
What would change the narrative? A sustained retreat in crude below roughly US$85 would remove much of the newly added inflation risk and improve the outlook for bonds and equities together. An Australian September quarter CPI confirming core above +3.5% would shift the conversation from no cuts to how many hikes. And a genuine deterioration in US employment would reverse the long-end sell-off quickly and reward the duration that cost investors’ money this week.
