-Rate hike expectations are front and centre again!

The 30-second wrap:

• Central Banks Rev Up Hawkish Rhetoric: Fed Chair Kevin Warsh signaled inflation remains uncomfortably high, boosting September rate hike expectations to 60% and flattening the yield curve.

• Australia’s Economy Stays Hot: Sticky July inflation (3.5% YoY) and surging household spending (+1.1% MoM) put heavy pressure on the RBA to act immediately to curb demand.

• Global Tightening Spreads: The Bank of Korea delivered back-to-back rate hikes, while ECB minutes confirmed their pause is not the end of the tightening cycle.

• Markets Adapt & Pivot: Short-end yields surged while commodities diverged—agricultural products hit 3.5-year highs on supply shocks, and precious metals pulled back on a stronger US dollar.

🟢 S&P 500: 7,711 (+0.5%)
🟢 NASDAQ: 26,402 (+0.8%)
🟢 DOW JONES: 53,559 (+0.5%)
🔴 ASX SPI: 9,008 (-0.2%)
🟢 DAX: 26,569 (+1.6%)
🔴 Hang Seng: 25,584 (-1.7%)

🔴 AUD/USD: 0.716 (-0.1%)
🟢 AUD/NZD: 1.211 (+1.0%)
🔴 EUR/USD: 1.159 (-0.8%)
🟢 USD/JPY: 160.09 (+0.8%)
🟢 US Dollar Index (DXY): 99.67 (+0.8%)

🟢 Iron Ore: $95.84 (+0.7%)
🔴 Brent Crude: $88.28 (-6.3%)
🔴 Gold: $4,509 (-3.4%)
🔴 Bitcoin: $77,490 (-1.1%)

🟢 VIX: 14.43 (-4.9%)

🔴 US 2-Yr Yield: 4.35% (+11 bps)
🔴 US 5-Yr Yield: 4.49% (+7 bps)
🔴 US 7-Yr Yield: 4.60% (+3 bps)
🟢 US 10-Yr Yield: 4.72% (-1 bp)
🟢 US 2s10s Spread: 0.37% (-12 bps)
🔴 AUS 2-Yr Yield: 4.72% (+16 bps)
🔴 JAP 10-Yr Yield: 2.92% (+4 bps)

Ok so this week ended up being all about central banks (CBs) and rate hikes. The Bank of Korea hiked their cash rate by 25 bp for the second consecutive meeting to 3.00% (AI related) and rate hike expectations grew in the US, Europe and Australia on a more hawkish speech from Fed chair Kevin Warsh, ECB minutes emphasizing that the July pause should not be interpreted as the end of the tightening cycle, and hotter than expected inflation data in Oz.

Let’s start with the main man, Kevin Warsh. Since his appointment, and his preference for limited forward guidance, there has been much speculation as to whether Warsh was a hawk, or whether he was doing Trump’s bidding and purposely avoiding tightening policy and therefore allowing the economy and therefore inflation to run hot! Well, I think we received some insight from his speech at Jackson’s Hole on Friday. Key takeouts:

“Credit and loan markets are showing few signs of policy restraint. Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive”.

“But as of now, I believe the labor markets are consistent with full employment”.

“But on the price-stability side of our mandate, the numbers are more concerning”.

“Inflation is running above our 2 percent target. So, the Fed’s predominant focus right now should be on prices”.

“And while this summer’s PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved”.

“Here is my standard: We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep”.

So, in summary, financial conditions are not restrictive, the economy is at full employment, and inflation is above target, concerning and not improving and so the Fed has more work to do. It was a hawkish speech, but it what was needed and relatively well received by markets, and most reassuringly for Warsh, it appears that markets believe him. The probability for a September Fed rate hike has increased to 60% from 30% pre-speech and the 2-year bond yield rose by 11 bp. However, the problematic 10-year bucket only rose 3 bp indicating growing market confidence that the Fed will successfully deal with inflation. In another vote of confidence equity markets only registered small declines post speech, and the USD rallied on increased rate hike expectations.

He referenced the PCE inflation measure which may have been a hint that this is still the Feds preferred inflation measure. And this series was released on Wednesday:

The US PCE price index rose 0.2% month-over-month in July 2026, above market expectations of a 0.1% increase, following a 0.1% decline in June. Core PCE inflation increased 0.2%, as expected, following a 0.1% increase in June. On an annual basis, headline PCE inflation remained unchanged at 3.7%, above expectations of 3.6%, while core PCE inflation also held steady at 3.3%.

Graph1: US inflation remains too far above the 2% target

In Australia we received the July inflation report which came in hotter than forecast (for further analysis visit my Substack article “Talk is cheap, Inflation isn’t”):

Headline inflation was +1.0% for July versus +0/9% forecast and -0.1% in June. Year-on-year (YoY) came in at 3.5% against 3.3% consensus and 3.8% previously. The Core or Trimmed Mean (TM) was 0.5% in July versus 0.3% expected and 0.3% in June and the YoY was 3.6% against 3.5% forecast and 3.6% in June. The monthly TM reading of 0.5% was the alarm bell as it is the highest reading since the inception of the monthly series back in May 2024.

In addition, we saw household spending for July which surged 1.1% over the month. This is the third consecutive monthly increase of +1.0% growth or higher, lifting the annual spending pace to 7.0%-the highest rate of growth since 2023.

Graph2: Oz demand is ambivalent to the RBA cash rate given overall economic settings:

Inflation in Australia is well above target, broad-based, sticky and just “too high” (as the RBA continue to tell us). The settings of the Australian economy are inconsistent with bringing demand back into equilibrium with supply such that there is the necessary price disinflation that follows (just see household spending and the price increases of the discretionary spending elements of the CP). Immediate action is required from the RBA to tackle this demand/supply imbalance and restore price stability, as government will not adjust their settings.

The minutes from the July ECB meeting where they kept the cash rate on hold after hiking in June were released this week. Some said they would not have opposed another hike, noting that the likelihood of further tightening becoming unnecessary remained low. Policymakers saw upside risks to inflation and downside risks to growth from geopolitical developments in the Middle East and the Russia-Ukraine war, while stressing that communication should remain clear to avoiding any pre-commitment to a September move. The minutes emphasized that the July pause should not be interpreted as the end of the tightening cycle, with another hike likely unless the inflation outlook improves significantly.

The Bank of Korea (BOK) raised its benchmark interest rate by 25 bp to 3.00% this week in its first back-to-back rate increase since 2023. It was a 6-1 vote with the one dissenter wanting a pause. It follows recent rises in headline and core inflation with core inflation hitting 2.5%, its highest level since December 2023. The South Korean economy has benefitted from a surge in global semiconductor demand which has spilled over into domestic consumption and investment. The BOK raised their growth (3.3% from 2.6% previously) and core inflation (2.5% from 2.4%) forecasts from previous and have guided for another 25 bp rate hike over the next 6 months.

Overall, the renewed focus on CB rate hikes led to rising shorter dated bond yields. The US 2-year bond yields rose 11 bp over the week, whilst Aussie 2-years increased 16 bp. The longer end was more restrained with yield curves flattening. The USD recovered and bounced against pretty much every pair with notable performances against the EUR and the JPY. The AUD also outperformed on adjusted RBA rate hike expectations. Equities took everything in their stride, with US stocks closing the week in positive territory and the Nasdaq outperforming after Nvidia’s block buster Q2 results and guidance. Gold and Silver started the week well but retreated post Warsh after the USD rallied and bond yields rose, and Copper made a record high at $6.84 before closing the week at $6.63. Oil paired some recent gains whilst agricultural commodities continued their strong performance on Russia/Ukraine crop concerns and El Nino with wheat rallying 12.5% over the week and posting a 3 ½ year high. And Bitcoin traded back above $80k at one stage this week, and most importantly sustained most of its mammoth gains from last week.

Graph 3: the global agricultural commodity index has broken higher providing another upside risk to inflation.

S&P GSCI Agricultural Index:

Ok so what to do? As I have alluded to above, markets pivoted this week to anticipating and pricing rate hikes from a growing number of developed economy CBs imminently. With that being said, we get rate decisions from two 2 relevant CBs this coming week. The RBNZ is expected to hike their cash rate by 25 bp to 2.75% and the Bank of Canada is expected to keep rates steady at 2.25% (they live too close to Trump). What will be important is how they see the world going forward!

It’s becoming increasingly apparent to me that the inflationary implications of deglobalisation and a deteriorating geopolitical landscape and the resulting negative impacts of well entrenched supply chain assumptions, amongst other things, are once again infiltrating domestic factors and creating growing upside risks. And with many CBs failing to return inflation to target since Covid, these are ghosts/risks that CBs shouldn’t/can’t tolerate given 1. the starting point, and 2. if they want to maintain credibility and stay in control of their bond markets without compelling further financial repression (the start of which we saw last week with Bessent’s intervention).

Warsh’s words this week gave bond markets some confidence that inflation should be low on the list of concerns for their term premia demands (debt, deficits, demand and supply are now currently the priorities). The Fed will quickly lose this support if they don’t act and their words are seen as hollow. I have been saying for a while that bond markets have been too eager and optimistic about forecasting the end to hiking cycles and the beginning of easing ones. In Australia, this has been ably supported by a naïve and unserious economist fraternity who get so inebriated by the populism of rate cuts, they ignore the analytical fundamentals of their supposed craft.

Now we find ourselves in a world where bond yields have risen to levels we haven’t experienced for a decade or in many cases two.

Graph 4: Bond yields at decade highs have been accepted so far, but do provide a major risk going forward, particularly if they continue their path higher.

Risk markets appear comfortable with this scenario for now, but they will get very testy if bond markets become disappointed with the action of the CBs they have currently discounted, which could drive bond yields on another journey higher. The risk here is if rate markets start to build in a multiple and an extended rate hike path if inflation fighting confidence dwindles. In the interim we will await the CB responses over the next few weeks.

This week we will also receive the US jobs report where it is expected 44k jobs were added in August compared with the 23k that were lost in July. The unemployment rate is expected to tick up to 4.2% from 4.1%. “When labor supply is barely growing, monthly job gains are naturally going to run low. I believe the labor markets are consistent with full employment”- Kevin Warsh, Jackson Hole.

Overall, I’m pretty viewless this week. I want to keep a close eye on the US long end to see whether the market remains a believer of Warsh’s inflation commitments. I think that variable will be central to all other asset classes such as equities, the USD, Gold, Silver and Bitcoin. Theres much commentary that the sell-off in precious metals on Friday is overdone, but I do think we need to see if there is a prolonged calm in long-end US treasuries and the USD. I do favour Aussie bond yields to go higher as I don’t think that market is prepared for a September rate hike by the RBA and a hawkish commitment to do more. This should also support the AUD.

Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice.

Graph 1: The RBA’s inflation failures in a picture:

The July inflation numbers were released yesterday and they were sobering. Headline inflation was +1.0% for July versus +0.9% forecast and -0.1% in June. Year-on-year (YoY) came in at 3.5% against 3.3% consensus and 3.8% previously. The Core or Trimmed Mean (TM) was 0.5% in July versus 0.3% expected and 0.3% in June and the YoY was 3.6% against 3.5% forecast and 3.6% in June. The monthly TM reading of 0.5% was the alarm bell, as it is the highest reading since the inception of the monthly series back in May 2024. N.B. the monthly TM needs to average 0.2% to achieve 2.5% inflation.

Graph 2: a 0.5% monthly TM inflation print is a massive alarm bell

There was little to like about these numbers with the data suggesting that Australian inflation remains broad-based and sticky.

Graph 3: only one category is sub 3% and tradables will probably be back there in August given oil prices

Of note there were sharp increases in housing (+5.0% YoY) with new dwellings rising 5.7% as builders passed on the costs of materials and labor. There were above average increases in the services and discretionary sectors, which most likely reflect the increase to minimum and award wages on July 1^st via a pass through of wage costs for business and more disposable income for the consumer. Meals out and takeaway food rose 0.9% for the month, hairdressing was +0.6% and dry cleaning was +1.0%. The rising cost of technology because of AI demand, which Apple flagged in their Q2 earnings, is starting to emerge in Australia with audio visual and computer equipment rising a whopping 7.7% for the month. And the proportion of the series above 2.5% is way too high at 60%.

As I have been saying for a while now the overall settings of the Australian economy are inconsistent with returning inflation to the 2.5% target. With a nominal cash rate of 4.35% and a real cash rate of 0.75%, government spending is too high, and fiscal conditions are too loose. The labor market remains tight and minimum and award wage increases are starting to infiltrate. Energy policy, decarbonization and electrification are inflationary. Government regulation/red tape and plummeting productivity lower the spare capacity threshold. Deglobalization and demographic developments are creating supply side headwinds to disinflation. All these combined push neutral rates higher, meaning a real cash rate of 0.75% is not sufficiently restrictive. To put it simply, if everything else remains the same, the RBA’s current cash rate of 4.35% is ill-equipped to return inflation back to the 2.5% target if the RBA is serious about honoring their mandate.

The minutes from the August RBA meeting were released this week and revealed that the RBA Board was far closer to hiking rates than what was expressed in the accompanying statement or at Bullock’s press conference. The key passage:

“One argument to raise the cash rate target by 25 basis points at this meeting was founded on an assessment of the risks to the inflation forecast. Members noted that if the risks around the inflation forecast were judged to be significantly skewed to the upside, it may be appropriate to mitigate those risks somewhat by tightening monetary policy pre-emptively. In that regard, members discussed various upside risks, including: a prolonged conflict in the Middle East could cause oil reserves to dwindle to very low levels and oil prices to rise sharply; widespread cost pressures reported in liaison could be passed into consumer prices more fully than assumed; the AI and data centre investment boom could prove to be larger than anticipated, globally and/or in Australia; aggregate demand in Australia more generally could be more resilient than forecast; and productivity growth might not pick up as assumed in the forecasts. Members noted that the case to raise the cash rate target to mitigate some of these risks would be further strengthened if they placed greater importance on returning inflation to target no later than the extended timeframe already envisaged in the forecast profile. Members observed that the central forecast was for inflation to return only gradually to target, adding to the already prolonged period over which it had been above target.”

I have been consistently critical of the RBA for their inflation failures and being an unserious institution. I mean if you consider compounding (i.e. this year’s 3.6% inflation on last year’s 3-something inflation and so on and so forth) the annual inflation rate since Covid has averaged 4.9%, and that’s just completely unacceptable for an organization that has an inflation target and professes to have concerns for those most vulnerable to cost-of-living increases.

Graph 4: the steeper gradient of Aussie CPI since 2020 reflects the brutal compounding of lazy inflation management.

We find ourselves in a situation where the only likely way we can achieve disinflation is via an economic downturn that would not have been necessary if the RBA wasn’t so cute with price stability over recent years. I understand the RBA only has one lever, and with other factors unlikely to pivot, it’s about time they use it and raise the cash rate immediately. One rate hike won’t be enough given the status quo; it will take 2 to 3 more rate hikes to return this economy to price equilibrium. 4.35% didn’t do it last time, and this latest inflation report indicates it is unlikely to do it this time.

In some more brief news:

The US PCE price index rose 0.2% month-over-month in July 2026, above market expectations of a 0.1% increase, following a 0.1% decline in June. Services inflation accelerated to 0.3% from 0.1% in the previous month, while goods prices fell 0.1% (vs -0.6%). Core PCE inflation, which excludes food and energy, increased 0.2%, as expected, following a 0.1% increase in June. On an annual basis, headline PCE inflation remained unchanged at 3.7%, above expectations of 3.6%, while core PCE inflation also held steady at 3.3%, matching expectations.

Wheat rose 5% toward $7.20 per bushel on Wednesday, the highest since July 2023, as intensifying Russia-Ukraine attacks threatened to further disrupt grain shipments from the Black Sea.

Graph 5: Wheat Prices

Nvidia is +4% in the aftermarket post Q2 results

Cheers,

Riesy

The views in this report are of the author and not investment advice.

-US bond yields; like trying to keep a beachball under water

The 30-second Wrap:

• Treasury Yield Suppression Backfires: US Treasury Secretary, Scott Bessent, doubled bond buybacks to $4B per operation to suppress surging long-term yields, but markets rejected the band-aid intervention, pushing bond yields back near multi-year highs.

• Debasement Trade Re-Ignites: Fears over ballooning fiscal deficits ($40T+ national debt) and attempted yield suppression drove a sharp drop in the USD, sparking aggressive rallies in hard and decentralized assets like Gold and Bitcoin (+19.8%).

• Global Inflation Sticky On Energy: Tighter energy supply and surging oil prices (+5.6%) pushed July inflation higher across Canada, the UK, and Europe, while Australia recorded a milestone with federal debt surpassing $1T for the first time.

• Key Catalyst Week Ahead: Market focus turns to Jackson Hole for Fed Chair Kevin Warsh’s speech, US PCE inflation, Aussie CPI data, and Nvidia’s Q2 earnings to dictate the next leg for global markets.

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Weekly Market Moves:

Equities
🔴 S&P 500: 7,674 (-1.4%)
🔴 NASDAQ: 26,180 (-2.1%)
🔴 DOW JONES: 53,277 (-0.9%)
🟢 ASX SPI: 9,026 (+0.1%)
🔴 DAX: 26,136 (-1.2%)
🟢 Hang Seng: 26,009 (+3.4%)

Foreign Exchange
🟢 AUDUSD: 0.717 (+1.1%)
🔴 AUDNZD: 1.199 (-0.3%)
🟢 EURUSD: 1.168 (+0.9%)
🔴 USDJPY: 158.86 (-0.3%)
🔴 USD Index: 98.84 (-0.8%)

Commodities & Crypto
⚪ Iron Ore: 95.21 (0.0%)
🟢 Bitcoin: 78,348 (+19.8%)
🟢 Brent Crude: 93.87 (+5.6%)
🟢 Gold: 4,661 (+4.9%)
🟢 VIX: 15.13 (+5.8%)

Bonds & Rates
🔴 US 10 yr bond: 4.73 (+4.0%)
🟢 US 10 yr real: 2.40 (-1.0%)
🔴 US 7 yr bond: 4.57 (+5.0%)
🔴 US 5 yr bond: 4.42 (+6.0%)
🔴 US 2 yr bond: 4.24 (+7.0%)
🟢 US 2/10 yr YC: 0.49 (-3.0%)
🟢 AUS 2 yr bond: 4.56 (-2.0%)
🔴 UK 10 yr bond: 5.06 (+2.0%)
🔴 Jap 10 yr bond: 2.88 (+1.0%)

Ok so the major news from this week is that the US government has entered another iteration of destructive USD policy after a surge in longer dated bond yields forced the US treasury to announce it was doubling the amount of its treasury bond buyback program.

US Treasury buybacks, Yield Curve Control (YCC) and Dollar Debasement:

On Tuesday this week the US 30-year bond traded to a 19-year high of 5.32% because of:

1. Another surge in oil prices

2. The Congressional Budget Office raising its forecast for the 2026 fiscal deficit from $1.9 trillion to $2.1 trillion……. wars are expensive!

3. Expectations of $200 billion of hyperscaler debt issuance in September, and:

4. Data revealing that the three largest holders of US debt, Japan, UK and China, simultaneously reduced their US treasury positions in June by 2.3% ($26.9 billion), 1% ($8.7 billion) and 4% ($25.9 billion) respectively

As a result, US Treasury Secretary, Scott Bessent, announced that the treasury would be doubling the amount of 10-year to 30-year treasuries in its buyback program from $2 billion to $4 billion per operation. The increase in longer dated buybacks will be funded by the issuance of shorter dated securities in what resembles “operation twist” back in 2010-11. Notably Bessent referenced AI related supply in his announcement:

“We are trying to keep the market in equilibrium,” Bessent said, flagging the coming supply of corporate debt issuance. Hyperscalers seem “almost yield-agnostic,” he added, given the returns they expect on the AI build-out. “They don’t really care what they are paying.”

Following this announcement, we saw a sharp drop in US longer bond yields (30 years down 15 bp from peak (Tuesday) to trough (Wednesday), a decline in the USD, a bounce in equities and an intense rally in Gold and in particular Bitcoin as the debasement trade re-emerged.

Graph 1: the USD is becoming increasingly dislocated from US bond yields:

Once the dust settled there was growing realisation that this was a band-aid on a bullet wound, and that the US government is neglecting to address the fundamental and structural bond market concerns of ever-expanding fiscal deficits and ballooning government debt, which surpassed $40 trillion this week. There was much commentary whether these actions constituted “Treasury QE” and there are arguments either way. What isn’t in dispute is that this behaviour signifies a level of yield suppression or YCC, and with the Fed’s Balance sheet (BS) continuing to grow, despite Kevin Warsh’s BS reduction mantra, government interference in free market dynamics yet again will likely have unintended consequences.

Graph 2: The Feds BS continues to expand as the US treasury intervenes

What is curious to me is that Bessent is claiming that the treasury and the Fed are fully aligned. I can’t square this narrative! How does the US treasury’s attempts to suppress longer dated yields fit with Warsh’s support for higher longer bond yields because they were assisting the Fed with its inflation battle as he alluded to at his recent press conference? This is messy!

And this wasn’t lost on circumspect markets as the fall in bond yields was mostly reversed about 24 hours later to close the week near recent highs. Interestingly, whilst this elevation in government interference was quickly rejected by the bond market, the broader implications of this strategy were embraced by FX and commodity markets with the USD continuing its decline and Gold, Silver and Bitcoin continuing to rally. Which is essentially a warning from markets that, we don’t care if you have reserve currency status, if you are going to behave like Japan, we will treat you like them! Rising bond yields, a falling USD and rising Gold and Bitcoin……beware!

Fed minutes:

The minutes from the recent Fed meeting were released and revealed that “several” Fed officials favoured raising interest rates, compared with only “a few” previously. The meeting also showed that “many” officials said that further rate hikes would be needed if inflation failed to decline. They also noted that economic activity remained solid despite uncertainty linked partly to the Middle East conflict.

US Economic Data:

This solid economic activity referred to was supported by data release this week. The Philadelphia Fed Manufacturing Index rose to 47.4 in August 2026, its highest level since April 2021 and well above expectations. Nearly 57% of surveyed firms reported higher activity, while only 10% reported declines. US unemployment benefit claims fell by 6,000 to 206,000, below expectations of 210,000. The US flash S&P Global Composite PMI rose to 56, up from 54.5 in July which is the strongest expansion since April 2022. The PMI improvement was mainly driven by stronger services-sector activity, better hiring and improved business confidence.

Australia:

Down in OZ, employment data came in slightly softer than forecast with the economy detracting 15.8k jobs in July (part-time -32.2k, full-time +16.3k). The unemployment rate rose to 4.5% from 4.4% in what would have been encouraging news for the RBA before we get the July inflation numbers next week. In addition, wages for 2Q came in at 3.2% as expected with public sector wages rising 3.4% and the private sector 3.1%. These wages are prior to the minimum and award wage increases that were implemented on July 1^st and are still too high given the declining labour productivity that currently exists in Australia (-0.6% Q1). And just like the US, Australia federal government debt recorded a landmark this week surpassing $1 trillion for the first time.

Canada:

Over in Canada headline inflation rose to 3.0% in July versus 2.8% in June after a sharp 25.7% increase in gasoline inflation which was driven by higher oil prices post the end of the ceasefire in the Middle East. The core inflation rate rose to 2.3% from 2.1% in June, a 4-month high. The reason I raise this is that I think many got carried away by June’s inflation numbers after the fall in oil prices in that month. And now that oil prices have been rising again since early July, we are starting to see the impacts on inflation. Canada’s 10-year government bond joined the rout, closing at 3.76% which was the highest level since April 2024.

Graph 3: Inflation has ticked up in July in Canada, UK and the EU following a rise in oil prices. We get US July PCE and Aussie July CPI this week:

Weekly Market Moves:

Ok so overall the week was dominated by the bond market. Rising bond yields to commence the week looked like they were about to break something, and Bessent tried to come to the rescue. His mediocre and unconvincing intervention, which lacked any element of substance, was rejected and bond yields have closed the week near multi-year highs. However, his intentions for intervention and yield suppression revived decentralized assets like Gold and Bitcoin, with the latter rallying 19.8% over the week. These same themes weighed on the USD as “debasement” returned front and centre. The weaker USD benefitted most other commodities and commodity currencies with the AUD, NZD and CAD performing well, and separately the EUR traded to a 3-month high. The equity markets of commodity dominated economies like Australia and Canada also outperformed and recorded positive weeks as US equites ended in the red. And Oil rallied 5.4% and closed the week back above $90 as Iran continues to frustrate President Trump with their unexpected resilience and unconventional playbook.

Graph 4: Bitcoin has burst back through its 200-day MA this week. Debasement trade?

Outlook:

Ok so this week was pivotal for numerous reasons:

1. It revealed that US long bond yields are becoming increasingly concerned by rising oil prices and inflation, debt and deficits, supply/demand and the Fed.

2. The US government is losing control of the bond market and are reverting to the intervention playbook as opposed to structural reform.

3. The US Treasury and the Fed are at odds, and:

4. Markets in general are unimpressed and are becoming increasingly allergic to USD exposure; with dollar debasement, decentralized assets and increased term premia becoming the focus.

Since elected, Japanese PM, Sanae Takaichi, has been very vocal on her objection to BOJ rate hikes. She also has minimal fiscal discipline and has implemented tax cuts in the world’s most indebted developed economy. As a result, 30-year JGBs have risen from 3.00% to 4.06% (highest since 1996) and the Yen has fallen around 9%. This is the path the US could be headed down if they don’t show some seriousness toward their fiscal position and debt levels, if the government continues to rely on intervention as their antidote, and if scepticism remains regarding Fed independence. They are fortunate to have USD reserve currency status but the chinks in that armour are growing as was revealed this week, and which we also witnessed last April during the “liberation day” period.

Jackson Hole, US July PCE, Australia July CPI and Nvidia Q2 earnings:

This week we will receive the much-anticipated speech from Fed Chair, Kevin Warsh, at Jackson’s Hole which will hopefully go a long way in explaining where the Fed stands regarding the path of MP, the BS, the level of bond yields and Treasury intervention. Or he might just say nothing in line with the new limited forward guidance framework. The latter would be unhelpful in the current environment! That speech will be delivered after the release of the US PCE inflation numbers for July (the Feds preferred measure; well it used to be pre-Warsh) which will be very interesting given that every major developed economy (EU, Canada, UK, Japan) has experienced a push higher in inflation in July following the rise in oil/energy prices over that corresponding period. July inflation will be particularly important for Australia, which is released this Wednesday (forecasts headline 3.3% from 3.8% June and core 3.5% from 3.6% June), given the RBA’s recent hawkishness and because most forecasters have removed expectations for further rate hikes in 2026 following the softer June reading. Another important point of information will be the release of Nvidia’s Q2 earnings which remains the bellwether for the AI complex.

Views:

This week was a real eye-opener with respect to the growing impatience of markets to US debt and deficits and the interventionist response. If we continue to see a weaker USD in concert with rising longer US bond yields and stronger Gold and Bitcoin, then the reckoning could be nigh. I favour further USD weakness as I think we are on route to test January lows. This should support commodities and commodity currencies like the AUD, NZD and CAD. Gold and Bitcoin should continue to rally as decentralized assets shine with both bursting back through their 200-day moving averages this week indicating a change in trend.

Graph 5: Gold has broken back through its 200-day MA. $5,000 again?

Bond yields I think should continue to rise. I mean a lot will depend on the oil price, which is hard to predict, but it feels to me like the underlying fundamentals (as explained above) are resulting in investors demanding a higher term premium before they get meaningfully involved again. In Australia I don’t think bond yields are pricing in enough risk for further RBA rate hikes in 2026. Equity markets should struggle with rising bond yields, but much will depend on Nvidia, and Commodity economy equity markets should outperform.

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Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice.

• Yield Curve Steepening: Short-end bond yields fell as soft US CPI and PPI data lowered Fed rate-hike odds, but long-end yields surged due to persistent inflation pressures and heavy debt supply.

• Commodity & Tech Debt Pressures: Broad-based commodity rallies (led by a 7% spike in oil) alongside massive corporate debt programs from AI tech giants like Nvidia and Google continue to push long-duration yields higher.

• Central Bank Divergence: While the Fed gains breathing room, the RBA and Norges Bank take amore hawkish stance

• Upcoming Catalysts: Market focus shifts to central bank meeting minutes, Aussie employment data and next week’s Jackson Hole Symposium for guidance on year-end policy direction.

Equities
🟢 S&P 500: 7,785 (+0.4%)
🟢 DAX: 26,440 (+0.5%)
🟢 NASDAQ: 26,729 (+0.1%)
🔴 Dow Jones: 53,732 (-0.6%)
🔴 Hang Seng: 25,116 (-2.3%)
🔴 ASX SPI: 9,017 (-2.4%)

Commodities
🟢 Brent Crude: $88.59 (+7.1%)
🟢 Iron Ore: $95.17 (+0.8%)
🟢 Gold: $4,432 (+0.7%)

Digital Assets
🔴 Bitcoin: $62,811 (-3.2%)

Currencies & FX
🟢 USD/JPY: 159.3 (+1.0%)
🟢 AUD/USD: 0.709 (+0.3%)
🟢 AUD/NZD: 1.202 (+0.2%)
🟢 EUR/USD: 1.157 (+0.1%)
🟢 US Dollar Index: 99.64 (0.0%)

Bonds & Rates (Yield increase = 🔴 | Yield decrease = 🟢)
🔴 UK 10 yr bond: 5.04% (+12.0 bps)
🔴 Japan 10 yr bond: 2.87% (+8.0 bps)
🔴 US 2/10 yr YC: 0.52 (+7.0 bps)
🔴 US 10 yr bond: 4.69% (+4.0 bps)
🔴 US 10 yr real: 2.41% (+2.0 bps)
🔴 US 5 yr bond: 4.36% (+1.0 bps)
🔴 AUS 2 yr bond: 4.58% (+1.0 bps)
🟢 US 2 yr bond: 4.17% (-3.0 bps)

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Ok so it was a relatively chill week compared to recent experiences. Equities and currencies were quiet; commodities were stronger across most categories and longer bonds continued their march higher in yield as curves steepened.

Central Banks:

Let’s start with the central banks (CBs). The RBA left the cash rate unchanged at 4.35% and suggested that, because of the 3 rate hikes implemented so far this year, growth was easing as expected. They raised their growth and unemployment forecasts and reduced their expectations for inflation and labour productivity. Governor Bullock was surprisingly hawkish at her press conference and warned that if inflation didn’t continue to ease as forecast, further rate hikes are firmly on the table. She had little sympathy for homeowners. (If you want more in depth analysis you can access my recent note: “Housing is not the Main Game” says Hawkish RBA Governor).

Graph1: Aussie median house prices. I’d say there’s a long way to go before the RBA voices any concerns!

Norway’s CB also left their cash rate unchanged at 4.25% after previously hiking 25 bp in May. They also retained a tightening bias and warned that they could hike again in 2026 if inflation didn’t ease further as forecast. Cleveland Fed President, Beth Hammack (voter and dissenter at recent meeting) advocated for multiple Fed rate hikes as she suggested that the current cash rate was not meaningfully restrictive for corporate investment and economic growth, and San Francisco Fed President, Mary Daly (non-voter) said in a speech in Tokyo that the compounding inflation threat could force the Fed to take larger than normal rate action.

US economic data:

However, over in the US we did receive some encouraging inflation data with the release of the July CPI and PPI reports. The headline July CPI fell to 3.4% from 3.5% in June and 4.2% in May, and the Core fell to 2.4% from 2.5% in June as expected. The headline PPI also declined in July to 4.7% from 5.5% in June and the core came in at 4.2% as forecast. These numbers are still well above the Fed’s 2% target, but they should give the Fed some breathing room given the “softer” employment data we saw last week. In addition, we saw weaker than expected July US retail sales (-0.6%), which fell for the first time in 14 months, weaker than forecasted consumer confidence numbers from the University of Michigan and a slight uptick in Initial Jobless Claims to 209k.

Graph 2: Reported US core inflation declines again…..breathing room for the Fed

And whilst this coalition of better-than-expected inflation information and softer activity data led to the removal of some Fed rate hike probabilities and a fall in shorter bond yields, longer bond yields took their lead from rising commodity prices, funding dynamics and failing intervention in the Yen, and rose yet again which sharply steepened the yield curve.

Graph 3: US yield curve steepens sharply since the Fed pause, big tech debt announcements and USDJPY interventions

Commodity Prices:

We saw a sharp increase in Oil prices this week as the stalemate between the US and Iran continues and as President Trump threatens to claim the Strait of Hormuz as US territorial waters. I think it was a joke, but you never know with this guy, and it remains unhelpful for stability in the commodities sphere. This was compounded further when the International Energy Agency (IEA) warned of a deeper supply deficit forecasting that oil supply in 2026 would register its largest shortfall in over 5 years. And it wasn’t only oil prices, which rose 7% this week! It was EU Gas (+9.8%), Methanol (+8.3%) and Coking Coal (+4.4%) to name a few. And agricultural commodity prices weren’t spared with Wheat (+5.3%), Canola (+4.9%), Barley (+10.7%) and Corn (+4.6%) rising handsomely over the week.

US Bond Issuance:

There were also some alarm bells in longer bond yields with the $25 billion US 30-year bond auction clearing at 5.216%, which was 16 bp above last month’s 5.058%, and the highest auction yield since 2001. Primary dealers also took a larger than normal share as domestic and international demand was restrained.

Graph 4: US 30-year bond yield auction cleared at the highest level since 2001. (grey areas recession)

Now there could be a few things at play here. Obviously, we have US inflation and expected inflation (commodity prices) and the amount of debt the US government has to issue to fund its fiscal deficit ($1.9 trillion) and to rollover existing debt.

Hyperscaler debt issuance:

However now we have another significant supply force emerging from the whole AI infrastructure roll-out. We are increasingly seeing large tech firms funding their AI capex intentions by tapping debt markets over using operational cash flow, circular/contra purchase agreements or equity. Over the last 12 months the big tech hyperscalers and AI adjacent firms have issued over $150 billion in corporate debt, with Google announcing another $25 billion just last week.

And this week Nvidia has announced intentions for a $500 billion funding program structured primarily as private debt and specialized credit facilities with financing partners and asset managers like Goldman Sachs, KKR, Blackrock and Blackstone. And whist some or most of this funding might not directly be corporate debt issuance, it does compete for the pools of capital that would normally be attracted to the debt asset class which increasingly creates a supply/demand conundrum. And capex and purchase commitments are only heading one way:

Graph 5: Hyperscaler AI capex intentions on an aggressive upward trajectory. Funded increasingly with debt?

USD/JPY:

The other factor that started to make some noise was the increasing impotence of CB intervention to strengthen the Yen. Yes, USDJPY is lower than when the BOJ initially intervened a couple of weeks ago in the high 163’s, but it has now bounced from 157 back up to 159.40 suggesting that intervention by itself has limited impact without structural change such as monetary tightening, fiscal discipline and asset repatriation. The latter to which markets are becoming increasingly concerned about, particularly given the sharp rise in JGBs this week, making them an increasingly attractive alternative to US treasuries.

Graph 6: Yen weakening again even as 10-year JGB yields hit record highs

Weekly asset price moves:

So overall it was quiet. US equities did register ATHs, but Aussie equities took a hit as big miners retraced and concerns about the housing market infiltrated most of the big banks. Foreign exchange mostly took a back seat with the Yen resuming its decline. The real noise came from Commodities and fixed income. The Short end of the US curve listened to July US economic data and priced out some Fed rate hike expectations, whereas the long end watched commodity prices like energy and soft commodities, USDJPY and the Nvidia funding program which steepened the yield curve. Gold and Silver obviously focussed on lower chances of a Fed rate hike and Bitcoin trailed off.

Outlook:

Ok so what to do? After the sum of this week’s information, market expectations for a September Fed rate hike declined from 44% to 33%, and if this theme continues, it provides one less thing for risk markets to concern themselves about. As we have seen since the Fed pause at their meeting a fortnight ago, growing expectations for a less hawkish Fed has supported equities and commodities, weakened the USD and steepened the Yield Curve in what could be viewed as an overall loosening of financial conditions. And this should continue if there are no hiccups.

What are the risks? Obviously if markets shift from prioritising historical US inflation data for their Fed expectations, to what is currently happening with rising energy and soft commodity prices and future inflation, then the mood could change quickly. The yield curve steepening is a bit perplexing as it suggests to me that there are two different interpretations at play. 1. Better reported inflation and softer economic activity and therefor reduced Fed hike expectations as represented by declining US short end yields. And 2. Higher expected inflation driven by rising commodity prices, and supply (big tech debt issuance) / demand (USDJPY) concerns as reflected by rising longer bond yields driven by rising real yields. Now it’s unclear how this evolves, but it’s my experience historically that elevated and rising longer bond yields tend to eventually break something. Is this time different? Who knows, but if longer yields stay elevated and continue to rise, risks increase.

This week the minutes from the recent Fed and ECB meetings are released, with particular interest on the Fed to understand how the 9-3 dissent was debated.

The real interest however begins next week with the commencement of the Jackson Hole Economic Policy Symposium which brings together the globe’s most important central bankers, government officials, economists etc…. There will be a keynote speech from new Fed chair, Kevin Warsh, which will be of interest for as much of what he doesn’t say as what he does say. Jackson Hole has always been crucial event for financial markets as it has tended to be a platform for central bankers to correct misconceptions, and to frame the narrative going into year end. Historically it has created above average volatility and so its worth keeping an eye on.

And the Jacksons Hole event leads us into September which is seasonally US equities worst-performing month, and the only month that averages a negative return. So just a few more nuanced matters to keep an eye on over the coming period.

Down in Oz we will receive the July employment report which, if it comes in strong again like it did in June, could really turn the screws on the RBA after Governor Bullocks hawkish take on things at her presser this week.

Overall, I think the same themes can continue in the short-term; rising equities, steeper yield curves, a weaker USD. I think Gold and Silver can continue to rise, it’s remarkable that Gold has been able to hold above $4,000 let alone rally back to $4,400 in the face of rising US 10-year real yields, something else is at play!

Graph 7: Gold rising again even as US 10-year real yields increase! Weakening USD or something more sinister?

Oil is once again a coin toss, $88 is kind of no man’s land, and Bitcoin no view!

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Have a great week!

Cheers,

Riesy

The views in this report are of the author and not financial advice

Pretty much straight off the bat, when responding to a question regarding the housing market Governor Bullock responded:

“Housing isn’t the main game. The main game is excess capacity, tight labour markets, the Middle East conflict, the AI boom…. these are all things that are front of mind with risks to inflation, and before anyone asks, the board did not discuss a cut at the meeting today, we only discussed a raise or a stay”.

However, the property obsessed media wouldn’t let it go with a barrage of questions surrounding house price declines, financial stability and rate cuts. Governor Bullock swatted these questions with a consistent response that house prices are not the main game and that a rate cut was not considered. I believe she said the latter around four to five times to emphasize the point to the tunnel visioned journos. She added that house prices are up 50% over the last 5 years giving homeowners large equity buffers, and that their modelling showed that even if house prices fell 20% (not in any analyst’s forecasts) that less than 5% of homeowners would fall into negative equity, and even then, it’s only an issue if you have to sell.

When asked why the board considered a rate hike at this meeting when they didn’t at the previous meeting even though inflation has improved, she responded:

“In favour of a hike, inflation is still too elevated, we have upside risks because of the Middle East (ME) conflict, and the longer it goes on the higher the risks it becomes embedded, and the labour market remains a bit tight.”

In another comment regarding plummeting productivity:

“Yes, we are concerned because the productive capacity of the economy is not growing. We cannot grow very fast without running into inflationary pressures, can we do anything about it? No. We can only set Monetary Policy.”

And as far as guidance or bias goes when asked about further rate hikes:

“We will go again if we need to….and I think personally it’s quite possible we might need to go”.

Now this point is critical, as since the new voting board was established, Bullock has been reluctant to offer unilateral opinion stressing she has only one vote. This suggests to me that 1. She doesn’t want the market to ease financial conditions to any extent and 2. The RBA are far closer to hiking than is being priced by financial markets.

So, if homeowners were anticipating some help from the RBA because of a pullback in house prices, Michelle Bullock has slammed the door shut on that pathway. The statement was unremarkable, but the language from Bullocks press conference revealed the RBA is clearly concerned about upside risks to inflation and that their finger is firmly on the rate hike trigger. The interesting thing for me is the adjustment to their forecasts and the emphasis from Bullock that the forecasts are “uncertain” and that they will be prepared to act if the data tells them their forecasts are wrong. The RBA lowered their headline inflation forecasts to 3.6% from 4.0% in May (current 3.8%), and core inflation to 3.3% from 3.5% (current 3.6%). They have also raised their forecasts for unemployment to 4.5% from 4.3% (current 4.4%). These forecast adjustments give the RBA increasing scope to hike again if inflation essentially flatlines and the employment market remains tight. As I have said previously, I see lopsided upside risks to inflation in 2H 2026 with mandatory wage increases coming in as of July 1^st and plummeting labour productivity, the full fuel excise tax being restored as of August 1^st, oil prices reaccelerating from their June lows and no real resolution forthcoming in the ME, and excess government spending and cost-of-living measures.

Bottom line: the risks to further RBA rate hikes in 2026 are far higher than currently being priced by the market. If rate markets get anywhere close to a neutral or dare I say an easing RBA, fade that with your life, barring some exogenous catastrophe. This should also support the AUD.

Cheers,

Riesy

The views in this article are of the author and not investment advice

-Growing El Nino concerns and a discreetly dovish Fed send commodities surging!

🎙️ The 30-Second Wrap:

1. Dovish Shift Triggers Commodity Surge: A pullback in Fed rate hike expectations and a weaker USD sent Gold, Silver, and Copper soaring—with Copper hitting fresh all-time highs alongside record stock market peaks in Australia and Canada.

2. US Labor Disconnect: Mixed employment data—softening job growth offset by a shrinking labor force—keeps the US job market structurally tight, but on balance gives the Fed “Doves” the upper hand for now.

3. Supply Disruption Meets El Niño: The global food price index reached 3.5-year highs as El Niño weather risks, fertilizer shortages and European dry spells risk crop yields.

4. All Eyes on Warsh & Upcoming CPI: The market has started to pivot to the “Warsh Dove” trade; all eyes now turn to this week’s US CPI print to see if inflation will confirm or derail this emerging status quo.

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Equities & Volatility
🟢 NASDAQ: 26,690 (+4.9%)
🟢 ASX SPI: 9,237 (+4.0%)
🟢 S&P 500: 7,757 (+3.5%)
🟢 DAX: 26,319 (+2.6%)
🟢 DOW JONES: 54,036 (+2.2%)
🔴 Hang Seng: 25,688 (-0.8%)
🟢 VIX: 14.90 (-7.3%)

Commodities & Crypto
🟢 Gold: $4,401 (+6.7%)
🟢 Bitcoin: $64,826 (+3.0%)
🔴 Iron Ore: $94.45 (-3.8%)
🔴 Brent Crude: $82.27 (-9.5%)

Foreign Exchange
🟢 AUD/USD: 0.7070 (+0.7%)
🟢 AUD/NZD: 1.1990 (+0.5%)
🟢 EUR/USD: 1.1560 (+0.3%)
🔴 USD/JPY: 157.74 (+0.2%)
🟢 USD Index: 99.60 (-0.2%)

Bonds & Yields
🟢 UK 10Y Bond: 4.92% (-13 bps)
🟢 US 5Y Bond: 4.35% (-10 bps)
🟢 US 10Y Bond: 4.65% (-8 bps)
🟢 US 2Y Bond: 4.20% (-8 bps)
🟢 US 7Y Bond: 4.50% (-7 bps)
🟢 US 10Y Real Yield: 2.39% (-6 bps)
⚪ US 2Y/10Y Curve: 0.45 (+0 bps)
⚪ JGB 10Y Bond: 2.79% (+0 bps)
🔴 AUS 2Y Bond: 4.57% (+1 bps)

Ok so many equity markets registered all-time highs (ATHs) as oil prices retreat and expectations of Fed rate hikes moderate. However much of the interest shifted to commodities as copper records an ATH, Gold and Silver surge and agricultural prices begin to reflect the impact of El Nino in the pacific, hot and dry conditions in Europe, and global shortages of fertilizer.

Graph 1: US rate hike expectations for the September meeting fall 23% this week:

So, the week began well with hopes accelerating that a peace deal in the Middle East (ME) would finally come to fruition, and that shipping traffic in the ME would normalize. As a result, we saw another sharp decline in oil prices which gave pause to the rising bond yields we have experienced over recent weeks.

There was no currency intervention this week, but it was revealed that the US assisted Japan in trying to strengthen the Yen by selling EUR/JPY. And interestingly it also became clear that Bessent didn’t want the Japanese to sell their US treasury holdings to assist in their Yen strengthening endeavours, instead encouraging them to access the US dollars to sell against the Yen via the Fed’s Foreign and International Monetary Authorities (FIMA) repo facility. Now the reason this is interesting is because it reveals that Bessent and US treasury are becoming highly sensitive to the yield level of longer dated US treasuries, and acutely aware of the risk to outflows. Which makes Kevin Warsh’s ambitions for balance sheet reduction very politically contentious.

Similar themes in the US economy continue with the ISM Manufacturing PMI rising to 55.6 in July from 53.3 in June, signalling the strongest expansion in factory activity since May 2022 driven by strong AI-related investment. Is this starting to feel like the mining boom back in 2010-2012 to anyone? The employment component rose to 52.8 which is its highest level since August 2022. The employment sector of the US economy is a real point of debate currently with the doves on the Fed citing a lack of job creation and the hawks pointing to a lack of job losses and full employment.

And we saw these colliding forces clash once again in US employment data this week. Early in the week data revealed that US based employers discarded 33.4k jobs in July, which is the fewest in two years and down 46% from the same month last year. In addition, Initial jobless claims (the dole) came in at 199k which is the third straight week below 200k – a feat last accomplished in 1969 when the US population was 202 million (today it’s around 345 million). Later in the week, US non-farm payrolls showed the economy shed 20k jobs in July (missing the +80k forecast), alongside a cumulative -103k revision to May and June. Yet, the unemployment rate edged down to 4.1% (from 4.2%), driven by a drop in labor force participation to a 5-year low of 61.4% as 264k workers exited the labor force. Wage growth fell to 3.2%, the lowest since May 2021. Takeaway: Demand is softening, but historically weak supply keeps the labor market structurally tight without fueling excessive wage inflation. Advantage: Doves!

Graph 2: Plummeting US labour supply keeps the employment sector tight-ish

In other employment markets the Canadian unemployment rate fell to 6.4% from 6.5% in June marking the lowest rate in over 2 years, and in NZ the unemployment rate rose to 5.6%, which is above the RBNZ’s expectations of 5.4%, as the participation rate rose 0.3% to 70.7% as supply in that market is becoming an issue.

And this reduction in rate hike expectations in the US has been supporting commodity prices recently. Since the Fed left rates on hold last week, and with Warsh giving very little guidance, Gold, Silver and Copper have been on a tear. This week Gold was +7%, Silver was +9% and Copper recorded an ATH. Now there are numerous influencing factors here. There is no doubt Gold and Silver have received a sharp tailwind from evolving expectations on US monetary policy and the resulting decline in shorter dated bond yields and the USD, however there is also conjecture as to whether their safety characteristics have also attracted capital because of concerns the Fed is unserious re inflation which has also manifested in a sharply steeper yield curve.

Graph 3: Gold in an upswing as the USD declines

As far as Copper is concerned supply issues continue with operational disruptions at the Codelco mine El Teniente in Chile, and the Democratic Republic of Congo announcing a ban on exports of copper concentrate effective immediately. Whilst demand remains robust with data revealing that 200k tonnes of copper arrived at US ports in July (largest monthly inflow in a decade: data centre and electrification demand) and Canada’s largest trade surplus in over four years was driven by a sharp increase in exports of metal ores led by gold and copper.

Graph 4: Copper records ATH this week on strong demand and supply constraints:

And on the soft side of the commodity equation, the FAO Food Price Index rose to 131.1 In July, which is its highest level since January 2023, as agricultural commodities like sugar (+8.8%), wheat (+6.7%), rice (+8.3%) and cotton (+4.4%) surged amid concerns of hot and dry conditions in Europe and conflict related disruptions in Black Sea export flows, and the growing impact of El-Nino related weather conditions on Pacific Rim countries’ crop yields.

Graph 5: Global food prices rise to 3 1/2-year high:

So overall it was a great week for sentiment with numerous indices registering ATHs. Of note were the commodity dominated economies of Australia (+4%) and Canada (+3.3%) which received tailwinds from the collective commodity price euphoria mentioned above.

Graph 6: Aussie and Canadian stock markets close the week at ATHs

The US continues to benefit from strong company earnings with aggregate annual S&P 500 profit growth tracking at a whopping 47% in the second quarter according to LSEG data. That’s almost twice as what was expected a month ago led by Big Tech, Big Banks and Big Oil.

Bond yields fell across the board as oil prices retreated on hopes for peace in the ME, which I think is a touch optimistic given there are still attacks on cargo ships in the SOH and the Red Sea, and now that Iran is asking for reparations from the US before it agrees to any peace deal. Interestingly, 10-year US real yields remain close to 18-year highs as supply concerns dominate, not only from government issuance, but as big tech increasingly taps debt markets to fund their growing capex requirements with Google this week announcing another $25 billion of debt issuance out to 40 years. Demand could also be an issue with buyers from Asia (Japan and China) looking elsewhere as domestic factors and currency dynamics become increasingly punitive for USD investments.

Graph 7: US 10-year real yields (blue) at highest level since 2008 on supply/demand:

The USD registered a small decline on diminishing rate hike expectations and risk on sentiment which supported the AUD and the EUR, the Yen was stable. As stated above the weaker USD was supportive of commodities amongst other things, and Bitcoin had a small bounce but continues to remain relatively anonymous.

Outlook:

The key here is Fed Chair Kevin Warsh! Ever since Warsh was announced as Fed Chair-elect back in January, we had seen consistent trend in certain asset classes. Bond yields up, USD up and gold down. US big tech doesn’t care who sits in the chair! These asset classes moved on the premise that Warsh walked like and quacked like a hawk! That changed last week post the Fed meeting! Whether or not Warsh is less hawkish than what was the popular belief is a moot point, the point is that markets now think he is.

The US employment data this week probably gave the doves the advantage, but whether they can assuage the hawks will depend on the US CPI data released this week, which is forecast to come in with headline at 3.4% (3.5% prev.) and core 2.4% (2.5% prev.). It should be noted that there was an article in the FT this week where “people familiar with the matter” said that Warsh would be prepared to hike rates at the September meeting if the upcoming inflation data was “strong” and market expectations for higher borrowing costs increased. If it comes in hotter then we will probably see a reversal of recent themes, but if it comes in lower, then we could be off to the races with a continuation of the post-Fed price action of lower bond yields, a weaker USD, stronger commodities and stronger risk markets as the Warsh Dove trade accelerates. US PPI and retail sales are also on the agenda.

We also get rate decisions from the RBA and the Bank of Norway who are both expected to keep their cash rates unchanged at 4.35% and 4.25% respectively. You know my opinion on the RBA’s apathetic approach to inflation, they will probably talk a big game, the market will ignore them, but all they will do is get further behind the curve.

Oil will once again depend on the language and actions with respect to the ME conflict. It’s my observation that when Brent heads above the $90’s, and is building a large risk premium, the market prioritises language. However, when it heads back into the $70’s and removes risk premium it responds to the activity. And with oil touching the $70’s this week, and Trump now announcing that “we have a deal” for the 117^th time since the conflict commenced (thanks Jason Pritchard), I think actions will gain gravitas yet again! In any event, I think the oil price is becoming less relevant as the correlation between oil prices and bond yields decline as real yields stay elevated and keep nominal bond yields high, despite falling oil prices, as they increasingly reflect supply/demand dynamics.

Graph 8: Correlation between US long bond yields and the oil price breaks down:

Overall, much will depend on the US CPI data, and it has gained extra significance since uncertainty surrounding Fed decision making has increased and this week’s spotlight on the US labour market. I still favour steeper curves and higher Aussie bond yields, a weaker USD and higher commodity prices. Oil and Bitcoin no view!

Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice.

-Is the implementation of Kevin Warsh’s unfamiliar Fed doctrine creating Dr Jekyll and Mr Hyde in equity markets?

The 30-Second Wrap:

• Warsh’s Fed: A different approach from the new Fed Chair confirms a shift away from traditional guidance, and 3 hawkish dissenters sparked a massive yield curve steepening and a USD slump.

• Tech Market Whiplash: Massive Q2 tech earnings created extreme volatility—Microsoft and Amazon surged on cloud and AI strength to drive overall weekly market gains, while Meta and Apple tumbled post-earnings.

• Global Inflation & Energy Risks: Softer June CPI numbers globally (including Australia) were driven by a temporary dip in oil, but re-accelerating energy prices in July mean it is too early to rule out further central bank rate hikes.

• Growing Market Disconnect: The sharp rise in long-term bond yields and extreme single-day equity moves point to underlying market anxiety and allocation shifts, signaling growing risks despite the bizarre drop in the VIX.

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Weekly Market Moves:

Equities
🟢 S&P 500: 7,489 (+1.0%)
🟢 NASDAQ: 25,373 (+1.6%)
🟢 DOW JONES: 52,845 (+1.7%)
🟢 ASX SPI: 8,864 (+1.1%)
🟢 DAX: 25,629 (+2.1%)
🟢 Hang Seng: 25,884 (+3.6%)

Currencies
🟢 AUDUSD: 0.702 (+0.6%)
🔴 AUDNZD: 1.193 (-1.1%)
🟢 EURUSD: 1.153 (+1.3%)
🔴 USDJPY: 157.4 (-4.1%)
🔴 USD Index: 99.79 (-1.7%)

Commodities
🔴 Iron Ore: 98 (-0.4%)
🔴 Brent Crude: 90.12 (-9.0%)
🟢 Gold: 4,108 (+1.3%)

Crypto & Volatility
🔴 Bitcoin: 62,858 (-2.0%)
🔴 VIX: 15.99 (-16.2%)

Bonds & Yields
🔴 US 10 yr bond: 4.73 (+5.0)
🔴 US 10 yr real: 2.45 (+2.0)
🔴 US 7 yr bond: 4.57 (+2.0)
🔴 US 5 yr bond: 4.45 (+2.0)
🟢 US 2 yr bond: 4.28 (-5.0)
🔴 US 2/10 yr YC: 0.45 (+10.0)
🟢 AUS 2 yr bond: 4.56 (-12.0)
🔴 UK 10 yr bond: 5.05 (+2.0)
🟢 Jap 10 yr bond: 2.79 (-1.0)

Ok so it was an action-packed week! We had Q2 big tech earnings, important inflationary and growth data, major central bank (CB) decisions, and all this whilst we contend with escalating conflicts in the Middle East (ME) and Europe.

Let’s start with the CBs. We heard from three of the major developed economy CBs from the US, Japan and the UK. First cab of the rank, the Fed. The Fed left the cash rate unchanged at 3.75% in a 9-3 split decision where the 3 dissenters (Hammack, Logan and Kashkari) voted for a 25 bp rate hike. The accompanying statement was effectively unchanged from June and markets embraced all and sundry, that is, until Kevin Warsh started speaking at his presser.

Warsh refused to give clear forward guidance. Instead, he mentioned he is watching a “broader range” of inflation metrics other than the PCE which may imply he can manufacture lower inflation (dovish?). He was also a bit dovish when he suggested that the recent rise in longer bond yields was doing some of the Fed’s tightening for them, hinting there is no rush for the Fed to hike. In any event the market response warned, if you are going be too cute and appear nonchalant when it comes to inflation, we will lose patience. And that is exactly what happened post the presser. The 2-year yield fell 4 bp, but the 30-year rose 11bp to 5.22% (highest since 2007) in what was the largest curve steepening following a Fed decision since April 2009 - a sharp caution to Warsh’s performance, if it was unintended. Equities were as equally sceptical posting their worst Fed Day performance since December 2024, with the Dow having its worst trading day since 2025. The USD sold off and Gold rallied.

Graph 1: The yield curve response to Warsh’s presser. Steeper, steeper, steeper!

Graph 2: Equities didn’t like the Warsh press conference:

The most interesting thing out of this meeting is that the 3 dissenters changed their vote from a pause at the June meeting to a hike in this July meeting even after they saw core inflation fall from 2.9% in May to 2.6% in June. Is June inflation irrelevant given re-accelerating energy prices in July?

We then heard from the Bank of England who left their cash rate unchanged at 3.75% in a 6-3 majority decision where 3 members voted to raise the cash rate to 4%. The Bank expects to raise rates again later in the year as higher energy prices feed through to households and businesses.

And finally, we had the Bank of Japan. Interestingly, there were some shenanigans preceding the BOJ’s decision on Friday, with Japan’s Ministry of Finance using the leverage of a more dovish Fed decision and the subsequently weaker USD to intervene in the FX markets and strengthen the Yen. This elevated expectations that there would be a double pronged attack with the BOJ hiking rates to add further support for the Yen. This was not to be the case with the BOJ leaving the cash rate unchanged in a 9-1 split decision with one member voting for a hike. They said that upside risks to inflation have increased, and they signalled they are ready to continue to lift the borrowing rate. So, a slightly more hawkish BOJ assisted Yen strength further as it rallied over 4% on the week, with 2-year JGB’s reaching their highest level since 1995.

Graph 3: USDJPY declines if continued could result in Japanese repatriation, leading to rising US bond yields and weaker global equities

We also had some important economic info in Oz with the release of the all-important June CPI numbers. On first appearance, the data came in softer with the headline number dropping to 3.8% in June from 4.1% previously and the core/trimmed mean (TM) printing 3.6% which was the same as May but below the 3.7% consensus. Commentators and economists became very excited by this data with many now pulling their calls for further 2026 RBA rate hikes (Westpac, Goldman, AMP), which would be welcome news for many. However, after further analysis I could not reach similar conclusions.

Firstly, June inflation data has been softer in all developed economies across the globe as oil prices retreated from $97 to $74, a 24% decline over the month following the temporary ceasefire in the ME. Now that hostilities have resumed, and shipping chokepoints/supply chains are once again vulnerable, oil prices have bounced to $90 which is a 22% increase for July. Now you may see this as one-dimensional or over-simplistic, but it’s real!

Of the analysis I have seen where people are now writing off anymore RBA hikes in 2026, there was minimal acknowledgment as to how the fall in automotive fuel prices (-10.9% in June) softened the inflation data. One analyst, however, suggested that if automotive fuel prices were flat, which is essentially the case for the overall June and July period, then the headline result would have been closer to 4.1%-4.2%.

In addition to this, there was limited recognition that the falling headline number was all to do with softer goods inflation (4.2% May to 3.5% June), whilst services inflation rose over the month (3.7% May to 4.0% June) and remains sticky.

There was minimal consideration as to the impact of declining global oil prices through June on falling tradeables inflation (imports like oil) from 2.5% in May to 1.5% in June, whereas non-tradeables (domestically generated goods and services) inflation rose again from 4.7% in May to 4.9% in June.

And finally, when you take a broader look into Australian core inflation by considering the smoother quarterly series, the trimmed mean is still on an upward trajectory with Q2 TM rising to 3.6% from 3.5% in Q1.

Graph 4: Australian quarterly TM inflation rises to 3.6% in Q2. Does that look like anything for the RBA to get excited about as numerous economists surmised this week:

My overall point is that the June Australian inflation data shows that the components of the CPI that are more influenced by oil prices fell in price, whereas the areas that are less exposed to oil continued to rise. So, when you consider that June inflation data globally (including OZ) has received a temporary reprieve from falling oil prices, then the re-emergence of rising oil and energy prices in July presents a clear and present danger to inflation going forward if these price levels are sustained.

There is little doubt the RBA will use the June inflation data to justify a pause at their August meeting, however in my opinion, it is way too premature to be dismissing further RBA rate hikes in 2026, particularly given the inflationary impulses that now exist in the Australian economy from, not only re-accelerating oil prices, but also from mandatory wage increases from July 1st, tight labour markets and plummeting labour productivity, the full fuel excise tax being re-instated as of today, and excessive government spending to name a few!

Graph 5: Oil (grey) vs OZI inflation (blue). It’s premature to dismiss RBA rate hikes on one month’s CPI when Oil is rising again!

On the economic front, the US PCE (the Fed’s preferred measure of inflation, or it was until Warsh said he is looking at other measures this week) eased slightly in June. Headline fell to 3.7% from 4.1% In May with the core easing to 3.3% in June from 3.4% in May in what is a consistent trend globally for June inflation as oil prices sank over that period. July readings will now take increased significance given the bounce in energy prices following the resumption of the conflict.

The US economy expanded at 1.5% in Q2 which is below 2.1% in Q1 and the forecasts of 2.1%. There is some nuance to this number, and it is far stronger than it printed with the trade deficit, lower than normal inventory replenishment and lower government spending detracting around 2.5% from the overall number. Government spending fell 0.8% as sales of crude oil from the SPR are recorded as revenue for accounting purposes and therefore offset spending, and the trade deficit and inventories can distort GDP in the short run but don’t have a huge overall impact on the economy and so the noise should be corrected. More positives were that business investment grew 15% in the quarter (technologies tied to AI) and consumer spending accelerated to 3.2% in Q2 from 0.5% in Q1.

The number of people claiming unemployment benefits in the US were at 197,000 on the week ending July 25th, rebounding by 9,000 from the 57-year low in the previous period but still under median expectations of 200,000.

Even though there was much activity in bond and FX markets, there was also a lot of action in the equity tech sector which displayed some remarkable price action. The week didn’t begin well when Nvidia announced a $500 billion memory chip deal with SK Hynix, and another large deal worth $250 billion with Open AI to lease computing capacity which revived concerns surrounding the circular nature of AI financing deals and what would happen if the music stops?

SK Hynix’s Q2 results on Wednesday were stellar but did little to arrest negative sentiment with the share price plummeting 10% post results. This shocked the Kospi which was -22% since the Monday opening by the close on Wednesday. This infiltrated US chip stock sentiment with the Philadelphia Semiconductor index dropping 9% by Wednesday close, it obviously wasn’t assisted by the rise in US long bonds post Fed.

Then we received the Q2 results from big tech and some of the hyperscalers with Meta and Microsoft releases after the close on Wednesday, and Apple and Amazon post close Thursday:

Meta beat revenue forecasts but this was overshadowed by disappointing EPS, rising capex, and sharply lower free cash flow which dropped from $8.55 billion one year ago to $784 million in Q2. Meta shares tanked 8% post results. (-7.7% for the week)

Microsoft beat revenue and earnings expectations, but investors got very excited after it reported a 43% YoY increase in its Azure Cloud revenue, which is the strongest since 2022, and guided for capex broadly in line with expectations. Microsoft shares surged 17.5% on Thursday after its results, adding $450 billion in market value to the company, the largest one-day dollar gain by any US company ever. (+19.5% for the week)

Amazon revenue jumped a better-than-expected 20% last quarter from a year ago, led by Amazon Web Services. The cloud unit’s sales surged 37% – its fastest growth in 18 quarters, beating estimates – with the AI and Chips subdivisions hitting $25 billion in annualized revenue each. That helped ease investors’ concerns around Amazon’s hefty spending which is now forecast to rise to $220 billion and has resulted in free cash flow turning negative. Amazon shares rallied 15.3% as the performance of AWS outweighed any concern re capex and negative free cash flow. (+15.5% for the week)

Apple’s results were more mixed. Revenue rose a slightly better-than-expected 16%, and iPhone sales beat forecasts. But growth in the firm’s services sector – home to its juiciest profit margins – fell short, and sales in key market China disappointed. Apple shares sank -7.3% on Friday following the release. (-8.0% for the week)

Equity markets, particularly tech and semiconductors, shrugged off the weakness early in the week and bounced euphorically post Microsoft and Amazon’s results (who’s Meta and Apple?) with Chipmakers like Micron (+18.4%), AMD (+13%) and Intel (11.3%) rallying significantly on the day. And the Korean stock market (KOSPI) rallied 20.6% on Friday alone (is still around 30% below its peak). This price action is berserk, and I can only remember such extraordinary moves during the dot.com boom/bust, the GFC and to an extent COVID.

Graph 6: The South Korean stock market rallied 20.6% on Friday alone…. uncanny!

After all this, equity markets have closed the week in positive territory. And this is despite a sharp steepening in the yield curve driven by rising long bond yields as it appears the bond market is starting to lose patience with the “unfamiliar” approach of the new Fed Chair. This same scepticism impacted the USD which has had a torrid week, its worst in 3 months, as cash headed for the JPY (intervention), EUR and NZD. Gold and Silver had productive weeks, as did Copper, assisted by falling Fed rate hike expectations and a weaker USD. The VIX/ volatility index has closed -16% this week which really doesn’t square with the volatility markets have been exhibiting, and Bitcoin renewed its decline.

Outlook:

I framed the narrative re the Fed and Warsh above as if markets were dissatisfied with his performance and his communication style in a response he may not have expected. Well, what if this is exactly what he wants? This could the risk premium that I have been suggesting will accompany an approach from a Fed chair that is completely foreign to what markets have become accustomed to over the last two decades?

I mean to be fair, he has been open about several things. 1. Inflation could be measured/interpreted differently. 2. The Fed should give itself more flexibility by changing its communication style. 3. Interest rates don’t need to be as restrictive because of AI and productivity enhancements improving supply side capacity. And 4. The Fed should reduce its balance sheet.

Graph 7: The Fed’s BS has been re-expanding since Dec 2025. Is that next on Warsh’s hit list? If so, watch out risk assets!

And the information we received, and the market reaction is aligned with his blueprint (steeper yield curves, weaker USD, weaker risk and stronger gold). He gave limited guidance, he talked about different inflation measures, they didn’t hike and the curve steepened in line with balance sheet reduction intentions.

Graph 8: The world according to Warsh: higher long bond yields (red) and steeper curves, a weaker USD (green), and weaker risk assets (blue), well they were until Microsoft and Amazon chimed in!

His comments relating to the rise in long bond yields tightening financial conditions and doing some of the work for the Fed is entirely consistent with a trade-off between tightening FCs through balance sheet reduction more so than hiking the cash rate. So, will we now see a Fed focussing on its inflation battles through BS reduction, higher long bond yields with some sort of compensation being a lower cash rate? I don’t know, they probably won’t tell us, but the signs are there and so, keep a close eye on any announcements re the Fed’s BS.

We could be moving into a completely different Fed MP framework going forward, and that is going to unsettle markets until they develop some security and certainty as to what the new status quo is, and that’s where the risk premium comes in.

We saw it this week immediately following the Fed and Warsh’s presser. Markets did bounce following Microsoft and Amazons results, but the volatility is where the risk premium currently resides. Does anyone honestly believe that a 17.5% daily rally in the world’s 4^th largest company by market cap ($3.45 trillion) after one quarterly result is healthy? Or a daily rally of 22.5% in the world’s 9^th largest equity market, South Korea? It smells more to me like re-allocation, desperation and almost panic as uncertain cash floods to a diminishing pool of perceived winners.

In any event, earnings season continues this week with the release of Q2 results from the likes of Space-X, AMD, Berkshire Hathaway and Disney, with the economic headline being the US jobs report where 91k jobs are expected to be added and the unemployment rate remains at 4.3%.

Overall, despite closing the week higher, the extreme volatility emerging in equity markets, which is currently not being reflected in the VIX, is alarming to me and suggests risks and uncertainty are growing. This uncertainty could be manifesting from Kevin Warsh’s alternate doctrine being introduced at the Fed which is unfamiliar and unfriendly to markets (rising equities and rising longer bond yields won’t co-exist for very long). If this is indeed the case, I expect the curve to steepen further and the USD to weaken which should support the AUD, JPY and the EUR. This should also support commodities like Gold, Silver and Copper. Oil, ask Trump and the IRGC, and Bitcoin will likely continue to sell off!

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Cheers,

Riesy

The views in this report are of the author and not investment advice.

-Will Kevin Warsh reveal the camouflaged hawk at the FOMC this week?

• Geopolitical Escalation Drives $100 Oil & Yield Spikes: Middle East conflict escalation—including Houthi threats in the Bab-el-Mandeb Strait—and Russian energy disruptions pushed oil past $100, driving US 10-year yields to an 18-month high of 4.73%.

• Tech Capex Hits Earnings while Economy Holds Strong: Big Tech sell-offs (Tesla down 17%, Google down 7%) were driven by massive AI capex rather than revenue misses, while US jobless claims hit 60-year lows and strong PMIs confirm underlying economic resilience.

• Aussie Inflation & Neutral Rate Reality Check: Strong Australian job growth (76k+) and incoming cost-of-living policy measures signal persistent inflation, reinforcing that structural factors are pushing long-term neutral interest rates higher.

• Heavy Central Bank & Earnings Week Ahead: Eyes are on the FOMC rate decision, upcoming BOJ/BOE meetings, Australian CPI numbers, and capex guidance from Microsoft, Meta, Apple, and Amazon.

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  Weekly Market Closes:

  Equities
  🟢 DAX: 25,099 (+1.1%)
  🟢 Hang Seng: 24,963 (+1.6%)
  🔴 DOW JONES: 51,947 (-0.4%)
  🔴 ASX SPI: 8,768 (-0.5%)
  🔴 S&P 500: 7,411 (-0.6%)
  🔴 NASDAQ: 24,975 (-2.2%)

  Currencies & Volatility
  🟢 USD/JPY: 163.79 (+0.9%)
  🟢 AUD/NZD: 1.206 (+0.9%)
  🟢 USD Index: 101.47 (+0.7%)
  ⚪ AUD/USD: 0.698 (0.0%)
  🔴 EUR/USD: 1.138 (-0.6%)
  🟢 VIX: 18.58 (-1.0%)

  Commodities & Crypto
  🟢 Brent Crude: $98.25 (+10.3%)
  🟢 Gold: $4,056 (+0.8%)
  🟢 Bitcoin: $64,137 (+0.2%)
  🔴 Iron Ore: $98.42 (-0.4%)

  Sovereign Yields
  🔴 US 5-Yr Bond Yield: 4.43% (+17 bps)
  🔴 US 2-Yr Bond Yield: 4.33% (+15 bps)
  🔴 US 7-Yr Bond Yield: 4.55% (+15 bps)
  🔴 AUS 2-Yr Bond Yield: 4.68% (+14 bps)
  🔴 US 10-Yr Real Yield: 2.43% (+14 bps)
  🔴 US 10-Yr Bond Yield: 4.68% (+13 bps)
  🔴 JPN 10-Yr Bond Yield: 2.80% (+11 bps)
  🔴 UK 10-Yr Bond Yield: 5.03% (+8 bps)
  🟢 US 2s10s Yield Curve: 0.35% (-2 bps)

Ok so this week was all about conflict escalation and growing energy disruptions in the Middle East (ME) and Europe, rising oil and gas prices, increasing bond yields, and questionable tech earnings.

The week was a mixed bag to begin with: oil prices opened sharply higher as the US/Iran war intensified over the weekend which also sent bond yields soaring. Equities, however, had a small bounce as semiconductor stocks found some relief from last weeks damage which was led from South Korea.

From here it was effectively all downhill as the situation in the ME deteriorated. Four US soldiers were killed as Iran attacked US military assets in gulf states. In response the US escalated attacks on Iran, and in response to that the Houthis of Yemen attacked two Saudi oil vessels that were approaching the Mandeb Strait in the southern Red Sea (see below map it’s the south-west point of Yemen across to Djibouti). The Bab-el-Mandeb is a maritime choke point like the Strait of Hormuz through which 25%-30% of global container shipping transits, mostly to Asia.

And so, if it was to be successfully and persistently disrupted, shipping would have take the alternate route north via the Suez Canal, the Mediterranean and then south around the Cape in South Africa which is a far timelier and more expensive voyage. Beyond the Middle East, Ukrainian attacks on the Caspian Pipeline Consortium terminal on Russia’s Black Sea coast also disrupted exports from Kazakhstan, one of the world’s largest crude suppliers. Around 40% of Russian refining capacity was reportedly hit, forcing Russia to order fuel shipments from India and disrupting oil flows through the Black Sea and Caspian routes.

Graph 1: The Houthis have claimed to have closed to Strait of Mandeb. If true, 2 major global maritime choke-points are at risk.

As a result of a second major ME cargo thoroughfare being compromised and issues in the Black Sea, the oil price surged above $100 and it took bond yields with it with the US 10-year bond hitting 4.73%, which is its highest level since January 2025. The US 30-year traded to 5.16% and has now spent its longest consecutive period above 5% (27 days) since 2007, which as we all know preceded the US housing crisis and the GFC.

Graph 2: US 30-year bond yields above 5% for longest consecutive period since 2007

This is about when equities started to topple over and they weren’t assisted by the Q2 earnings results from Tesla or Google. Tesla beat revenue expectations and delivered record Q2 vehicle volumes, but EPS missed sharply, operating margins collapsed, free cash flow turned negative, and heavy AI/Robotaxi capex created investor concern. Its shares fell 17% following! And Google beat revenue and operating-income expectations, but Q2 capex surged to $44.9 billion and full-year capex guidance rose toward $200 billion, pushing free cash flow negative and weighing on the stock which close the day -7%.

However, it wasn’t all bad with US economic data revealing that the US economy remains a far cry from where the doomsters and the rate-cut cult would like to see it. Initial Jobless claims (the dole) fell to a 60-year low of 187k indicating the labour market remains relatively tight and in a “no hire, no fire” mindset. A common narrative from employers is that, whilst the economy remains solid, they don’t want to find themselves in labour shortages as they did post Covid, and so are prepared to “hoard” labour if necessary. The S&P PMIs also illustrated the US economy is chugging along nicely. Flash PMI data showed an eight-month high in composite and services activity, but selling prices rose at the fastest pace since 2022, with supply-chain delays and Middle East risks adding inflation pressure.

Down in OZ employment surged by more than 76k (29.3k FT and 47.1k PT) in June versus 15k forecast, which kept the unemployment rate stable at 4.4% despite the participation rate rising 0.3% to 67.0% (66.7% in May), which is the highest level since July 2025. The unemployment result is slightly higher than the RBA’s forecast of 4.3% over the same period but it is becoming clearer to me that, given the employment market is a key indicator of spare capacity in the economy, an unemployment rate sub 4.5%-5.0% is incongruent with inflation returning to target. Particularly given the re-emergence of elevated energy prices, minimum and award wage increases hitting as of July 1, the full fuel excise tax being restored on August 1^st and plummeting labour productivity.

Given the RBA’s own admission that the economy can now only operate at around 2% without adding to inflation (this was 3% pre-Covid) because of supply constraints, and if they were honest excess government spending, it also fits that the level of assumed full employment should have risen from what has been an historically accepted level of around 4.5% to somewhere between 5%-5.5%.

Now I know everyone thinks that I am an inflation and therefore an interest rate hawk, and that’s probably fair over the last 5 years, but I am far more pragmatic than that as I am just responding to the conditions and policy reactions in front of me. The inflation issues that confront us, and that central banks (CBs) have been derelict in dealing with, will not just be wished away by CB political rhetoric, the landscape has changed! We now reside in a world that is being increasingly defined by structural inflation. What do I mean by that?

1. Deglobalisation and a shift from rewarding capital to prioritising labour.

2. Savings (fiscal surpluses) to debt fuelled spending (fiscal deficits) with political motivation for inflating away debt.

3. Climate change policies and de-carbonisation.

4. Rising geo-political tensions, re-shoring and compromised supply chains.

5. Immigration policies and related infrastructure spending leading to public and private sectors competing for scarce resources.

6. Ageing populations, rising retirements, shrinking labour forces and baby boomer spending.

All these factors lead to higher neutral rates, which is something that CB’s and markets are yet to fully come to terms with. There has been some slight recognition recently, but it will eventually land with a thud! In any event, the surprisingly robust employment result will place increased significance on the CPI release this week as we head into the RBA on August 11th.

The ECB left rates unchanged after a June hike, adopting a cautious wait-and-see stance while warning that elevated energy prices could create second-round inflation effects.

Overall, the themes continued. Equities had another negative week led by big tech and semiconductors, however once again it wasn’t all that bad as rotation continued with 8 of the 11 sectors S&P 500 recording positive weeks. Oil prices rallied another 10% with Brent Crude breaching $100 for a short period following the Houthi attacks which drove bond yields to YTD highs.

Graph 3: Global oil reserves continue to plummet:

Aussie bond yields are on the verge of breaching 2011 highs which coincided with the mining boom and AUDUSD around 1.10ish.

Graph 4: Aussie 2-year bond yield approaching 15-year highs

The USD had another strong week which weighed on the Yen, and the GBP got the slight wobbles on Andy Burnham’s, (The King of The North) unfunded cuts to VAT on energy bills, cuts to business tax on licensed venues and two pound bus fares. Interestingly commodities like Gold, Silver and Copper all had positive weeks despite large rises in bond yields and the USD. Now one week doesn’t make a trend, but if this continues it illustrates that investors are yet again prioritising safety and inflation protection over yield compensation and USD comfort. And Bitcoin continues to fluff around the mid $60k’s with no real conviction either way!

Graph 5: Rising US real yields have been weighing on Gold, but that changed this week. Does it signal the bottom in Gold?

Outlook:

Ok so this forthcoming week is a heavy information one, even before we consider the inflationary ramifications of the ME conflict and developments in Europe. We will hear from the Fed who hold the FOMC and rate decision this week. New Fed chair, Kevin Warsh, is doing a great job of playing hard to get and keeping us guessing. Now what if he was to appease the hawks on the voting committee and agree to a rate hike this week? That would throw the cat amongst the pigeons! It’s my view that there is a strong case for the Fed to hike at least 2 more times this year, so why not get started immediately? If Warsh really wants to make his mark and differentiate himself from his predecessors, which I believe he is trying to do, then this is his moment, a surprise rate hike the market did not expect! The market believes a rate hike this week is around a 35% chance.

We also have rate decisions from the Bank of Japan (BOJ) and the Bank of England (BOE) who are both expected to keep rates unchanged. The BOJ will be interesting as they are juggling a fiscally accommodative government, rising energy prices, surging exports, soaring equity prices and a rapidly depreciating currency. They can’t afford to reveal any dovish inclinations.

In OZ we receive the June inflation report which is expected to come in at 4.1% headline vs 4.0% in May and 3.8% for the core versus 3.6% in May. Look I know I go on about it but lets just use the core! If the core comes in at 3.8% then that means Australia’s real cash rate is 0.55% when there is a strong argument that the real neutral rate now resides somewhere between 1.5%-2.0% given all the colliding settings of the Australian economy, in particular government spending. And if you listen to the narrative out of the Labor Party Conference this week their main priority is to tackle cost of living and not via reform, but through spending. And the inflation reading this week will not include the renewed spike in energy prices in July, mandatory wage increases of around 5% and the removal of fuel excise tax exemptions.

On the earnings front we will receive Q2 results from Microsoft, Meta, Apple and Amazon, and given the market reaction to Tesla and Google’s results this week all eyes will be on capex intentions. I said last week that Google’s outlook for capex could be definitive for the momentum in semiconductor stocks. Well, I think the market’s reaction to Google’s results and their expansionary capex program is reflective of the current sentiment, which is concerning to say the least, given we have now broken some key technical levels (S&P 500 breaks 50-day MA).

Graph 6: The S&P 500 breaks down through 50-day MA. Rotation is alive but leadership is weighing on index performance.

Overall, I think rotation continues! I continue to be negative tech and long duration stocks but constructive on value stocks like financials, commodities, staples. Oil will remain volatile, but I can’t see much downside given the aggressive posture of both the US and Iran, the Houthi’s have now claimed the Mandeb Strait is closed (Sky News this morning), energy supply chains out of Russia are now being severely challenged, and global oil reserves are being rapidly depleted. This means downside to bond yields is unlikely given recent correlations, although much will depend on the Fed and the BOJ. The USD is on the verge of breaking higher so watch your crosses closely.

Graph 7: The USD Index is on the verge of breaking higher.

Commodities will be interesting! If the likes of Gold, Silver and Copper can continue to rally in the face of rising bond yields and USD strength it could confirm that there are different factors coming into play (geopolitical risks and inflation) and that the recent decline in these assets could be over. And Bitcoin will probably continue to hang around the mid $60k’s.

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Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice.

-A Butterfly flaps its wings In Korea…….

The 30 second Wrap:

• The Semiconductor Unwind: A massive revaluation wave hit chipmakers, triggered by South Korean regulatory interventions, rising capex anxieties from TSMC, and lower-cost Chinese AI models. The sector is officially entering a tactical cooling period after a historic run.

• Geopolitical Macro Squeeze: Re-escalating US-Iran tensions have severely restricted tanker traffic in the Strait of Hormuz, causing Brent Crude to spike 13.7%. With the US SPR depleted to its lowest level since 1983, the lack of an energy cushion will likely apply a persistent floor to oil prices and bond yields.

• Inflation vs. Hawkish Reality: June CPI and PPI numbers came in soft due to temporary declines in energy prices. However, the market remains skeptical—and the Fed openly hawkish—because July’s oil spike threatens to reverse that progress quickly.

• Tactical Market Rotation: Despite the headline tech hit dragging down the S&P 500 and NASDAQ, market breadth actually held up well. Capital is actively rotating into value, financials, and small-caps rather than exiting the equity market entirely.

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Major Indices
🔴 S&P 500: 7,457 (Last week: 7,575) | -1.6%
🔴 NASDAQ: 25,520 (Last week: 26,281) | -3.0%
🔴 DOW JONES: 52,146 (Last week: 52,637) | -0.9%
🟢 ASX SPI: 8,811 (Last week: 8,807) | 0.0%
🔴 DAX: 24,830 (Last week: 25,067) | -1.0%
🟢 Hang Seng: 24,562 (Last week: 24,175) | 1.6%
🔴 VIX: 18.77 (Last week: 15.03) | 19.9%

Currencies & Commodities
🟢 AUDUSD: 0.698 (Last week: 0.696) | 0.3%
🔴 AUDNZD: 1.195 (Last week: 1.206) | -0.9%
🟢 EURUSD: 1.145 (Last week: 1.142) | 0.3%
🔴 USDJPY: 162.35 (Last week: 161.67) | 0.4%
🔴 USD Index: 100.76 (Last week: 100.97) | -0.2%
🟢 Iron Ore: 98.81 (Last week: 98.72) | 0.1%
🟢 Brent Crude: 88.09 (Last week: 76.03) | 13.7%
🔴 Gold: 4,023 (Last week: 4,128) | -2.6%
🔴 Bitcoin: 64,031 (Last week: 64,104) | -0.1%

Bonds & Yield Curve
🟢 US 10 yr bond: 4.55 (Last week: 4.56) | -1.0 bps
🟢 US 10 yr real: 2.29 (Last week: 2.30) | -1.0 bps
🟢 US 7 yr bond: 4.40 (Last week: 4.42) | -2.0 bps
🟢 US 5 yr bond: 4.26 (Last week: 4.30) | -4.0 bps
🟢 US 2 yr bond: 4.18 (Last week: 4.21) | -3.0 bps
🔴 US 2/10 yr YC: 0.37 (Last week: 0.35) | 2.0 bps
🔴 AUS 2 yr bond: 4.54 (Last week: 4.50) | 4.0 bps
🔴 UK 10 yr bond: 4.95 (Last week: 4.87) | 8.0 bps
🟢 Jap 10 yr bond: 2.69 (Last week: 2.73) | -4.0 bps

The Butterfly effect: a butterfly can flap its wings in Brazil and cause a tornado in Texas a short time later! Edward Lorenz’s chaos theory refers to a framework where a seemingly minor alteration in a system can result in massive, unpredictable variations in a later state. Well think about a couple of semiconductor stocks in South Korea creating turbulence in the US semiconductor complex.

This week really was a rollercoaster ride for semiconductor stocks, and it followed hot on the heels of South Korean chip maker, SK Hynix, listing in the US as an American Depository Receipt (ADR) in what was the largest IPO by a foreign company. AI and chip stocks started to get the jitters when China’s Moonshot AI unveiled its new Kimi K3 open-weight AI model which is similar to US systems but at a fraction of the cost, which raises questions about the enormous capex that AI companies are investing, particularly on chips. This hit SK Hynix and Samsung Electronics particularly hard.

Graph 1: South Korea’s SK Hynix is off over 30% from its June high but is still +172% YTD

And there were further equity headwinds in Korea this week with its central bank (CB) hiking the cash rate for the first time in 3 ½ years to 2.75%, citing 1. stubborn inflation (3.2%), 2. the economic tailwind from the semiconductor boom (export boom, strong nominal growth and rising wages) and 3. the weak currency, and with a promise to do more, and an explicit warning they plan to “continue the rate-hike trend”. And this wasn’t the only regulatory intervention with the Financial Services Commission stepping in to pause the new listings of single-name leveraged ETFs and tripling the minimum cash deposit on existing ETFs. These single named leveraged ETFs have been turbocharging the performance of single-named semiconductor stocks. The result was that by the close of the week SK Hynix was -19%, Samsung Electronics -12.4% and the KOSPI relinquished -7.3%.

And whilst we were navigating the Korean chip-maker revaluation, we also had to deal with a re-escalation in the US-Iran conflict and increased military activity in the Middle East (ME) and the Strait of Hormuz (SOH). And despite Trumps assurances that traffic in the SOH remains “normal”, Reuters reported that tanker traffic had fallen to a 2 -month low with only seven vessels transiting the waterway on Wednesday after the US reimposed its naval blockade.

As a result, Brent Crude oil prices rose 14% this week to close at $88, but this remains well below their May peak of $114, most likely due to the enormous quantity of oil reserves being released into the market from the likes of the US, Japan and Europe. Interestingly the US strategic petroleum reserves (SPR) fell to 317 million barrels this week which is its lowest level since 1983. Releases of oil from the SPR (US: 172 million barrels over 120 days authorized) has helped offset supply lost to transportation disruptions in the SOH, and this has moderated the squeeze on oil prices. However, the SPR is now falling dangerously close to its congressionally mandated (Energy Policy and Conservation Act) lower band of 250 million barrels, so what happens if we hit the 250 million threshold? The US is losing runway to cushion higher energy prices if this conflict remains unresolved.

Graph of the week: The US SPR at its lowest level since 1983:

The geopolitical noise didn’t end in the ME this week with Trump having some choice words for China accusing them of election interference in the 2020 Presidential. This won’t be helpful for the trade temperature. How many people does this bloke want to fight in the same cage?

And the oil issue is important for the Fed as the sharp fall in oil and energy prices in June (-26%) has provided a very favourable environment for US inflation as was revealed this week in the June CPI and PPI reports:

June headline came in at -0.4% versus consensus of -0.1% and annual fell to 3.5% from 4.2% in May. Core was flat which beat expectations of +0.2% and YoY slowed to 2.6% versus 2.8% forecast. These numbers were strongly influenced by a drop in gasoline (-9.7%) and overall energy prices (-5.7%).

The PPI was similar with the monthly headline dropping 0.3% and the annual falling sharply to 5.5% in June from 6.5% in May. The core rose a modest 0.2% under the 0.3% forecast and the YoY rose by 4.7% which was well below the 5.1% consensus. Once again this was driven by a sharp decline in energy prices with gasoline price -12% for the month.

Graph 3: US CPI and PPI would have given the Fed breathing room before the recent spike in oil prices

Normally the market would have received this information very favourably, however given the spike in oil prices since the beginning of July, there was notable scepticism as to how meaningful this data would be in altering recent Fed hawkishness. And this cynicism was justified after Fed chair, Kevin Warsh, in answering questions before congress, pushed back against any “mission accomplished” sentiment with regard to inflation when he stressed the decline was largely the result of temporary energy price drops, and that after 63 consecutive months tracking above the Fed’s 2% target, core inflation remains “too high”.

Amidst all of this Q2 earnings season commenced with financials leading off and the results were predominantly strong but also a bit mixed. Banks that are more exposed to trading, asset prices, M&A and underwriting (Goldman, JP Morgan) outperformed those relatively more consumer-facing (Citigroup, Wells Fargo) as rising bond yields curb credit behaviour. N.B. the US 30-year fixed mortgage hit 6.65% this week, a 9-month high. Interestingly Goldman closed +9% the day it released its results but has only closed the week +0.8%. Citi was -8.7% over the week, but the overall US banking index closed the week +0.4%.

IBM had its worst daily decline ever (-25%) after it released a pre-earnings profit warning this week. IBM’s software deals shifted rapidly in the final weeks of June as clients prioritised technology expenditure on AI hardware such as memory chips, servers/computing capacity and cybersecurity. Ironically IBM’s trash was semiconductor stock’s treasure and gave the sector some short-term respite. That was until Taiwan Semiconductor Manufacturing Company (TSMC) released its Q2 results. The headline numbers were stunning with YoY revenue increasing 77% and net income rising 36% but it appears investors got spooked by a larger than expected increase to capex to $60-$64 billion up from $52-$54 billion. It appears that markets are becoming increasingly concerned about future return on investment given elevated valuations. And this was also reflected in Space-X which closed the week at $124 and -14% and below its IPO price ($135) for the first time.

In other news the Bank of Canada kept their cash rate on hold at 2.25%, citing improving economic conditions but continued uncertainty from energy prices and geopolitical risks.

The self-anointed “King of the North”, Andy Burnham, became leader of the UK Labour Party and will be sworn in as Prime Minister on Monday. In his speech to accept the Labour leadership he proclaimed, “and that is why this change today is the most significant change moment in our politics for 40 years”. If you don’t mind sir!! I think he forgot about the Good Friday Agreement and Brexit. He also announced that he has a “plan”, no detail of course, but we should all have faith in the bloke that was the Mayor of Manchester 2 months ago! Anyway, the market (GBP and Gilts) seems to be giving him the benefit of the doubt right now as it is expected that he will appoint Shabana Mahmood as his Chancellor of the Exchequer. However, if he goes down the Ed Miliband route with this role things could get very fruity!

Overall, there were numerous impediments to risk performance this week. We had growing uncertainty in the ME (which markets had stopped pricing) and the resulting rise in energy prices and bond yields (early in the week). We had a mixed beginning to Q2 earnings season, and we also had a revaluation and unwind of the semiconductor trade which now comprises close to 19% of the S&P 500 (was 12% mid 2025 and 5% 2021). The Philadelphia Semiconductor Index (SOX) closed the week -7% and is now -20.7% from its June high……a bear market.

Graph 4: The US semiconductor index is still +64% YTD even after the 20% drawdown

Overall, however I thought equity markets behaved quite well as the rotation theme continues and if you look under the hood that is exactly what you see with only 3 of the S&P 500’s 11 different sectors in the red for the week driven by information technology (-5.5%). The small cap index was barely negative as was the equal-weighted S&P 500 and the Dow, and Australia and Hong Kong both had positive weeks. Bonds yields traded close to YTD highs early in the week as oil prices spiked, but they did retreat a little on the softer US inflation numbers and a bit of flight to safety as equities had a soft weekly close.

Graph 5: US 10-year bond yields remain close to YTD highs

Currencies were bland but the USD was slightly weaker with the NZD being the standout and the AUD and EUR also performing. Gold can’t take a trick and couldn’t rally even with a weaker USD and slightly lower bond yields; it did however bounce out of the 3-handle range and close back in the 4000’s which is something! And Copper had a positive week on some supply constraints in Chile. Bitcoin was flat!

Outlook:

Ok so the themes are pretty clear. The semiconductor trade is becoming exhausted and continues to be unwound, and the escalating US-Iran conflict is accelerating macro risks when markets had waved these hazards good-bye.

Will semiconductor downside continue? I think it probably does as I can’t currently see a compelling catalyst to arrest the negative momentum, but if the slide continues what’s the big deal? The Philadelphia Semi-Conductor Index is still +64% YTD even after the 20% decline from its June peak. Direction could come from the Q2 earnings from Google and Intel this week. Intel will obviously need a strong beat and optimistic forward guidance to support underlying strength in the sector and dispel the gremlins. And Google, with one of the world’s most aggressive AI capex programs, will need to display that they have the confidence to continue that investment and that the music will keep playing. Any perceived hesitancy or reluctance by Google on this front could be very damaging for semi-conductor stocks and the AI play in general. We also get Tesla’s result which could reveal any plans for a merger with Space-X.

I obviously can’t tell you what will happen with the conflict as the US and Iran continue to trade blows, it looks like its deteriorating as it is reported that Iran has unlocked the Houthi’s to create shipping chaos in the Red Sea off Yemen. In any event, what I will say is that the longer this conflict continues and the further the SPR is depleted and progresses towards the 250 million lower limit, the more risk premium should be applied to the oil price, as it is unclear whether the US can (legally) or will (logistically) continue to play the major role in offsetting supply constraints generating from the SOH, which is currently cushioning the oil price. So, whilst the war remains kinetically hot, I see limited downside to energy prices or bond yields which could provide a further headwind for equity markets that appear to be in flux.

On the CB front the Fed goes dark heading into its July 28/29 rate meeting and we get the rate decision from the ECB who are expected to keep rates on hold at 2.25%.

Equities: I expect rotation theme to continue!

Graph 6: US equity rotation continues and set to continue:

Bond yields are probably fairly priced right now given the wrestle between higher oil prices/future inflation and a growing risk off environment/flight to safety. The USD neutral, but it looks like AUDNZD has broken down and the EUR could get a lift this week from the ECB. Gold has bounced out of the high $3,900’s 3 times now and so I am getting more comfortable that it has potentially bottomed out, but it really needs to break back above $4,170 to return bullish. And Bitcoin is still a sell rallies scenario.

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Cheers,

Riesy

The views in this report are of the author and not investment advice.

-Did the Japanese finance minister just upend the carry trade?

⏱️ The 30-Second Wrap:

• Middle East & Oil Shock: Macro sentiment swung hard on Middle East escalation, driving a massive 5.1% spike in Brent Crude ($76.03) and thrusting energy supply chains back into the spotlight.

• Sticky Inflation vs. Hawkish Fed: Robust US Services PMI data in combination with multi-year highs in NY Fed inflation expectations, gives ammunition to FOMC hawks and drives global bond yields toward yearly highs (US 10-Yr up to 4.56%).

• The Warsh Effect & Central Banks: Markets are aggressively adjusting to a more taciturn, data-dependent Fed under Kevin Warsh’s shifting forward guidance agenda. Meanwhile, global tightening remains live, highlighted by a 25 bp hike from the RBNZ.

• Capital Repatriation Wildcard: Japan’s finance minister teased a major policy shift to pull overseas savings back home, causing JGBs to buck the global trend (yields down -5.0 bps) in a structural move that could disrupt global liquidity.

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📊 Weekly Market Dashboard

Global Equities

• S&P 500: 7,575 vs. 7,483 🟢 (+1.2%)

• NASDAQ: 26,281 vs. 25,832 🟢 (+1.7%)

• DOW JONES: 52,637 vs. 52,900 🔴 (-0.5%)

• Hang Seng: 24,175 vs. 23,350 🟢 (+3.4%)

• DAX: 25,067 vs. 25,779 🔴 (-2.8%)

• ASX SPI: 8,807 vs. 8,802 🟢 (+0.1%)

Commodities & Crypto

• Brent Crude: $76.03 vs. $72.13 🟢 (+5.1%)

• Gold: $4,128 vs. $4,187 🔴 (-1.4%)

• Iron Ore: 98.72 vs. 98.25 🟢 (+0.5%)

• Bitcoin: $64,104 vs. $62,124 🟢 (+3.1%)

• VIX: 15.03 vs. 15.81 🔴 (-5.2%)

FX Markets

• USD Index: 100.97 vs. 100.83 🟢 (+0.1%)

• AUDUSD: 0.696 vs. 0.694 🟢 (+0.3%)

• AUDNZD: 1.206 vs. 1.215 🔴 (-0.7%)

• EURUSD: 1.142 vs. 1.144 🔴 (-0.2%)

• USDJPY: 161.67 vs. 161.3 🟢 (+0.2%)

Sovereign Bonds (Yield Move)

• US 10-Yr Bond: 4.56% vs. 4.48% 🔴 (+8.0 bps)

• US 2-Yr Bond: 4.21% vs. 4.14% 🔴 (+7.0 bps)

• AUS 2-Yr Bond: 4.50% vs. 4.48% 🔴 (+2.0 bps)

• UK 10-Yr Bond: 4.87% vs. 4.78% 🔴 (+9.0 bps)

• Jap 10-Yr Bond: 2.73% vs. 2.78% 🟢 (-5.0 bps)

Ok so I said last week that the US/Iran conflict had lost its market influence. Well, a belligerent Iran, a Grumpy Trumpy and a few bombs later how premature I was! There was a fair bit happening this week, but the dominating feature was Middle East (ME) escalation and the corresponding spike in oil prices.

So, the week started with the release of the June US services PMI which registered 54 (>50 is expansion territory) and suggests the US services sector (75%-80% of the US economy) remains robust. The prices paid component of this survey fell to 67.7 from 71.3 in May reflecting some inflation relief from falling oil prices over the survey period (-24%). This same inflation excitement was not replicated in the New York Fed’s inflation expectations reading which revealed that 1-year inflation expectations rose 0.2 bp to 3.7% (highest since Sep 2023) and 3-year inflation expectations also rose 0.2 bp to 3.3% (highest since June 2022) and this was while expectations for gas prices fell 3.5 bp to 1.5% which was the lowest since August 2022. And don’t underestimate the influence of this data set on the Fed with NY Fed President, John Williams (voter), commenting on Wednesday that inflation remains “far too high”!

This got wrapped up with a ME conflict escalation spike in oil prices and the Fed minutes from the June meeting which revealed that, whilst the board remains divided between hawks and neutrals, a few commented that, given the labour market is stable and there were some upside risks to inflation (energy prices, tariffs and AI related demand), there was a case for a 25 bp hike in June. This is fresh news and reiterates the developing hawkishness on the Fed.

Other notable developments out of the Fed were the briefer document release which is in line with Warsh’s contempt for forward guidance, and the announcement of the leadership for Warsh’s taskforces which confirms he is committed to Federal reserve reform. What this means remains unclear, but bond market reaction suggests they think this revised Fed will be vigilant on price stability, balance sheet consolidation and that there is now a premium for understanding the Fed’s state of mind!

Warsh’s tentacles seem to be infiltrating Europe where, according to their latest minutes, ECB policymakers agreed to avoid providing guidance on the future path of interest rates following June’s first rate hike since 2023, citing elevated economic uncertainty.

South of the equator the RBNZ hiked their cash rate by 25 bp to 2.5% as expected in a unanimous decision citing an economic recovery that was “stronger than expected”. This comment was franked by the NZ PMI, which was the strongest since 2021 and places further rate hikes this year firmly on the table. Market pricing was supported by Governor Breman comments at her presser when asked if expectations for 2 more rate hikes this year was realistic? To which she replied, “it’s not not realistic”. You’ve got to love the double negative!

In Australia there was minimal statistical data but there was some noise from the private sector and international agencies. The IMF revised Aussie 2026 growth down to 1.9% from 2.0% previously and 1.7% in 2027 ranking Australia 21^st out the world’s 30 largest economies. Deloitte was even more pessimistic downgrading growth to 1.3% from 1.9% previously (weakest since 1990-91 recession), but they are still predicting a 25 bp hike in August because of persistent inflation. They argue that immigration led population growth has been masking a decline in productivity which has been sustaining inflation. This productivity theme, or should I say lack of, was also illustrated by an OECD study which revealed that real wages in Australia have declined 5.1% since 2021. The report cited persistently high inflation and a lack of labour productivity as the culprits landing Australia near the bottom of the standard of living list for developed countries, with the broader OECD average enjoying a 5% increase over the same period. And Michelle Bullock and the RBA Board are soooooo concerned about the impacts that high inflation has on the most vulnerable!

Graph of the week: Aussie real wages have been in decline since the post Covid inflation outbreak which the RBA has been completely derelict in dealing with.

Graph 2: Australian productivity (or lack of) a key determinant in declining real wages

In other developments, Australian gold exports recorded a whopping $68.4 billion for FY 2025/26 which overtook coal ($67.6 billion) and natural gas ($59.4 billion) to become the second largest resource export behind only iron ore ($116.6 billion) for the first time since the 1960’s.

Canada exports defied Trumps tariffs and reached a record month-on-month high $77.1 billion for the month of May driven by exports of metal ores and non-metallic minerals. This was led by a sharp increase in the turnover of sulphur as the recent blockade in the Strait of Hormuz has led to a surge in its price. Exports of other metal ores and concentrates more than doubled on new gold ore shipments to China.

There was an interesting development in Japan late in the week which resulted in Japanese bonds bucking the global trend of rising yields. On Friday, Japanese finance minister, Satsuki Katayama, announced a soft policy stance to encourage Japanese savings invested in foreign markets to return home. The gist of the proposal was that reflation in Japan, the rise in Japan bond yields and the weaker Yen provide a strong platform for the repatriation of Japanese capital in what the finance minister described as a relatively more attractive domestic asset environment. I think this might be an alternative route for Japanese authorities to arrest the decline in the Yen. There was no hard policy, but it appears that the speech was directed at large pension funds including the Government Pension Investment Fund (GPIF) (the world’s largest pension fund) who oversees $2 trillion in assets, 50% of which is invested overseas. There were no announcement of tax incentives or subsidies, but it is believed the government will amend statutory rules which limits the GPIFs cap on investing in certain domestic asset classes (JGBs, Nikkei etc….) when the final blueprint is released on the 21^{st of} July. Now this could be significant as any material and sustained structural change in the allocation of Japanese savings could have large implications for global liquidity and by extension global markets. Watch this space!

Graph 3: Japanese bond yields decline on repatriation calls from the finance minister

The status quo volatility continued in the semi-conductor market, and it was once again book ended by the Koreans. It started with Samsung electronics who’s 19-fold increase in quarterly profit could not get the bulls mobilized and its share price capitulated around 8% (Kospi -5%) maybe because on the same day China’s Deep Seek announced that it is developing its own AI chip. The semi-conductor sector remained in flux, that is until SK Hynix listed on the US stock market, raising $26.5 billion in what was the largest ever US listing by a foreign company in an offering 7 times oversubscribed. Post the listing the share price jumped 12.8% which dragged the whole semi-conductor complex with it. And whilst the Philadelphia semi-conductor index was down 9% at one stage, it closed the week down only 0.7%.

Graph 4: Korean stock market enters bear market as semi-conductor stocks weigh

Ok so overall mild weekly moves masked underlying volatility. I mean you can understand young tech companies exhibiting elevated volatility, but when you see trillion-dollar companies like Meta, Tesla and Microsoft experiencing consistent 3-4%+ daily volatility and they are still negative YTD, it does alert the senses as to underlying fragilities in the market. In any event, US equities reside just shy of ATHs whilst Korea entered a bear market this week and Aussie stocks remain dormant. US bond yields continue to rise as increasing oil prices becomes a factor yet again, and markets adjust to Warsh’s price stability and balance sheet reform agenda and also take note of the rising prominence of the hawks on the FOMC. JGB yields fell quite aggressively on Friday following Katayama’s announcement which had minimal impact on USDJPY as the USD strengthened yet again. The stronger USD and higher bond yields weighed on Gold and Silver, but Copper bucked the trend with a positive week! And Bitcoin was just shy of being the outperformer rallying 3.4% which was just below oil which rallied 5.1%.

Graph 5: US bond yields at or approaching yearly highs

IMF World Economic Outlook:

“Where inflationary pressures are visible but judged to be temporary and inflation expectations remain anchored, central banks should keep real rates broadly constant over a reasonable horizon, which may imply raising nominal policy rates. If higher inflation is paired with higher demand pressures from the technology-led upturn, central banks may need to do more to avoid overheating. Where inflation was still above target when the war started, credibility is weaker, exchange rate pass-through is greater, or second-round effects appear more likely, policy may need to remain tighter for longer—or be tightened further—to prevent de-anchoring.”

Outlook:

Ok so what to do? This week we head back into earnings season with US banks taking centre stage with the release of their Q2 results, and they would want to be good with analysts forecasting S&P 500 companies to grow by 25% this calendar year. We also receive US inflation numbers with the release of June CPI and PPI. Headline CPI is forecast to come in at 3.8% versus 4.2% in May with core expected at 2.9% (same as May). Headline PPI is forecast to drop to 6.2% from 6.4% and core is expected to rise to 5.2% from 4.9% in May.

Graph 6: US core inflation wouldn’t want a 3 handle in front of it this week:

The Bank of Canada meet and are expected to maintain the cash rate at 2.25%.

Kevin Warsh appears before congress where I imagine he will give little away on the direction of MP and will try to steer the narrative around his proposed reforms for the Fed, and we will also hear from Chris Waller (not the horse trainer) who has recently endorsed Kevin Warsh’s minimal forward guidance doctrine.

So, with an increasingly taciturn Federal Reserve, markets are becoming more reliant on other indicators for their expectations of MP. And with bond yields approaching year-to-date highs it appears they are focussing on upside inflation risks and maybe assigning some risk premium to an introverted, but increasingly hawkish Fed. I think it’s important to note that bond yields have continued to rise as oil prices retreated (before this week) which suggests to me that rate markets are factoring in other sources of inflation (structural), the Fed and maybe some fiscal concerns.

Are they right? I think they are! As I have been saying for a while now, I think US and Aussie markets are under-pricing the potential for rate hikes, particularly multiple ones, and I think the belief of a slowing US labour market is diminishing and the focus returns to price pressures. We will know more after this week’s data drop!

I continue to expect rising bond yields which I think will continue to favour the USD which will place pressure on AUD, EUR and JPY. This should continue to provide a headwind to USD denominated commodities except maybe for oil. Oil is very hard to predict as obviously it depends on the temperaments of Trump and the IRGC. I read a good article this week where the author argued that Trump the “dealmaker” is pulling the wrong rein by prioritising financial incentives in his negotiations with Iran. He points out that USDs have a diminishing marginal value when you are negotiating with medieval sadists whose ultimate goal is to meet Allah in the afterlife and be gifted 72 virgins for services rendered. I will say however that the spike in oil has been relatively subdued given the re-escalation in the ME and deteriorating developments in Europe where Russia has now been forced to suspend diesel fuel exports. It appears that countries are becoming nimbler in navigating the energy supply chain (aka Mexico starting to export natural gas to Asia and Canada sulphur to Europe for example).

Equities are still difficult to say. We have US and German equities lingering around ATHs, Korea has entered a bear market, and Japan is in correction territory, and Australia is muddling. Bond yields have not been an issue for US equities so far this year but there will come a point, if bond yields continue to rise, that liquidity will become an issue. And keep abreast of the semi-conductor driven bear market in Korea, which could be a warning for the US, and also noise surrounding Japanese repatriation of capital which could provide potential wobbles in global markets. And Bitcoin had a very productive week, but whether that continue is anyone’s guess.

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Cheers,

Riesy

The views in this report are of the author and not investment advice.

-The bond bears and the equity bulls have mostly been friends in 1H 2026, will it continue?

⏱️ The 30-Second Wrap:

• The Rotation is Real: US markets had a subdued holiday week, but the underlying trend remained in tact—semiconductors copped a beating while traditional value sectors carried the Dow and DAX to fresh All-Time Highs.

• Warsh Drops the Mic: New Fed Chair Kevin Warsh explicitly buried “forward guidance” at a central bank panel, telling markets to stop relying on hand-holding and to judge the real-time data for themselves.

• The RBA’s 7-Year Itch: The June minutes revealed a central bank that is fundamentally unserious about its inflation target. By admitting that the neutral rate is higher while refusing to even discuss a hike, the RBA is basically locking in seven consecutive years of above-target inflation.

• A Supply-Side Employment Twist: June’s soft +57k headline NFP payroll number masks a hawkish truth. Aggressive drops in labour supply (via immigration limits and baby boomer retirements) mean the jobs market remains tight enough to push unemployment lower and wages higher, completely validating why bond yields remain stubbornly high despite falling oil prices.

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📊 Weekly Market Performance Summary

Equity Indices

• NASDAQ | 25,832 | 25,297 | +2.1% 🟢

• DOW JONES | 52,900 | 51,879 | +1.9% 🟢

• S&P 500 | 7,483 | 7,354 | +1.7% 🟢

• DAX | 25,779 | 24,671 | +4.3% 🟢

• Hang Seng | 23,350 | 22,671 | +2.9% 🟢

• ASX SPI | 8,802 | 8,777 | +0.3% 🟢

Foreign Exchange

• AUDUSD | 0.694 | 0.690 | +0.6% 🟢

• EURUSD | 1.144 | 1.139 | +0.4% 🟢

• USDJPY | 161.30 | 161.73 | -0.3% 🔴 (Yen strength)

• USD Index | 100.83 | 101.37 | -0.5% 🔴

• AUDNZD | 1.215 | 1.223 | -0.7% 🔴

Commodities & Crypto

• Bitcoin | 62,124 | 59,835 | +3.7% 🟢

• Gold | 4,187 | 4,103 | +2.0% 🟢

• Brent Crude | 72.13 | 73.57 | -2.0% 🔴

• Iron Ore | 98.25 | 100.33 | -2.1% 🔴

Fixed Income (Yields)

• Jap 10 yr bond | 2.78% | 2.61% | +17.0 bp 🔴

• US 10 yr bond | 4.48% | 4.37% | +11.0 bp 🔴

• US 7 yr bond | 4.35% | 4.25% | +10.0 bp 🔴

• US 5 yr bond | 4.23% | 4.13% | +10.0 bp 🔴

• US 10 yr real | 2.24% | 2.16% | +8.0 bp 🔴

• US 2/10 yr YC | 0.34% | 0.28% | +6.0 bp 🔴

• US 2 yr bond | 4.14% | 4.09% | +5.0 bp 🔴

• UK 10 yr bond | 4.78% | 4.73% | +5.0 bp 🔴

• AUS 2 yr bond | 4.48% | 4.47% | +1.0 bp 🔴

Ok so it was a relatively subdued and shortened week for markets as the US celebrated the Independence Day holiday and their 250^th birthday. Similar recent themes dominated however, with semiconductor stocks remaining under pressure (Kospi, Micron etc…) and a continued rotation into more traditional stocks (Dow, DAX), and Kevin Warsh signalling to markets that forward guidance has been parked and instructing them to do their own work!

Early in the week it was all about June 30 and end of quarter/end of 1H and volatility remained subdued. In the first half of 2026 the Dow Jones (+8.9%) recorded its best performance in over 5 years, with both the S&P 500 (+9.6%) and the Nasdaq (+12.8%) registering their strongest performance since 2024. The ASX has underperformed adding a pedestrian 1.5%, and the Kospi was the star rising 77% in 1H and that is despite falling 11% from its June 19 all-time high (ATH). The USD was up 4.8%, whilst the US 2-year bond yield was +61 bp and the 10 year was 35 bp higher. The Aussie 2-year was +47 bp, Gold was -4.1% and Bitcoin was the real dog falling 30% in the first half.

Graph 1: Higher bond yields (green) have been no problem for the Dow (blue) so far in 2026:

New Fed chair, Kevin Warsh, spoke on a panel at a central bank (CB) conference in Portugal and he delivered a little bit of red meat. He noted that whilst inflation risks had receded in recent weeks, the Fed remains committed to restoring inflation to its 2% target, and he stressed that delivering price stability remains the Fed’s primary objective. Warsh added that the Fed balance sheet is too large which hampers the transmission of monetary policy (MP) via rate setting. And he repudiated “forward guidance” yet again when he responded to a comment by ECB chief, Christine Lagarde, who said her biggest regret was “to feel compelled to act in accordance with prior forward guidance instead of judging the economy independently in real time”. Warsh emphatically seconded that notion when he said, “President Lagarde’s answer on forward guidance — I couldn’t have said it better myself”.

We also heard from the RBA who released the minutes from their recent June meeting where the board unanimously kept the cash rate steady at 4.35%. I mean it really is all lip service from the RBA. They provide a narrative that they are serious about returning inflation to the 2.5% target, and will be vigilant in doing so, but then they look for any excuse to avoid following through on these “commitments”. Under Phil Lowe-IQ it was “to preserve jobs” and now under Michelle Bullock it appears to be housing and the downstream downside risks from falling house prices. And that is why, based on the RBA’s own forecasts, by the time they “forecast” inflation returning to target in 2028, it will have been above target for seven years……seven years! And that is just completely unacceptable when you have unemployment consistently below 4.5% over the same period.

Graph 2: AUS U/N (blue) versus AUS TM inflation (grey):

There were 2 excerpts in the minutes which jumped off the page for me and demonstrate how unserious this CB is:

1. “Inflation remained materially above the Board’s target, and members noted that the staffs May forecasts (which were based on available data and conditioned on market expectations for interest rates at that time) envisaged that it would be a further two years before inflation returned sustainably to target.” – And why would we believe that? They’ve been telling us that inflation would return to target within the next 2 years for 5 years now! Talk about policy and institutional failure!

Graph 3: AUS trimmed mean inflation has been above 2.5% since Q4 2021 and is forecast by the RBA to be above that level until 2H 2028……. institutional failure!

2. “Members observed that estimates of the real neutral rate had risen over preceding years – and were a little higher than when the cash rate target was previously at its current level.” – In layman’s terms, a higher real neutral rate means an economy needs a higher cash rate than previously to be in its sweet spot where it is neither speeding up (causing inflation) nor slowing down (creating unemployment). Ok so we have worked out with some hindsight that a 4.35% cash rate was insufficient to return inflation to target back in 2024. And now we have the RBA board acknowledging that the real neutral cash rate has risen since the cash rate was previously at 4.35%. The cash rate is 4.35% once again, but inflation is rising again and so Australia’s actual real cash rate is lower. And so financial conditions are clearly looser, and they sit on their hands and tell us that “financial conditions are probably somewhat restrictive” and don’t even discuss a rate hike. This is non-sensical, economic illiteracy and smells of political capture, and that my friends are what leads to unnecessary mistakes that this group of jokers should have learnt from the last time they favoured politics over independence.

So over in the US we received the latest reading of their major employment report, June Non-Farm Payrolls (NFP). On first glance it appeared to be a little on the softer side, but there was something for everyone!

For the rate doves, the headline number revealed that in June the US economy added only 57k jobs which was far beneath the consensus of 112k. It also showed that the job creations for April and May had been revised lower by a combined total of 74k.

For the hawks the unemployment rate fell to 4.2% from 4.3% in May as the participation rate fell to 61.5% in June from 61.8% previously. And average hourly earnings rose to 3.5% in June from 3.4% in May. The reason the participation rate fell so aggressively was 720k people (mostly foreign-born workers) dropped out of the workforce entirely.

Now there are two ways you can look at this. 1. Demand side. People dropped out of the labour force because there are limited jobs and they are losing confidence in finding a job, maybe because of things like AI replacement or softening economic conditions. However, that would normally show up in rising initial jobless claims (the dole) which fell again this week to 215k. Or falling job openings, where the JOLTS (job openings) data released earlier in the week revealed that the number of jobs available reached a two year high.

Or 2. Supply side. You can look at the large number of people leaving the workforce as a function of Trumps restrictive immigration policies (falling foreign-born labour) and ageing demographics resulting in increasing retirements, which both negatively impact labour supply. All things being equal if it’s a demand issue this would normally result in falling wages, but if it’s a supply shortage this would normally lead to rising wages, and in the NFP data average hourly earnings rose to 3.5% from 3.4% in May.

I think some of the dovish commentary surrounding the NFP release is a touch premature. We could have entered a world where, because of demographics and other dynamics, the US labour supply is stagnating/declining to an extent where the US economy doesn’t need to provide as many jobs as in the past to keep the unemployment rate stable, and if that’s the case a lower threshold to generating wage pressures. These evolving dynamics could be the ballast to the potential risks enunciated by the economic doomsayers and the AI labour replacement hysterics. It’s only one piece of data but keep an eye on these emerging and changing trends, it could have large implications to the way CBs approach MP!

Graph of the Week 1: US’s ageing population and labour participation rate. The fastest growing population demographic (55+) has a declining labour participation rate:

Graph of the Week 2: foreign born workers in the US have declined by 1.5 million since Trump’s return to the Presidency also contributing to a declining participation rate:

Overall, it was a quiet week. There was a slight dovish reaction to the weaker headline NFP number, but bond yields have risen materially over the last week with the US 10-year flirting with 4.5% again. This didn’t assist the USD which took a breather from its recent strength, and this supported the AUD, the EUR and the JPY after recent weakness. It appears that precious and industrial commodities are being mostly influenced by the USD, as despite rising bond yields, the weaker dollar was able to arrest the recent declines of Gold, Silver and Copper, and Bitcoin had a bounce with more work to do. The rotation continued in equity-land with the Dow and DAX closing the week at ATHs and semiconductors and the Kospi once again copping it.

Separately, there was interesting price action in Meta whose share price rose 8% on Wednesday when it was reported that they would rent out and monetize their excess computing/cloud capacity. On further evaluation markets then queried whether excess computing/cloud capacity was synonymous with overcapitalization on AI infrastructure and the share price dropped 5% Thursday. This is just something to keep in mind, as at certain stages recently the market has become suspicious of aggressive AI capex.

Outlook:

The cupboard is pretty bare when it comes to relevant economic and market information this week, but we will receive the June FOMC minutes which should give us something to chew on. Hopefully we will get a further insight into how a Warsh led Fed will operate, whether that be status quo or unfamiliar? Beware of growing risk premium for an increasingly introverted Fed!

In the absence of other significant information markets should continue to be driven by the recent dominating themes of semiconductor volatility and equity rotation, and the performance of bond yields and rate expectations from the Fed. I think the US/Iran war has lost its market mojo given the oil price has retraced to pre-war levels. Que Sera, Sera semiconductor stocks, but bond markets remain interesting!

There was much commentary following the US jobs report Thursday, the majority of which reverted to the weak employment and economy narrative, and were basically putting the nail in the coffin for further rate hikes, and I think that is both premature and misguided. As I noted above, the June data could be beginning to reveal the changing shape of the US employment market (relevant for other western market economies) where evolving supply side dynamics could mean labour markets could still remain tight even with lower job creation, which would lower the threshold for the generation of wage inflation and have major ramifications for how MP functions from the lens of the historical experience.

In any event, I think the bond markets tended to agree with me as post the data there was essentially no reduction to rate hike expectations by year end. And whilst the 2-year bond fell 3 bp on the day, both the 2-year and the 10-year bond yield have closed materially higher over the week and have become completely dislocated from falling energy prices.

Graph 6: N.B, the dislocation between the US 2-year bond (blue) and the oil price (green):

Now whether this is fiscal anxieties, lingering inflation concerns or a rejuvenated hawkish Fed is up for debate, but bond markets continue to reject any macro narrative that warrants lower bond yields, and that could be a problem for risk markets if it persists and/or deteriorates (it hasn’t been a problem so far in 1H).

Overall, I think bond yields in both the US and AUS continue to underprice multiple rate hikes going forward. I think the USD will continue to perform after its breather this week. This should place pressure on the AUD, EUR and JPY and provide a headwind for Gold and Silver. Equities recovered well this week after last week’s drawdown, and I have no real view there given the volatility, and Bitcoin performed well but the jury is still out!

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Cheers,

Riesy

The views in this report are of the author and not investment advice.

-I don’t think these two were long 2X leveraged Samsung Electronic ETFs.

The 30 second wrap:

• Tech & Semiconductor Shakeup: A massive leverage unwind in South Korea hammered Samsung and SK Hynix, triggering a global tech sell-off that dragged down the NASDAQ (-4.8%) and Nikkei (-4.5%) despite blockbuster earnings from Micron.

• Classic “Flight to Safety”: Investors aggressively dusted off the risk-off playbook, rotating out of crowded tech and dumping cash into the US Dollar and safe-haven bonds, which drove global yields lower.

• The “Warsh Effect” Peaks Commodities: Growing acceptance of a hawkish Kevin Warsh led Fed continue to lift the USD, challenging the macro “debasement trade” and pushing Gold, Silver, and Bitcoin (-5.3%) deeper into bear territory.

• Sticky Inflation Pressures Central Banks: Stubborn Core PCE inflation in the US (3.4%) and a rising underlying trimmed mean in Australia (3.6%) mean central banks remain backed into a corner, with markets likely underpricing the risk of further rate hikes.

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Equity Indices & Volatility

• Hang Seng: 22,671 | 23,924 | 🔴 -5.5%

• NASDAQ: 25,297 | 26,517 | 🔴 -4.8%

• S&P 500: 7,354 | 7,500 | 🔴 -2.0%

• DAX: 24,671 | 24,985 | 🔴 -1.3%

• ASX SPI: 8,777 | 8,809 | 🔴 -0.4%

• DOW JONES: 51,879 | 51,564 | 🟢 +0.6%

• VIX (Volatility): 18.41 | 16.78 | 🟢 +8.9%

Forex & Currency Indices

• AUDUSD: 0.690 | 0.701 | 🔴 -1.6%

• EURUSD: 1.139 | 1.147 | 🔴 -0.7%

• AUDNZD: 1.223 | 1.221 | 🟢 +0.2%

• USDJPY: 161.73 | 161.27 | 🟢 +0.3%

• USD Index (DXY): 101.37 | 100.75 | 🟢 +0.6%

Commodities & Crypto

• Brent Crude: 73.57 | 80.59 | 🔴 -9.5%

• Bitcoin: 59,835 | 63,010 | 🔴 -5.3%

• Gold: 4,103 | 4,172 | 🔴 -1.7%

• Iron Ore: 100.33 | 101.14 | 🔴 -0.8%

Sovereign Bond Yields (bps Change)

• UK 10 yr bond: 4.73% | 4.84% | 🟢 -11.0

• US 5 yr bond: 4.13% | 4.23% | 🟢 -10.0

• US 7 yr bond: 4.25% | 4.34% | 🟢 -9.0

• US 2 yr bond: 4.09% | 4.18% | 🟢 -9.0

• US 10 yr bond: 4.37% | 4.45% | 🟢 -8.0

• Jap 10 yr bond: 2.61% | 2.65% | 🟢 -4.0

• US 10 yr real: 2.16% | 2.18% | 🟢 -2.0

• AUS 2 yr bond: 4.47% | 4.48% | 🟢 -1.0

• US 2/10 yr YC: 0.28% | 0.27% | 🔴 +1.0

Ok so an enlightening week where the disinflationary effects of “so-called” Middle East (ME) peace and a falling oil price could not sustain the euphoria in AI and semi-conductor stocks, with overconfidence and excess leverage yielding to anticipated tighter financial conditions and regulatory warnings, and with the impacts reverberating globally.

The week started where we left off with renewed Fed “price stability” discipline echoing and the US manufacturing PMI hitting its highest level since May 2022, both driving bond yields higher. And then on Tuesday something very unexpected transpired! The Head of South Korea’s Financial Supervisory Service, Lee Chan-Jin, commented that authorities might have moved too quickly in approving highly leveraged stock ETFs. This created a certain level of unrest in the highly leveraged Korean stock market, particularly its two largest members, memory chip firms Samsung Electronics and SK Hynix, as we head into the rebalancing period in front of June 30. The Kospi Index closed -10% on the day, its 5^th worst daily performance on record, with Samsung E down 12.3% and SK Hynix -12.5%. The Kospi is +175% over the last year and Samsung E and SK Hynix contribute over 50% of the Kospi’s market cap. This unease firstly hit Japan and the Nikkei (-4.5%) and then it infiltrated the NASDAQ which closed -2.8%. As a result, US chipmaker Micron, fell13% going into the release of its Q1 results. And other markets reverted to more conservative flight to safety price action with the USD rising and bond yields falling. Then Micron released its results which revealed a spectacular rise in year-on-year net profit to $28.4 billion from $1.9 billion a year ago. The share price rocketed, rallying 15% and dragging everything with it, including Korea and Japan. And amongst all this Apple revealed that it was increasing the prices of its iPad and Mac lineups due to surging cost of memory chips which sent its shares down 6% and provided an unsavoury close to the week with the Kospi, the Nikkei and the Nasdaq suffering yet again. It really is unhealthy and unprecedented volatility for non-GFC, non-Covid eras!

Graph 1: Leverage for Korean chipmakers has risen sharply:

Graph 2: And leverage creates volatility

Graph 3: Japan equities outperforming on a weak Yen, a “pro-business” government, reflation creating pricing power for companies, recent falling energy prices and AI investment.

Amidst all this we received some important economic data which indicated that the US economy performed better than originally expected in Q1 (final Q1 GDP), the labour market remains tight (Initial jobless claims) and that US inflation remains a prickly issue for the Fed. The May US PCE (the Fed’s preferred inflation measure or is it now Kevin?) came in at 4.1% for the headline as expected up from 3.8% in April, and the core was 3.4% also as forecast above the 3.3% recorded in April. The core was the highest it has been since autumn of 2023 and the last time the headline had a 4 handle was in spring 2023.

Graph 4: US Core PCE inflation headed in the wrong direction

We also received the inflation data for May down in Oz. The headline fell to 4.0% from 4.2% in April driven by lower fuel prices. However, the trimmed mean, or the “underlying” rate rose to 3.6% in May from 3.4% in April fuelled by domestic factors particularly in the services sector. Not good! We also received the May employment report which revealed that the Australian economy added 40k jobs in May, the unemployment rate fell to 4.4% from 4.5% in April, whilst the participation rate remained the same at 66.7%. For some misguided reason markets reduced rate hike pricing following the data. However, considering this data I want you to remember 2 quotes from Michelle Bullock’s presser last week following the RBA meeting where they kept the cash rate unchanged:

“In terms of what it means for the headline inflation rate it’s going to mean that instead of rolling off (fuel excise exemptions extended) and the headline inflation jumping up it will just stay down. But we understand that. So, our focus is on the underlying rate. So, it’s not going to make, I don’t think, a lot of difference to us in terms of us thinking about inflation and determining what’s going to be done for inflation.”

“Well, at 4.5%, even though it’s higher than we were sort of expecting, we still think the labour market is a bit tight at that level”.

Graph 5: Australian Core/Underlying inflation also heading in the wrong direction:

Overall risk markets were the main catalyst this week as other asset classes dusted off the old flight to safety playbook. As mentioned above tech heavy equity markets like the Nasdaq (-4.8%), Korea (-6.1%) and Japan (-4.7%) underperformed, whilst more traditional indices like the Dow (+0.6%), the ASX (-0.4%) and the Dax (-1.3%) outperformed as rotation remains a key pillar of current market activity. Risk off sentiment drove cash into bonds and the USD which resulted in a weaker AUD, JPY and EUR (Euro 12-month lows). And USD strength weighed on commodities like Gold and Silver despite falling bond yields. And Bitcoin traded to its lowest level since September 2024 as MicroStrategy, the world’s largest Bitcoin treasury, dominates the headlines yet again.

Graph 6: Rotation continues:

Outlook:

Ok so what to do? This week we started to see some cracks emerge and they surfaced in the areas that have underpinned the rally and driven indices to all-time highs (ATHs), AI, semi-conductors and memory chips, and the hyper-scalers. The performance of these stocks has been fashioned by excess leverage and overcrowding, and now we have another factor emerging……...is the debasement trade finished?

Following on from last week and our introduction to the newly minted Kevin Warsh led Federal Reserve, questions are growing as to the expiry date of the debasement trade which has captured markets after successive years of Fed inaction toward the inflation side of their mandate, and gratuitous Fed interventions in markets. The debasement trade has developed with consistently above target inflation and QE, and expressed itself via a weaker USD, stronger USD denominated assets such as precious metals (Gold and Silver) and Bitcoin, booming long duration tech stocks which flourish under easy financial conditions and unnaturally suppressed interest rates.

Since Kevin Warsh became favoured to become the next Fed chair in late 2025 and then was nominated by Trump on Jan 30^th we have seen the peaks in Bitcoin, Gold and Silver, which all now reside in bear markets, and the nadir in the USD and US bond yields. And now we are experiencing extraordinary and unhealthy volatility and potential wobbles in AI, semi-conductor and tech stocks in general. Is this a coincidence or the final leg of the debasement trade unwinds?

Graph of the week: Since Kevin Warsh was nominated (Jan 30^th red line) Gold (green line) has peaked and Bitcoin (blue line) is off another 30%.

Graph of the week 2: since Warsh was nominated (red line Jan 30^th) the USD (green line) has bottomed and bond yields (blue line) are around 60 bp higher.

If Kevin Warsh is true to his maiden performance, the type of priorities (price stability) and reforms (balance sheet) he has proposed should continue to strengthen the USD and tighten liquidity and that shouldn’t be conducive to possessing richly valued tech stocks whose ownership remains highly leveraged and crowded. But this doesn’t have to be destabilising for the wider equity complex if the current rotation continues.

The major news this week will be the US jobs report that is released Thursday as the US celebrates its 250^th birthday on Friday. The consensus is for the economy to have added 115k jobs in June and for the unemployment to remain at 4.3%. This follows the blockbuster May Jobs report where 175k were unexpectedly created which further dispelled concerns of a softening labour market, so two in a row???

The US and Iran have been exchanging a few minor blows, but it doesn’t appear serious enough to derail the peace process. And we will hear from the world’s major central bankers, including Kevin Warsh, at the ECB’s annual forum for Central Banking.

Overall, I favour the USD to continue to strengthen, as I said last week, I think Warsh is USD positive, until that is, he gives us a reason not to be! I continue to think Bond yields in the US and Australia are under-pricing the possibility of multiple rate hikes, particularly Australia where the market incorrectly focussed on headline inflation and seems consumed by the softening housing market. Equities, it’s hard to say! Every time we have seen material corrections buyers have shown up, but if Warsh stands fast, I think we could continue to see pressure on the highly leveraged and overcrowded tech sectors and further rotation into value. The stronger USD should continue to provide a headwind for commodities like Gold and Silver and currencies like the AUD, JPY and EUR, and Bitcoin keeps making lower highs and lower lows and needs some sort of circuit breaker!

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Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice.

-Kevin Warsh is the new sheriff in town and he’s the “strong, silent type”!

The 30 second Wrap:

• Equity Markets Hit All-Time Highs: The Dow Jones and the Nikkei touched fresh record highs this week, completely unperturbed by a massive week of central bank decisions.

• Kevin Warsh’s New Fed Playbook: The Fed held rates steady but delivered a major hawkish shift, removing its easing bias and dumping traditional “forward guidance”—leaving the market to interpret upcoming inflation data themselves.

• The “Underwhelming” US-Iran MOU: Risk assets rallied after Trump signed a 60-day ceasefire deal with Iran to depress energy prices, though the stability remains highly volatile after weekend reports of Iran closing the Strait of Hormuz

• Australian Rate Pressures Mount: While the RBA left rates unchanged and shockingly didn’t even discuss a hike, sticky core inflation and unbridled new government spending mean a cash rate starting with a 5 may still be on the table.

Equity Indices

• S&P 500: 🟢 7,500 (+0.9%)

• NASDAQ: 🟢 26,517 (+2.4%)

• DOW JONES: 🟢 51,564 (+0.7%)

• ASX SPI: 🔴 8809 (-0.5%)

• DAX: 🟢 24,985 (+1.4%)

• Hang Seng: 🔴 23,924 (-3.3%)

Commodities & Currencies

• AUDUSD: 🔴 0.701 (-0.4%)

• AUDNZD: 🟢 1.221 (+1.1%)

• EURUSD: 🔴 1.147 (-0.9%)

• USDJPY: 🟢 161.27 (+0.7%)

• USD Index: 🟢 100.75 (+0.9%)

• Iron Ore: 🔴 101.14 (-0.5%)

• Bitcoin: 🔴 63,010 (-0.8%)

• Brent Crude: 🔴 80.59 (-7.6%)

• Gold: 🔴 4172 (-1.6%)

Bonds

• US 10 yr bond: 🟢 4.45% (-3.0 bps)

• US 10 yr real: 🔴 2.18% (+3.0 bps)

• US 7 yr bond: ⚪ 4.34% (0.0 bps)

• US 5 yr bond: 🔴 4.23% (+2.0 bps)

• US 2 yr bond: 🔴 4.18% (+10.0 bps)

• US 2/10 yr YC: 🟢 0.27 (-13.0 bps)

• AUS 2 yr bond: 🟢 4.48% (-1.0 bps)

• UK 10 yr bond: ⚪ 4.84% (0.0 bps)

• Jap 10 yr bond: 🔴 2.65% (+3.0 bps)

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Ok so it was a busy week! We’ve had world cup matches, the state of origin, the men’s US Open golf, 4 major central bank decisions and a very underwhelming memorandum of understanding (MOU) between the US and Iran that reveals the US attack on Iran was pointless in what some are describing as the most blundering US foreign policy intervention since Iraq. In any event, risk markets seemed unperturbed with US equity indices registering or close to all-time highs (ATHs).

It started with the Bank of Japan (BoJ) who hiked their cash rate by 25 bp in a 7-1 majority decision (1 voted for a pause and the Governor was laid up in hospital). And whilst some of the accompanying commentary was deemed as hawkish and suggested further rate hikes were inevitable, this was zero consolation for the Yen which continued its decline and traded to a 40-year low against the USD, which helped the Nikkei 225 record another ATH (I knew Japanese equities had been strong, but I didn’t realise they are +86% over the last year alone!).

Then we had the Reserve Bank of Australia (RBA) who left the cash rate unchanged at 4.35% and staggeringly revealed they didn’t even discuss a rate hike. This revelation emerges as they are in a hiking cycle with a tightening bias, core inflation continues to rise above target, and as the Australian economy digests inflationary impulses from statutory wage decisions and falling productivity, the removal of fuel price support and excess government spending (N.B. this week the Albanese government announced an extra $3.6 billion support to the child care sector to ensure a 15% pay increase for child care workers……NDIS anyone?).

Then we heard from the Fed and its new chair, Kevin Warsh and he did not disappoint. The Fed left the cash rate unchanged at 3.75%, removed their easing bias and signalled the next move in rates will most likely be higher, maybe as early as September. Warsh did not use the MOU and the associated decline in oil prices as a proxy for some Trump pressured dovishness. Indeed, he cast himself as a bit of an inflation hawk with a focus on price stability. He also presented as a reformer and announced the appointment of task forces in five areas central to the broad conduct of monetary policy:

1. Fed communications

2. The Fed’s balance sheet

3. Their use and reliance on existing data sources

4. Productivity and jobs in an era of transformation

5. The Fed’s inflation frameworks

And he did not submit a dot plot himself as he believes forward guidance is counterproductive to decision making flexibility. Following the decision release and Warsh’s press conference bond yields rose sharply, led by the short end as the curve flattened aggressively as markets reassessed the policy cycle. The chances of a rate hike in September are now 40% higher than before the FOMC, and one and a half rate hikes are now priced by the end of the year.

The final cab off the rank was the Bank of England (BoE) who left the cash rate at 3.75% in a 7-2 decision with the dissenters favouring a rate hike to 4.00%. Amongst all of this we received a very solid US consumer report which revealed May retail sales rose 0.9% versus 0.6% forecast with all 4 categories beating consensus, indicating the US economy is carrying solid momentum into 2H 2026.

Overall, it wasn’t all smooth sailing for equities. Between peace deal yes and peace deal maybe, the more hawkish Fed did provide a short-term hiccup, with a >1% drawdown in equities transpiring after the 2-year bond yield rose 17 bp at one stage following the FOMC. However, given the markets renewed confidence that the Fed would actively engage the inflation battle, the US 10-year bond yield dropped this week on a massive curve flattening. And so, when Trump and Iran eventually signed the MOU on Thursday there was no strong impediment from the longer end of the US yield curve to prevent a further risk rally with semi-conductor stocks once again leading the way and the DOW closing at an ATH. The USD rallied further on growing Fed rate hike expectations which hindered the performance of the AUD, EUR and JPY. Gold and Silver struggled under the weight of a stronger USD and higher bond yields and copper couldn’t test its recent ATHs. And Bitcoin returned to a slight red week!

Graph of the week: the 10-year real yield after the Fed:

Graph 2: USDJPY at highest level in over 40 years, Will the weak Yen result in intervention?

Graph 3: US 2-year yield highest since Feb 2025 post Fed

A bit more detail on Australian government spending the Fed and the MOU or skip to end for outlook:

Australian governments are preparing to buy votes again as One Nation emerges as a legitimate disruptor at the next election:

The Federal government announced a further $3.6 billion to extend the 15% wage increase for early childcare workers, just as polls showed One Nation gaining momentum and Pauline Hanson emerging as preferred prime minister. Labor’s odds have drifted to their weakest since the 2025 election.

Labor appears rattled: its negative gearing and capital gains tax proposals have been electorally toxic, while One Nation’s “Fire the Liar” campaign has cut through.

The political risk is more spending. Both federally and in Victoria, unpopular Labor governments may keep using taxpayer money to shore up support, regardless of deficits or inflation.

That matters because excess government spending has been a major driver of Australia’s sticky inflation, while the RBA has been reluctant to confront it. If 4.35% was not enough last cycle, it may not be enough now; a cash rate with a 5 handle may be needed to restore equilibrium.

The Fed:

There’s the newly refined and succinct FOMC statement. Note how brief it is. Information from a Warsh led Fed is now at a premium:

The Federal Open Market Committee approved the following statement for release by a 12–0 vote: The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system. Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little. Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.

The Federal Reserve held rates at 3.50%–3.75%, but Chair Kevin Warsh’s first meeting marked a clear hawkish shift, with the Fed dropping its easing bias and leaving the door open to rate hikes if inflation remains elevated.

The statement was sharply pared back, removing much of the usual forward guidance and signalling a more data-dependent, less communicative Fed.

June 2026 decision:

The FOMC voted 12–0 to hold rates steady, but the detail was hawkish:

· Dot plot: Nine officials projected at least one hike in 2026; eight saw no change; one expected a cut.

· Inflation: The 2026 PCE forecast was lifted to 3.6% from 2.7%, with energy and Middle East supply shocks cited.

· Growth: 2026 GDP was trimmed to 2.2% from 2.4%.

Warsh’s debut:

Warsh presented as a quieter, more inflation-focused chair. He did not submit a dot-plot forecast, argued excessive guidance limits flexibility, defended the 2% target, and announced task forces on communications, the balance sheet, data, productivity/jobs and the inflation framework.

Graph 4: Fed rate hike expectations surge post meeting:

The US/Iran Memorandum of Underwhelming:

The US/Iran MOU is a 14-point, 60-day ceasefire framework meant to end the recent war. In essence, Iran agrees to reopen the Strait of Hormuz (SOH)and avoid nuclear weapons, while the US lifts oil sanctions, releases frozen assets, funds reconstruction, dismantles the naval blockade and pulls back forces. Yet the Strait was already open before the war, sanctions and frozen assets were already in place, and the conflict has left thousands dead, depleted US resources and delivered another inflation shock. What was the point?

Winners:

IRGC: Gains more money, power and a blueprint for weaponizing the Strait of Hormuz.

China: Sees limited US appetite for prolonged foreign conflict.

Democrats: Strengthen their position ahead of the mid-terms.

Losers:

Trump administration: Politically weakened after spending heavily for limited strategic gain.

Iranian people: No regime change, but a more powerful leadership with greater resources.

Israel: Faces a weaker US alliance and greater regional vulnerability.

Global economy: Higher energy prices add stagflation pressure and push central banks hawkish.

Taiwan: A potential loser if China reads US restraint as weakness.

Outlook:

Ok so this week markets really wrestled between a US/Iran peace deal (MOU) and a freshly hawkish and more introverted Fed. In the end it was the MOU and the subsequent drop in oil prices in combination with the belief by markets that this different Fed will contain inflation (lower long bond yields) that allowed for another positive week for risk markets. So, will this continue?

It’s clear from the lopsided MOU in Iran’s favour that Trump wants out! The domestic political ramifications, particularly higher oil prices and the cost of living, are just too fatiguing. And I expect Trump to continue to favour peace and de escalation at least until we get through the midterms. The problem however is that it might not necessarily be in his control as we have seen over the weekend that the Iranians have once again closed the SOH because of “breaches” to the MOU by the US and Israel. So, the whole ME conflict factor and the oil price will continue to be volatile and random.

The Fed will be interesting! The initial response by markets to the more hawkish Warsh led Fed was one of liquidity removal (bond yields up, equities down), but after contemplation the market appears to be giving the Fed the benefit of the doubt, i.e. we see you are going to hike, but we trust you to get on top of this recent inflation outbreak without too much liquidity withdrawal and pain so we are all good. The problem is with the new Warsh guidance vacuum… we might not know what they are thinking! Already we are seeing far fewer Fed speakers in this coming week than we normally would following a rate decision.

Since 2008 and the GFC “forward guidance” had been a key pillar of the Fed and other CB’s playbook. And markets have become accustomed to it and almost reliant on it, they don’t like surprises! With Warsh’s fresh approach to forward guidance and his attitude towards the Fed balance sheet, which will be under review in one of the taskforces, he is signalling to markets that you are on your own, or let me rephrase that, you are “more” on your own than under previous leadership. And with all noise from the MOU, I think markets missed or ignored this point, and it wasn’t that subtle either! For years markets have been spoilt by abundant liquidity and forward guidance, and they have been lazy in identifying that with that level of information and support there is less risk with associated investment choices. If this has changed, which I believe it has, then markets will need to assign some sort of risk premium to this unfamiliar and unfriendlier market environment. This won’t happen immediately as markets will continue to assume the Fed has their back, that is until they realise that they don’t to the same degree as previously. Like for example, an un-telegraphed Fed rate hike in July!

In any event data, and analysis of data will become more important going forward, and in a data light week, we receive the Feds preferred measure of inflation (or is it now Kevin?) the PCE, with the headline forecast to print 4.1% (3.8% April) and the core expected at 3.4% (3.3% prev.). Down in Australia we will get the May inflation numbers with the headline expected at 4.2% (same as April) and the core to land at 3.5% up from 3.4% in April. Overall, I think bond markets continue to underprice the risk of multiple rate hikes both in the US and Australia, I mean look at those expectations for inflation above, its not trending down! Iran closing the SOH again probably won’t assist risk markets early in the week and so we’ll have to see what the inflation data reveals. On the AI front we will also receive Micron’s Q2 results.

I think the USD will continue to strengthen, Warsh looks like he is bullish for the dollar which should weigh on the AUD, EUR and JPY further, Watch for BoJ intervention, the rate hike didn’t work! A stronger USD and rising bond yields should continue to weigh on Gold and Silver and watch to see if Copper can test the $6.60’s again? And has Bitcoin resumed its path downwards?

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Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice!

- The RBA is doing the same things over and over! Are they insane?

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The Reserve Bank of Australia (RBA) left the cash rate at 4.35% at their meeting yesterday and maintained a tightening bias as expected.

The accompanying statement was bland with the points of note being:

“Financial conditions have tightened this year in response to three increases in the cash rate target. Money market interest rates and government bond yields have risen, and the exchange rate has appreciated. There are signs that growth in consumer spending is slowing as expected and momentum in the housing market has shifted, with housing prices falling in some capital cities. The unemployment rate was higher than expected in April, but other measures of labour market conditions have been more resilient”.

That is to justify the pause.

“The Board remains focused on ensuring that inflation does not become embedded once the impulse from higher oil prices has passed through. To achieve this, growth in demand needs to slow to reduce capacity pressures and help bring inflation back to target. Following the three increases in the cash rate target since the beginning of the year, financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected. But inflation is still too high and the Board judged that it was appropriate to leave the cash rate target unchanged while it assesses the response to previous interest rate rises and the impact of the oil supply disruption.”

“It will do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required”

And there’s your tightening bias.

However, it was Michelle Bullock’s press conference where things became a bit confusing. She started with a punch and to remind everyone that if inflation lingers, the board will not hesitate to lift rates again:

“I want to be very clear that inflation remains too high” adding “Today’s decision does not rule out further tightening in monetary policy if that is what’s required.”

She then received a question about the fuel excise tax resuming in July and whether the resulting increase in fuel prices would influence RBA decision making. To which she basically said no comment and that the RBA focuses on the underlying rate of inflation not the headline rate which fuel prices directly influence.

She was also asked about the most recent 4.75% increase to award and minimum wages by the Fair Work Commission. To which she responded that “this wasn’t material”, “but it was higher than the RBA’s forecast” and would require “an upward revision to our wage forecasts”.

She acknowledged that inflation was already a problem before the middle east (ME) conflict began:

“We already had an inflation problem before the Strait of Hormuz and that (event) supercharged prices…so (the re-opening) is good news and that will help, but we have to make sure that the inflation problem we had prior to the conflict is addressed. “

She noted at the previous meeting in May that the 3 rate hikes this year were to deal with inflation that existed prior to the conflict.

And then la piece de resistance. She was asked whether the board discussed a rate hike at this meeting? To which she replied “NO”!

If that is true, then Houston we have a real problem! She acknowledged that inflation is still a problem and remains too high. She’s on the record as saying that the 3 previous rate hikes were to deal with re-emerging inflation prior to the ME war. She also confirmed, via her answer to the fuel excise question, that it is “underlying inflation” that the board focusses on. Well, the most recent reading of underlying inflation (the Trimmed Mean) rose from 3.3% in March to 3.4% in April (highest since Q4 2024). And then she admitted that the 4.75% FWC wage increase was higher than the RBA’s forecast and would require an upward revision to their wage projections. And yet after all of this they did not even discuss a rate hike!

Graph 1: That is Australian underlying inflation, and the RBA did not even discuss a rate hike at their board meeting yesterday:

The RBA remains a very unserious central bank, and they continue to be politically submissive in my opinion. You can sense the political overtures, not only by their policy actions, but also in their reluctance to address government influence on inflation via areas such as government spending, fuel excise and FWC wage decisions. The fact that, with core inflation rising and well above target, and inflationary impulses being far more prevalent than disinflationary ones, a rate hike wasn’t even discussed is very concerning for the future stability of the Australian economy.

The current cash rate is 4.35%, which was the same level as the peak of the last hiking cycle in 2024. The RBA cut the cash rate to 3.6% in H1 2025 on their belief that inflation was conquered and, on the way back to target. Well, how mistaken they were, and they were hiking again 6 months later. Easing the cash rate was wrong, and you can argue highly political, as they started unnecessarily cutting in a federal election cycle. And I think with hindsight (many of us were arguing this at the time!) you can argue that 4.35% wasn’t a sufficiently high enough cash rate to return inflation sustainably to target.

So, what makes this time different? As Albert Einstein said, “the definition of insanity is doing the same thing over and over again and expecting different results”. Well, here we are and you would have thought the RBA would have a level of humility and a desire for redemption given how horrific they have been in forecasting and responding to inflation since Covid. I’m not suggesting yesterday’s pause in rates was a diabolical course of action, I would have hiked so everyone would understand I was serious about inflation and not prepared to repeat the mistakes of 2024/25, but you can sort of stomach some of their reasons. However, it is the fact that they didn’t even discuss or consider a rate hike that suggests to me there remains an unhealthy level of complacency, naivety or indeed contempt with this board when it comes to inflation, and a lack of understanding of real and neutral rates.

Bullock and the board are not serious about inflation, and when she continues to say that the board needs to get on top of inflation because it hits the most vulnerable the hardest, that is a complete cop-out and becoming completely offensive. If she truly believed this, then why has she and the RBA board allowed inflation to remain above target since Dec 2021? Mistakes are imminent with a central bank with these levels of hubris, incompetence and political capture, a bad trio! And I think the growing number of those that are convinced that 4.35% will be the peak in this cycle will be grossly mistaken.

Over in Japan the BoJ hiked their cash rate by 25 bp to 1.00% in a 7-1 outcome (1 member dissented in favor of no change).

The primary catalyst for this hike was the ongoing Middle East conflict. The board specifically noted the need to prevent an Iran war-driven energy shock from fuelling broader inflation across the domestic economy. With energy costs rising, the BoJ warned that underlying inflation could accelerate past its 2% target if left unchecked.

“With underlying inflation approaching 2%, we need to be mindful ​of upward price risks. We will guide policy so that we won’t fall behind the curve,” Uchida told a news conference he held on ⁠behalf of Governor Kazuo Ueda, who missed the meeting for medical treatment.

“Taking into account that medium- and long-term inflation expectations have also continued to increase, there is a risk of underlying inflation deviating above our price target,” the BOJ said in explaining ​the move.

“It’s quite striking the BOJ mentioned so clearly that underlying inflation could deviate upward from its target”. “It’s essentially saying there is a real risk of being behind the curve. There’s a chance the BOJ could hike rates sooner than the dominant market view of a December action.” said former BOJ official Nobuyasu Atago.

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-How do you value space? Ask Elon!

⏱️ The 30-Second Wrap

• SpaceX Steals the Show: Elon Musk’s SpaceX completed the world’s largest IPO, raising $75B and surging to a $2.27 trillion valuation on Friday—making Musk the world’s first trillionaire and leaving Tesla in its wake.

• Yields Move the Market: A wave of friendlier US CPI/PPI data, a 4-month high in jobless claims, and a sharp drop in oil to 3-month lows combined to drag global bond yields lower, paving the way for a late-week equity rally.

• Central Bank Split: While the ECB hiked rates by 25 bps on sticky local inflation forecasts, the Bank of Canada held steady at 2.25% amid a technical recession. Locally, NAB joined CBA in calling for the next RBA move to be a cut in Q2 2027.

• The Week Ahead: Buckle up for a massive central bank bonanza. We get rate decisions from the Fed (Kevin Warsh’s first meeting as Chair), BOJ, BOE, and the RBA. Keep a close eye on Dr. Copper—as it approaches a massive triple-top at $6.64.

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📈 Major Indices & Crypto

S&P 500: 7,431 | Last Week: 7,383 | 🟢 +0.6%
NASDAQ: 25,888 | Last Week: 25,709 | 🟢 +0.7%
DOW JONES: 51,202 | Last Week: 50,866 | 🟢 +0.7%
ASX SPI: 8,855 | Last Week: 8,503 | 🟢 +4.0%
DAX: 24,635 | Last Week: 24,759 | 🔴 -0.5%
Hang Seng: 24,718 | Last Week: 24,961 | 🔴 -1.0%
Bitcoin: 63,493 | Last Week: 61,059 | 🟢 +3.8%

💱 Forex & Commodities

AUDUSD: 0.704 | Last Week: 0.704 | ⚪ 0.0%
AUDNZD: 1.207 | Last Week: 1.215 | 🔴 -0.7%
EURUSD: 1.157 | Last Week: 1.153 | 🟢 +0.3%
USDJPY: 160.18 | Last Week: 160.20 | 🟢 -0.0%
USD Index: 99.81 | Last Week: 100.06 | 🔴 -0.3%
Iron Ore: 101.62 | Last Week: 102.00 | 🔴 -0.4%
Brent Crude: 86.71 | Last Week: 92.98 | 🔴 -7.2%
Gold: 4,239 | Last Week: 4,344 | 🔴 -2.5%
VIX: 17.69 | Last Week: 21.51 | 🟢 -21.6%

📑 Fixed Income & Yield Curves

US 10 yr bond: 4.48 | Last Week: 4.54 | 📉 -6.0 bps
US 10 yr real: 2.15 | Last Week: 2.17 | 📉 -2.0 bps
US 5 yr bond: 4.21 | Last Week: 4.28 | 📉 -7.0 bps
US 2 yr bond: 4.08 | Last Week: 4.16 | 📉 -8.0 bps
US 2/10 yr YC: 0.40 | Last Week: 0.38 | 📈 +2.0 bps
AUS 2 yr bond: 4.49 | Last Week: 4.62 | 📉 -13.0 bps
UK 10 yr bond: 4.84 | Last Week: 4.90 | 📉 -6.0 bps
Jap 10 yr bond: 2.62 | Last Week: 2.66 | 📉 -4.0 bps

How do you value space? That was the $trillion question this week! When I opened my email Saturday morning the word SpaceX was shall I say “prominent”. In a world where trillion-dollar valuations of AI and tech companies are becoming regular, we can now add space to the mix. As the company that is leading the race to exploit the opportunities of that infinite frontier, SpaceX, became the world’s largest IPO when it raised $75 billion on Thursday at a price of $135 per share valuing the company at $1.77 trillion USD. On Friday, when it started publicly trading, the stock reached $176 before closing at $161. And as of Friday’s close, the company is valued at $2.27 trillion which makes it the 6^th most valuable company on the planet behind only Nvidia, Google, Apple, Microsoft and Amazon. But when your target opportunities reside in the solar system and then the Milky Way thereafter, who’s really counting? The valuation of this company has generated the world’s first trillionaire in Elon Musk, who retains 42% of the company, and SpaceX is now more valuable than Musk’s other lovechild, Tesla, which comes in at a “measly” $1.4 trillion. To place this in context SpaceX is currently valued more than the entire Australian stock market ($2.15 trillion USD) and worth more than Australia’s GDP ($1.95 trillion USD). And Google didn’t miss out either with its roughly 5% ownership stake, which it purchased for $1 billion in 2015, now valued at over $100 billion.

So, SpaceX provided some positive sentiment, but I think it was the drop in bond yields this week that provided the impetus for broader index performance. US bond yields fell in yield across the curve for a few reasons. Firstly, we saw friendlier than expected US CPI and PPI data revealing that, whilst headline inflation remains hot, core inflation came in slightly below forecast. Then initial jobless claims printed at a 4-month high suggesting that, even though there were a few seasonal excuses, the US labour market could be easing slightly. And 3. We saw a sharp drop in oil/energy prices and to a 3-month low on increasing hopes of a US/Iran deal, de-escalation in the middle east and the re-opening of the Straits of Hormuz. All of this gave a glimmer of hope to the “transitory” crowd as we head into the Fed rate decision this week which will be Kevin Warsh’s first as chair.

Over in Europe, the ECB remains scarred by the ghosts of inflation past, shelved the idea of “transitory” and hiked their cash rate by 25 bp whilst raising their inflation forecasts and lowering their growth forecasts. The Bank of Canada held at 2.25% and appears ready to respond in either direction whist it delicately balances a weak domestic economy (technical recession) with lingering global inflationary pressures.

In Australia we juggled weaker consumer sentiment data (Westpac) with a bounce in business confidence (NAB), but everyone is watching the housing market as auction clearance rates had their second consecutive week below 50% (decade average is 65%). Interestingly NAB joined CBA this week in scrapping their forecasts for further RBA rate hikes and predicted the next move in the cash rate will be a cut in Q2 2027. It’s a bold call by NAB to follow CBA in given, since Covid, CBA has clearly been the worst Aussie rate forecaster going around, and I don’t think the RBA knows what it is doing this week let alone in 2027! In any event the rate market ran with it and Australian bond yields were one of the biggest outperformers this week which in turn provided a strong tailwind for Aussie equities and put a slight dampener on the AUD.

Overall, equities had a volatile week and really did oscillate around anticipated outcomes of the middle east conflict, the oil price and bond yields, but did end the week in the green. Oil fell to a 3-month low and US bond yields fell in yield which placed pressure on the USD which closed the week slightly lower. These 2 factors couldn’t save the weekly performance of Gold which entered a bear market this week, but it did get it off the canvas as it bounced 4.5% after briefly flirting with the $4,000 level. Dr Copper (global economy bellwether) had a productive week and rallied 3% but watch that $6.64 level which could either signal a triple-top (bad!) or provide a clear break which should unlock further upside (good!), and Bitcoin had a bounce, but I am yet to be convinced!

Graph of the week, Dr Copper: Copper is often referred to as “Dr Copper” for its reputation for predicting the health and turning points in the global economy. Copper, as an industrial metal, is a core component of modern infrastructure and is used extensively in construction, electrical wiring, manufacturing, electronics, and transport. It is seen as a leading indicator because companies order copper well in advance of building homes or manufacturing products; changes in copper demand happen early. Copper is not only an important lead indicator for the global economy it is also very important for the Australian share market with Australia’s largest company by market cap, BHP, also being the world’s largest copper miner/producer. The price of copper is approaching an interesting juncture. At $6.43 it is approaching its previous high of $6.64 recorded on 2 separate occasions in the last month or so. If it reaches $6.64 and fails that would be what we call a “triple top” which is a negative technical signal. If it breaches the $6.64 level and sustains this move higher that could unlock significant further upside. What drives a failure or a break is anyone’s guess, but it could coincide with the central bank rate decisions this week!

Graph 2: US bond yields fell this week but the 2-year bond yields remain close to its yearly highs

Graph 3: Gold entered a bear market this week, but it bounced well when it flirted with the psychological $4,000 level. You would like to see it back above $4,350 in the not-too-distant future to retain confidence:

A bit more detail or skip to end for Outlook:

US CPI:

• Headline CPI (YoY): 4.2%, up from 3.8% in April (highest since April 2023).

• Headline CPI (MoM): +0.5%, down slightly from +0.6% in April.

• Core CPI (YoY): 2.9%, matching forecasts but hitting a 7-month high.

• Core CPI (MoM): +0.2%, a welcome downshift from April’s +0.4%

Middle East supply disruptions drove headline inflation to 4.2% YoY, while cooling underlying demand saw Core MoM slow to +0.2% from 0.3% previous. Spiking oil prices accounted for over 60% of the monthly increase, highlighting an external supply shock rather than domestic overheating. Due to moderating core inflation central bank policymakers are likely to hold interest rates steady.

Graph 4: This is what faces Kevin Warsh as he takes over as Fed chair this week:

US PPI:

May Result (MoM), Expected (MoM), 12-Month Rate (YoY)

Headline PPI+1.1%, +0.7%, 6.5% (Highest since Nov 2022)

Core PPI (Excl. Food & Energy)+0.4%, +0.5%, 4.9%

Core-Intermediate PPI (Excl. Food, Energy, & Trade)+0.8%,N/A, 5.1%

The U.S. Producer Price Index for final demand rose 1.1% in May 2026, driven by a 10.7% surge in energy costs that pushed the 12-month wholesale inflation rate to 6.5%, the highest level since late 2022. Core-intermediate PPI saw its largest jump since March 2022, signalling significant inflationary pressure likely to pass through to consumer prices, complicating the Federal Reserve’s policy path.

ECB:

The European Central Bank raised interest rates by 25 basis points at its June 2026 meeting, the first increase since 2023, as policymakers emphasized their commitment to anchoring inflation at the 2% medium-term target. The move follows rising energy costs and persistent inflation risks driven by the Iran conflict and disruptions to oil shipments through the Strait of Hormuz. The ECB stated that the Middle East war is amplifying inflationary pressures, and the rate increase is supported across scenarios assessing its impact on the euro area’s outlook. The ECB also revised its inflation forecasts upward, now expecting headline inflation to reach 3.0% in 2026 (up from 2.6%) and 2.3% in 2027 (up from 2.0%). Core inflation was also raised to 2.5% for both 2026 and 2027, from previous estimates of 2.3% and 2.2%, respectively. For economic growth, the ECB slightly lowered its Eurozone GDP projections, forecasting expansion of 0.8% in 2026 (down from 0.9%) and 1.2% in 2027 (down from 1.3%).

Bank of Canada (BoC):

The Bank of Canada left the target for its benchmark overnight rate steady at 2.25% for a fifth consecutive meeting in June 2026, in line with expectations. Policymakers said that so far, there has been limited evidence of broad-based pass-through of higher energy prices to other consumer prices. However, the central bank is continuing to look through the war’s near-term impact on inflation and will not let higher energy prices become persistent inflation, standing ready to respond as needed. Inflation in Canada rose to 2.8% in April mostly due to energy prices, but the core rate moved down to 2.1%. The central bank expects inflation to hover around 3% before gradually easing towards the 2% target. Policymakers also noted that economic activity in Canada has been weak and uncertainty about US trade policy persists.

Graph 5: Carson Group providing some historical context of the recent S&P 500 melt-up from the March low: “The S&P 500 recently was up more than 19% in two months. You ready for this one? That has only happened seven other times and stocks were never lower 1 month, 3 months, 6 months, or a year later. In fact, up more than 40% on average a year later. My oh my.”

Outlook:

So, if last week was about landmark IPOs and inflation data, this week is all about major developed economy central banks (CBs) as we receive the rate decisions from 4 of them including the Fed, the Bank of Japan (BOJ), the Bank of England (BOE) and the Reserve Bank of Australia (RBA). The Fed will once again take centre stage and this meeting will add extra intrigue as it will be the first meeting with Trump appointee, Kevin Warsh, as chair. Warsh takes the helm of an extremely divided board, with inflation at 3-year highs and well above target, and with Presidential pressure for rate cuts. The Fed are expected to keep rates on hold, but the key interest will surround language that could remove the existing easing bias and potentially install a tightening one. This could manifest via adjustments to members rate expectations (the “dot plots”) and their forecasts for inflation.

The BOJ are expected to hike the cash rate by 25 bp to 1.00% (a 30-year high) in order tackle rising inflation and to support a grossly depreciated yen. They are also expected to wind back some bond purchasing or QE.

The BOE are anticipated to keep rates on hold but there are expectations they could pivot to a tightening bias despite the GDP data this week revealing the UK economy contracted 0.1% in April.

And the RBA are also expected to keep the cash rate unchanged at 4.35% following rate hikes at their 3 previous meetings and the recent unexpected increase to the unemployment rate to 4.5%. They are expected to maintain their tightening bias with core inflation (3.4%) well above their 2.5% target.

It was apparent toward the tail end of last week that risk markets were becoming highly sensitive to bond yields, and that theme continued this week as declining bond yields facilitated a moderate risk rally. That could go either way this week! Collective hawkishness could be very disruptive to equities, and vice versa, a lack of hawkishness could really turbo charge a further risk rally with some removal of future rate hikes currently built into all four of these economies yield curves. If the Fed is, say dovish, it will be up to markets to determine if they trust the Fed and this course of action, or whether there is some political driven complacency influencing decision-making. My personal take is that it is better to be a bit hawkish now than a lot hawkish later. Scare the current inflation surge out of the market rather than having to sledgehammer it down the track in a repeat of 2022/23. I hesitate to predict what these CBs will do as I have experience in financial markets and economics…...not politics! My only suggestion is to keep a close eye on bond yields this week as they will be highly influential to the performance of other asset classes. And keep an interesting eye on copper, it can’t sustain a move above $6.60ish without the permission of a robust global economy.

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Have a great week! And GO Socceroos!

Cheers,

Riesy

The views in this report are of the author and not financial advice.

-Rising bond yields upset equity markets this week. Is it a one-off adjustment or something more sinister?

The 30 second wrap:

• Yield Shock Overpowers Tech: A massive, unexpected beat in US Non-Farm Payrolls (+172k) and upward revisions sent the US 2-Year yield spiking 16 bps to 4.16%. The sudden reality of higher-for-longer rates completely derailed the AI momentum, triggering a brutal tech liquidation on Friday that dragged the NASDAQ down -4.9% for the week.

• Aussie Productivity Strains: While Australia’s Q1 GDP managed a modest +0.3% q/q expansion fueled by data center investment, underlying productivity dropped again (-0.6% GDP per hour worked). This leaves the RBA in a tight spot as they navigate a looming 4.75% minimum wage hike against sticky domestic services inflation.

• Crypto and Commodities Crack: A surging USD Index (+1.1%) acted as a heavy anchor across alternative assets. Bitcoin plunged -20.2% back to 2024 levels, punctuated by MicroStrategy selling coins for dividends and slipping to a deep 0.8 discount to its NAV. Core commodities weren’t spared either, with Iron Ore tumbling -6.7% and Gold sliding -5.2%.

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🔴 S&P 500 — 7,383 — 7,580 — -2.7%
🔴 NASDAQ — 25,709 — 26,972 — -4.9%
🔴 DOW JONES — 50,866 — 51,032 — -0.3%
🔴 ASX SPI — 8,503 — 8,740 — -2.8%
🔴 DAX — 24,759 — 25,104 — -1.4%
🔴 Hang Seng — 24,961 — 25,182 — -0.9%
🔴 VIX — 21.51 — 15.32 — +28.8%
🔴 Bitcoin — 61,059 — 73,415 — -20.2%
🟢 Brent Crude — 92.98 — 91.70 — +1.4%
🔴 Iron Ore — 102.00 — 108.82 — -6.7%
🔴 Gold — 4,344 — 4,569 — -5.2%

FX / Currencies — This Week — Last Week — Change — Direction

🟢 USD Index — 100.06 — 98.91 — +1.1%
🔴 AUDUSD — 0.704 — 0.719 — -2.1%
🟢 AUDNZD — 1.215 — 1.199 — +1.3%
🔴 EURUSD — 1.153 — 1.166 — -1.1%
🟢 USDJPY — 160.20 — 159.26 — +0.6%

Bond / Spread — This Week — Last Week — Change (bps) — Direction

🔴 US 2 yr bond — 4.16% — 4.00% — +16.0
🔴 US 5 yr bond — 4.28% — 4.14% — +14.0
🔴 US 7 yr bond — 4.40% — 4.30% — +10.0
🔴 US 10 yr bond — 4.54% — 4.44% — +10.0
🔴 US 10 yr real — 2.17% — 2.03% — +14.0
🔴 AUS 2 yr bond — 4.62% — 4.53% — +9.0
🔴 UK 10 yr bond — 4.90% — 4.81% — +9.0
⚪ Jap 10 yr bond — 2.66% — 2.66% — 0.0
🔴 US 2/10 yr YC — 0.38% — 0.44% — -6.0

Ok so I noted last week that the S&P 500 was on a historical tear (9 consecutive positive weekly closes and +17% from the April low) and it seemed like it was continuing to climb the wall of worry making a fresh all-time high (ATH) on Tuesday, that is until Friday when a stronger US employment report, rising bond yields and a tech U-turn rained on the parade.

Earlier in the week things were looking good. US economic data revealed that the manufacturing industry was expanding at its fastest pace in over four years and that the services sector grew at its fastest rate in 3 months. Both were driven by stronger business activity and a sharp pickup in new orders, and both also indicated that price pressures were escalating. Preliminary US jobs numbers (Job openings and private payrolls) were encouraging and Eurozone inflation showed that Europe hasn’t been spared from the re-emergence of inflation.

Down in Oz the Fair Work Commission gave minimum and award wagers (3 million + workers) a 4.75% “real” wage increase (headline inflation currently 4.2%) which is kind of problematic for the RBA as the Q1 GDP numbers revealed that, whilst the Aussie economy is travelling ok (0.3% q/q and 2.5% yoy), labour productivity (-0.6%) is once again heading in the wrong direction.

Bitcoin had a shocker (-20%) as Michael “I’d sell a kidney before I’d sell Bitcoin” Saylor (boss of Strategy, the world’s largest Bitcoin treasury) sold 32 Bitcoins to fund some dividend payments on preferred equity. He’s clearly on dialysis! Now on face value that’s inconsequential to Strategy’s 843k holdings of Bitcoin, but a flood does start with rain drops, and Strategy now sits in the precarious position of a sub 1 net asset value (0.8 as of Friday).

But all the action was saved until the latter part of the week, and this time the middle east conflict and the oil price was on the sidelines. It began when Trump announced an additional 10%-12.5% tariff on countries (including the EU, Australia, the UK and Canada) that imported goods from countries who lacked adequate controls over forced labour, and then it quickly moved into the tech/semi-conductor sector. Broadcom rallied 5% going into its Q1 earnings release Thursday, but when it was revealed that it missed on revenue expectations, the market response was brutal driving the stock 13% lower, and took its peers like Micron, ARM, AMD and Intel with it.

However, it wasn’t all bad at that point as there was strong sector rotation with cash being re-allocated into banks and healthcare and the Dow made an ATH. That was of course until Friday when a much stronger May US employment report (+172k vs 85k expected, U/N 4.3%, and +93k more jobs added in March and April) sent Fed rate hike expectations and thus bond yields soaring. Cleveland Fed President, Beth Hammack (voter) commented “Based on the data, I’m more concerned about the growing risks of persistently elevated inflation than the risks to full employment and that monetary policy may not be sufficiently restrictive to bring inflation down to 2%,” and that was on Tuesday and before the employment data. And these sentiments have recently been shared by Fed voters Logan, Kashkari, Williamson and Waller (not the horse trainer).

No one was spared Friday, it was a bloodbath, as the realisation of higher US bond yields overpowered the recent momentum of AI and AI infrastructure. The Nasdaq had its worst day (-4.2%) since April 2025 and the semi-conductor index fell -10.3% in what was its biggest daily decline since 2020. The S&P 500 (-2.6%) and the Dow (-1.3%) faired better in what was a tech led rout. The 2-year bond yield rose 12 bp to 4.15%, its highest level since February 2025, as chances for a rate hike in 2026 rose by 20% with a full 25 bp rate hike in 2026 now priced, and the 10-year rose 8 bp to 4.54% as the curve flattened. The USD rallied strongly on rising US interest rates and risk-off Friday which sent the AUD, EUR and JPY south. Gold and Silver suffered under the weight of a stronger USD and higher bond yields and Oil, whilst it did play second fiddle this week, continues to oscillate in accordance with Trumps temperament towards the conflict, but did close the week slightly higher.

Graph 1: Oil played 2^nd fiddle this week, but dangerously low diesel oil stockpiles could start making headlines if traffic through the Strait of Hormuz remains obstructed

A bit more detail or skip to end for outlook:

US non-farm payroll employment report:

The U.S. labour market surprised strongly in May 2026, with nonfarm payrolls rising 172,000, far above expectations of around 80,000–85,000. The unemployment rate held at 4.3%, labour force participation was unchanged at 61.8%, and wages rose 0.3% month-on-month, with annual wage growth easing slightly to 3.4%.

The report was reinforced by large upward revisions to prior months: March payrolls were revised up by 29,000 to 214,000, and April by 64,000 to 179,000. Together, those revisions added 93,000 more jobs than previously reported, suggesting the labour market has remained more resilient than expected.

Graph of the week: US employment remains full as inflation breaks higher

US Services and Manufacturing PMIs:

US services activity accelerated in May 2026, with the ISM Services PMI rising to 54.5 from 53.6, beating expectations and marking the strongest expansion in three months. Growth was driven by stronger business activity and a sharp pickup in new orders, pointing to resilient demand across the services sector.

However, the details show ongoing pressure beneath the surface. Employment remained in contraction, suggesting firms are still hesitant to hire, while the prices index climbed to 71.3, its highest since August 2022, with diesel, gasoline, oil, and related commodities continuing to drive inflation higher.

US manufacturing strengthened in May 2026, with the ISM Manufacturing PMI rising to 54.0, its highest level in four years. The report points to broad-based expansion, driven by strong new orders, rising production, and very low customer inventories, which suggest demand should stay firm.

At the same time, the picture isn’t all clear: cost pressures remain intense, with the prices-paid index still very high due to energy, geopolitics, and tariffs. Employment improved but stayed in contraction, meaning firms are still cautious on hiring even as activity picks up.

Graph 3: US 2-year yields and S&P 500. 2-year yields break into a higher range on growing Fed rate hike expectations which has currently upended US equities parabolic recent moves.

Australia GDP:

Australia’s GDP rose modestly in the quarter, increasing 0.3% q/q and 2.5% y/y, with growth driven mainly by private investment, especially spending on data centre machinery, and supported by steady household consumption. However, the result was held back by weak government consumption, weather-related disruptions to mining and exports, and a large drag from net trade as imports rose faster than exports. Net trade detracted 0.8 percentage points from GDP growth due to a fall in exports (-1.1%) and a rise in imports (+2.1%). House-hold consumption grew 0.5%, contributing 0.3 percentage points to GDP growth. Government consumption fell 0.2%. This fall was driven by reduced social benefits to households from state and local general government with the ending of energy bill relief.

Beneath the headline, domestic demand remained positive, but GDP per capita fell 0.1% and GDP per hour worked dropped 0.6%, pointing to continued weakness in productivity and underlying living standards.

EU Inflation:

Eurozone consumer price inflation reached 3.2% in May 2026, up from 3.0% in April and matching market expectations, according to preliminary data. This marks the highest rate since September 2023, staying significantly above the European Central Bank’s 2.0% target. Energy costs surged 10.9%, the steepest rise since February 2023, fuelled by supply constraints tied to the Middle East conflict. Prices also accelerated for services (3.5% vs. 3.0% in April) and non-energy industrial goods (0.9% vs. 0.8%), while inflation for food, alcohol, and tobacco eased (2.0% vs. 2.4%). The core rate, excluding energy and food, climbed to 2.5% from 2.2%, suggesting broadening price pressures beyond energy. Among major Eurozone economies, inflation picked up in Spain (3.6% vs. 3.5%), the Netherlands (3.4% vs. 2.5%), Italy (3.3% vs. 2.8%), and France (2.8% vs. 2.5%), but slowed in Germany (2.7% vs. 2.9%).

Bitcoin and Strategy:

Strategy’s small bitcoin sale matters more for the symbolism than the size. The company sold just 32 BTC between May 26 and 31, to help fund preferred-share dividends, but because Strategy has long promoted a “never sell” bitcoin strategy, investors are reading it as a sign of rising financial strain.

Over the past two years, Strategy used leverage and equity issuance to build a huge bitcoin position and its stock traded at a big premium to NAV during the bull market. Now that bitcoin has fallen, dilution has risen, and MSTR is trading at a discount to NAV, investors are questioning whether the model still works — and whether further bitcoin sales could add pressure to both the stock and the crypto market.

Holds 843,706 Bitcoins after selling 32 coins or 3.3% of all mined Bitcoin.

The Current State: Strategy’s current 843,706 BTC portfolio has an average purchase price of $75,699 per coin. Cost of purchases is $63.8 billion. Net asset value (NAV) at Fridays mark of $61,059 is therefore $51.5 billion or 0.8. Strategy’s market cap as of Friday’s close is $42.3 billion, Now I’m not sure what the value of their liabilities are but I guess you can look at this scenario 2 ways. They are screwed and will become a forced seller which will way on crypto markets or 2. If you buy Strategy equity you are buying Bitcoin at a discount (that all depends on liabilities of course). Knock yourself out!

Graph 4: Bitcoin is back at 2024 levels and more than 50% lower than its September 2025 peak

Outlook:

Ok so what to do? Is it kind of inconvenient that after we receive the last of the Q1 earnings results from a chipmaker/AI related firm the market has a hissy fit or is that indicative of a market priced for perfection? Or is it also the fact that the market has finally realised that with the state of the US economy and the re-emergence of inflation that rate hikes, not rate cuts, are imminent. Or is it a combination?

I heard a ridiculous comment on Bloomberg today that the FOMC will most likely give new chair, Kevin Warsh, a few meetings before considering a rate hike. Seriously? Inflation is going to take a summer vacation whilst Warsh gets settled in? I mean please! Its this type of complacency and hubris that will end in tears. We have regime change at the Fed and it should coincide with regime change in rate philosophy.

The US is an economy showing all the hallmarks of one which is at, or closely approaching, full capacity. It is currently operating at full employment and 4% inflation. Manufacturing and Services sectors are expanding assertively; Equity markets are at or near ATH’s and financial conditions are loose and supportive. And it’s about to get a strong tailwind from the soccer world cup which begins this week and is expected to add somewhere between 0.2%-0.3% to GDP.

It’s very clear to me after this week’s price action that risk markets were getting intoxicated on liquidity (M2 and rate expectations) and complacent re inflation and potential rate hikes, which led them to dance with duration (AI and tech). And when it became clear that the booze (liquidity) was drying up (US employment and rising bond yields) the music stopped and everyone rushed for the exit.

The question now is can the dance continue? It can if the Fed acknowledges the threat of inflation and deals with it immediately and accordingly, there might be a few speed humps with this approach. However, if it continues to treat this inflation outbreak as “transitory”, tries to look through it and gets behind the curve again, this week will feel like a massage compared with what’s to come. If the Fed is forced to go 5%+ again (i.e. 100bp to 150 bp) then markets illustrated this week that they will be incapable of weathering that type of liquidity withdrawal and tightening in FCs.

We get further news on US inflation with the release of the CPI (0.5% monthly and 4.2% annual expected) and PPI (0.7% monthly and 6.4% annual forecast). This data will be highly influential to the Fed and their narrative as they head into their next rate meeting on June 16. As far as other central banks (CBs) are concerned, we receive rate decisions from the Bank of Canada, who are expected to hold, and the ECB who are anticipated to follow the RBA and Norges bank and hike 25 bp from 2.15% to 2.4%. The ECB will be interesting to see what kind of message accompanies the expected rate hike, remember CBs don’t usually alter policy once and then pause (see the RBA in 2026). Considering all this it’s kind of interesting that markets are only seriously considering a full 25 bp rate hike by the Fed in Q4 this year when the US is arguably the strongest developed economy and with 4%+ inflation and 4.3% unemployment. There’s much room for movement in the US rate market!

In the current environment risk assets will remain at the mercy of rates. Is it “sell in May and go away” (a seasonal reference to offloading equites at the end of May and go on summer holiday)? I think bond yields will continue to move higher as CBs have an horrendous inflation track record and were way too cute with “transitory” inflation in 2021/22/23, and look flatfooted with the current inflation outbreak. How destructive another hiking cycle will be to equities will depend on the response of CBs and the magnitude of mistakes. Right now, equities have just had a bad day! A risk off environment driven by higher bond yields should continue to be supportive of the USD which should provide headwinds for commodities including gold and silver. Oil watch Trump, and Bitcoin watch for anymore sales out of Saylor and Strategy, but it doesn’t look great for crypto.

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Have a great week!

Cheers,

Riesy

The views in this report are off the author and not investment advice.

-Have the Australian government’s unmandated tax changes just burnt down the Aussie dream?

🔥30 Second Wrap:

1. Housing starts to crack? — Sydney & Melbourne prices are slipping, clearance rates collapsing, and even CBA’s share price is flashing alarm, signalling the first real wobble in years.

2. Tax shock hits confidence — the government’s unmandated removal of negative gearing on existing homes and the end of the 50% CGT discount has spooked investors, with Morgan Stanley seeing 5–10% national falls and 15–20% needed for investor maths to work again.

3. RBA boxed in — rising wages (FWC, 4.75%), zero productivity, returning fuel excise and sticky inflation mean the RBA may be forced to tighten into a downturn, leaving the property market exposed with no policy safety net.

Ok with NSW and Victorian house prices starting to tip over it’s worth some brief analysis of what this could mean for the wider property market and the broader economy in general.

Firstly, how did we get here? Australia - and Sydney in particular - is one of the most expensive/least affordable property markets in the world by many metrics. The major benchmark used is the “median multiple” (the median house price divided by the median pre-tax household income). 3 is rated affordable and 9+ is impossibly unaffordable. Hong Kong ranks #1 least affordable at 14.4, Sydney is #2 at 13.8, RAdelaide is #6 at 10.9 and Melbourne is #9 at 9.7. Australia has 3 cities to in the top 10. Brisbane (9.3) and Perth (8.3) were 11^th and 14^th respectively N.B. this ratio was around 4 times in Australia back in 2000.

Graph 1. Is not as up to date as the statistics above but does reveal housing unaffordability in Australia

So what happened post 2000 to drive this surge in prices? 1. We saw a secular decline in inflation driven by globalization/free trade, central bank inflation targeting and productivity gains which resulted in a dramatic fall in interest rates which prompted borrowing and debt accumulation.

Graph 2. Interest rates have been in secular decline since 1990 until now???

2. The introduction of the 50% Capital Gains Tax (CGT) discount in 1999, combined with existing negative gearing rules, turned residential housing into a highly attractive investment vehicle. 3. Aggressive population growth led by net overseas migration turbocharged housing demand. And 4. Significant debt accumulation which has made Australian households currently the 2^nd most indebted relative to income globally.

Graph 3: Australia debt/income, 2^nd highest globally:

Since the Covid years of 2020/21 the global economy has generated bouts of inflation that we haven’t experienced since the 70’s, 80’s and 90’s as “transitory” inflation subsides, and “structural” inflation normalizes. As inflation re-emerges, CBs are hiking again or preparing to hike, and the term structure of interest rates is reflecting this. This factor, in combination with differing immigration dynamics, has resulted in house price declines in similar economic countries such as the US, Canada and NZ. However, Australian house prices have continued to soar with government policies surrounding elevated immigration and the generously refined 5% housing deposit scheme (1 in 3 first home buyers are now using this scheme to bypass the traditional 20% deposit requirement) providing key tailwinds.

Graph 4: Australia house prices (blue) versus Canada house prices (grey)

Graph 5: Forecasts for net overseas migration increased by 55k in the recent May budget.

Australian house prices have been an outlier to its developed economy peers of recent times……that is until now. Recent data has revealed that Australian house prices are starting to tip over and that auction clearance rates (the proportion of houses that sell at auction) are plummeting. And there is certain anecdotal evidence that house prices in some of the more expensive Sydney suburbs are down 10%-15%

Graph 6: Australian house prices start to decline:

Graph 7: Monthly declines in Sydney and Melbourne house prices are dragging down the national average:

Graph 8: Sydney auction clearance rates plunge:

Graph 9: Is the CBA (Australia’s largest mortgage lender) share price sending warnings re Aussie house prices:

So, despite the support from net migration and the 5% deposit scheme, the Australian property market’s ability to continue to defy gravity is being tested. Australia did feel the tailwind of monetary easing with 3 rate cuts in 2025, but once the RBA realized that they hadn’t defeated inflation, these rate cuts were quickly reversed with 3 consecutive rate hikes so far in 2026. Now this is starting to weigh on a highly indebted property market, but what could really break the camels’ back is the tax changes that were announced by the federal government in the May budget that they had zero mandate for. “Liebour” announced that they would erase negative gearing for investment in existing housing (grandfathered for current investors as of May 12^th, 2026). Negative gearing will still apply for investment in new property. In addition, they will replace the 50% capital gains discount with a cost-based indexation system (tied to CPI) with a minimum 30% tax on net capital gains.

These changes are highly contentious, and the explanation and justification by the government is confusing, incoherent and deceitful. Investors are facing haircuts to loan amounts on existing housing, recipients of the 5% deposit scheme (230k homeowners) are facing potential negative equity, first home buyers are getting pillaged on investments they are using to save for home deposits, investors are unsure how they approach losses, small business and entrepreneurs now look very disincentivized, existing homeowners are now concerned that this dishonest government will tax the family home and inheritance. And overall, investors and non-investing homeowners are confused alike. I mean it’s an interesting point why would you believe a government not to go further with taxation on assets and investment when they have lied about changing taxation on negative gearing, CGT, superannuation and stage 3 tax cuts so far\? Not an ideal investment climate. Confusion reigns supreme, and confidence is tumbling. And if you combine that with rising interest rates, rising energy prices, rising unemployment (only one month but a close watch!) and global uncertainty, it could be a cocktail for some severe disruption.

Morgan Stanley released a research paper following the budget suggesting that national house prices could fall at least 10%:

“We estimate that housing prices would need to fall 5 per cent to adjust to the tax changes (with a permanent reduction in investor demand share), but taking into account the soft starting point for housing with RBA rate hikes, we see a 5-10 per cent drop in national prices as likely – one of the largest price corrections over the past 40 years,”.

Investors are the first line to feel the impact of the tax changes and, on Morgan Stanley’s estimates, would require price falls of between 15 per cent and 20 per cent to make the economics of investing stack up again.

“Larger declines could come from more fundamental changes in investor price expectations or a slower-than-usual policy response.”

Now you might say if all this happens there is no way the RBA hikes rates further and that’s a debatable point. However, just in, the Fair Work Commission (FWC) has just announced that the award and minimum wages will be increased by 4.75% from the 1^st of July 2026 (last year was 3.5% increase). This impacts a minimum of 3 million workers and can infiltrate other wage negotiations, and so with zero labour productivity, this is another complication for the RBA. I think we are already in a quasi-wage price spiral, as with high and above target inflation, Federal Treasurer, Glass Jaw Jim, had endorsed a minimum wage increase that would ensure “real” wage growth and the FWC obliged accordingly. And so, with zero productivity growth, I imagine we will see this 4.75% wage rise infiltrate the prices of our goods and services and so on and so forth!!!! And when these price rises, most likely hit in Q3, we will also see the fuel excise tax return to normal in July which will provide another inflation tinder. Let’s not forget government spending! And if we have above target and rising inflation, the RBA will find it very difficult to avoid further rate hikes, let alone ease rates, even if the housing market and the economy are struggling. They might need something more severe than a mild downturn to defeat inflation. As Sarah Hunter (RBA chief economist) put it recently, “if Australians believed inflation pressures would keep growing, the bank may have to engineer an economic slowdown akin to the recession of the early 1990s.”

Graph 10: Australian productivity is flatlining which could have inflationary consequences for the FWC’s 4.5% wage decision.

The Australian property market has been in a relentless bull market since the 1990’s supported by falling interest rates, tax incentives and government policies such as immigration and deposit schemes. Australian property prices have continued to progress even as its peer group stumbles, with numerous metrics indicating that Australian house prices remain highly expensive or even overvalued. Rising interest rates again in H1 2026 have provided a spanner in the works for further progression and have outpaced the tailwinds from positive net overseas migration and the 5% deposit scheme. The million-dollar question right now is, will the dishonest and unmandated removal of tax incentives for investment announced in the recent Federal Budget, and therefore the overall anti investor/capital perception of the current government, be the straw that broke the camels back for the Australian property market and result in further and maybe large declines? Only time will tell, but the early signs don’t look good, and the RBA may not only exacerbate the problem, but they could very well be hamstrung in providing any form of support.

Cheers,

Riesy

The views in this article are of the author and not investment advice.

-Divided central banks are becoming complacent with “structural” inflation.

🔥 30‑Second Wrap

• Markets priced in a US–Iran ceasefire even though no deal is currently signed — oil collapsed 13%, driving a global risk‑on rally.

• Underlying Inflation is re‑accelerating across the US, Australia, NZ and Korea, but central banks remain split, hesitant, and politically timid.

• Structural inflation is the new regime — deglobalisation, energy self-harm, demographics, fiscal excess and repeated supply shocks mean “transitory” is all but dead.

• Equities hit all‑time highs, bonds rallied on the oil move, USD softened, gold lifted slightly, Bitcoin stayed weak.

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📈 Equity Indices

• 🟢 S&P 500: 7,580 vs. 7,473 (+1.4%)

• 🟢 NASDAQ: 26,972 vs. 26,343 (+2.3%)

• 🟢 DOW JONES: 51,032 vs. 50,579 (+0.9%)

• 🟢 ASX SPI: 8,740 vs. 8,630 (+1.3%)

• 🟢 DAX: 25,104 vs. 24,888 (+0.9%)

• 🔴 Hang Seng: 25,182 vs. 25,606 (-1.7%)

💱 Forex & Currencies

• 🟢 AUDUSD: 0.719 vs. 0.713 (+0.8%)

• 🟢 EURUSD: 1.166 vs. 1.160 (+0.5%)

• 🟢 USDJPY: 159.26 vs. 159.16 (+0.1%)

• 🔴 AUDNZD: 1.199 vs. 1.218 (-1.6%)

• 🔴 USD Index: 98.91 vs. 99.32 (-0.4%)

🪵 Commodities & Crypto

• 🟢 Gold: 4,569 vs. 4,510 (+1.3%)

• 🔴 Brent Crude: 91.70 vs. 103.94 (-13.3%)

• 🔴 Iron Ore: 108.82 vs. 109.67 (-0.8%)

• 🔴 Bitcoin: 73,415 vs. 75,653 (-3.0%)

📉 Volatility & Fixed Income

• 🟢 VIX: 15.32 vs. 16.70 (-9.0%)

• 🟢 US 10 yr bond: 4.44% vs. 4.56% (-12.0 bps)

• 🟢 US 10 yr real: 2.03% vs. 2.14% (-11.0 bps)

• 🟢 US 7 yr bond: 4.30% vs. 4.41% (-11.0 bps)

• 🟢 US 5 yr bond: 4.14% vs. 4.26% (-12.0 bps)

• 🟢 US 2 yr bond: 4.00% vs. 4.12% (-12.0 bps)

• ⚪ US 2/10 yr YC: 0.44% vs. 0.44% (0.0 bps)

• 🟢 AUS 2 yr bond: 4.53% vs. 4.59% (-6.0 bps)

• 🟢 UK 10 yr bond: 4.81% vs. 4.90% (-9.0 bps)

• 🟢 Jap 10 yr bond: 2.66% vs. 2.75% (-9.0 bps)

So, we may have a peace deal? Well markets think so! There is a ceasefire deal sitting on the Resolute Desk in the Oval Office and it appears that President Trump is drawing out the process to ensure there is a perception that he is the critical figure in the outcome of this negotiation and that it satisfies his “red lines”. Just in Statement from the White House, “the situation room has completed and lasted about 2 hours. President Trump will only make a deal that’s good for America and satisfies his red lines. Iran can never possess a nuclear weapon”. No deal yet!

In any event, markets ran with it this week, and we have seen the oil price close at its lowest level in 6 weeks (-13% this week). Now this is obviously important, as since the conflict began, energy prices, particularly the oil price have been the central force that other asset classes have been orbiting. And so, the perceived inflationary benefits from this gravitational pull provided further respite to bond yields which in turn escalated the tailwinds to risk assets. This is despite inflation data in the US and Australia indicating that underlying inflation is becoming somewhat embedded.

The Bank of Korea and the RBNZ kept the rates on hold, but both experienced dissenting decisions (BOK 5-2, RBNZ 4-3) with some members of both these Central Banks (CBs) wanting to hike rates immediately on inflationary concerns. Now this is very interesting and reveals just how spooked CBs are by the recent inflationary impulse from rising energy prices, I guess if they were super concerned, they would have hiked. The BOK raised its growth (semiconductor exports) and inflation forecasts driven by expectations of an expanding positive output gap (growth exceeding potential growth = demand inflation) and is expected to hike and its next meeting and 2-3 times for the remainder of 2026….makes sense! And the RBNZ lowered its growth outlook and raised its expectations for inflation despite an anticipated contracting output gap and are also expected to hike 2 more times this year commencing at their next meeting.

This is indicative of the differing challenges faced by CBs and how haunted they are by the post-Covid inflation ghosts where they never successfully returned inflation to target. And so, no matter what the underlying fundamentals are suggesting, their instincts are increasingly to hike. And this isn’t isolated to the BOK and the RBNZ, we have seen continued hawkish dissents from the likes of the FED (8-4) and the BOJ (6-3).

And adding further confusion to the global CB mishmash, the Canadian economy entered technical recession this week after recording a second consecutive quarter of negative growth with Q1 GDP contracting -0.1% (Q4 2025 -1.0%). The Canadian economy has been a major casualty of Trumps trade policies, and notwithstanding elevated oil prices (Canada is the world’s 4^th largest oil producer) business investment and confidence is crumbling under the weight of US tariffs. But despite these economic headwinds, the market still believes there is a 75% chance of a 25 bp rate hike by October. This should be a stark warning for the Australian government and their recent inexplicable attack on capital, ambition and investment via the elimination of certain tax incentives. If you do something that interrupts and disincentivizes business/individual investment and capital allocation (Canada was an exogenous shock and not self-inflicted) beware of the economic consequences. It’s like the saying about trust: it takes years to build, seconds to break and a lifetime to repair.

Ok so considering all this US equities continued their march higher with all indices reaching all-time highs (ATHs). The S&P 500 had its 9^th consecutive positive week, only the 5^th time since 1965. This dragged global equities and credit higher in what was a risk on week. The USD had a softer week with the NZD firing up after the RBNZ meeting, the AUD and the EUR also had solid weeks. Global bonds fell in yield, and this combined with the weaker USD provided a small tailwind for Gold and Bitcoin had a 2^nd consecutive challenging week and remains in its bear market.

A bit more detail or skip to end for the outlook:

Graph of the week: Canada enters a technical recession, but the BOC is still expected to hike this year. Could Australia be next?

The weaker-than-expected GDP data coincides with a weaker job market as well, painting a sobering picture of the Canadian economy as US President Donald Trump’s tariffs squeeze Canadian businesses. Business capital investment in the first quarter posted a fifth consecutive decline, shrinking 3% on an annualized basis, driven by lower spending on engineering structures.

The “surprising” first quarter data means Canada has seen growth only in one of the last four quarters, noted Charles St-Arnaud, chief economist at Servus Credit Union. The last time Canada recorded two consecutive quarters of negative growth was in 2020 during the Covid-19 pandemic. Before that, it was in 2015 amid low oil prices.

The Bank of Korea (BOK) decision:

Rate Hold with a Hawkish Twist: The BOK voted to keep its benchmark interest rate unchanged at 2.50% for the eighth consecutive meeting. However, it was a “hawkish hold”—newly appointed Governor Shin Hyun-song noted that a hike could have been justified, and two board members openly dissented by voting for an immediate 25-basis-point increase.

Upgraded Forecasts Across the Board: Driven by a powerful semiconductor export cycle, the central bank significantly upgraded its 2026 economic growth forecast to 2.6% (up from 2.0%). Due to ongoing Middle East geopolitical tensions and high oil prices, its 2026 inflation forecast was also pushed higher to 2.7% (up from 2.2%).

Imminent Tightening Cycle Signalled: With the economy growing above its potential and inflation remaining sticky, the BOK strongly signalled that an interest rate hike is right around the corner. Market analysts and economists widely expect the central bank to kick off a multi-hike tightening cycle as early as their next meeting in July

RBNZ:

A “Razor-Thin” Hold: The RBNZ voted to keep the Official Cash Rate (OCR) unchanged at 2.25%, but the decision was incredibly close. The Monetary Policy Committee was deadlocked in a 3-3 split between holding and hiking. It ultimately came down to Governor Anna Breman’s casting vote to keep the rate steady, making it clear that this hold is precarious.

Surging Inflation Projections: Driven by geopolitical conflict in the Middle East and its subsequent impact on global oil and transport costs, the RBNZ sharply revised its near-term inflation outlook. The central bank now expects CPI inflation to spike and peak at 4.3% in the September 2026 quarter before cooling back down toward its 2% target midpoint by mid-2027. RBNZ also raises unemployment, lowers GDP and increases the negative output gap.

Incoming Hikes: The RBNZ explicitly warned that the OCR will likely need to “increase sooner and by more than previously signalled” to combat these sticky price pressures.

“We note that 75bp of rate hikes by year end is almost exactly what the OIS market is already pricing, and we think the risk is that we get less rather than more rate hikes this year. We side more with the Bank staff than the independents on where we think the bulk of risks now sit, and we think the NZ economy remains very soft and that second round inflation will struggle to take hold.” – Sean Keane, JB Drax Honore.

US PCE (the Fed’s preferred inflation measure…. that is before Kevin Warsh became the boss):

The personal-consumption price index rose by 0.4% last month, the fifth large increase in a row.

The yearly rate of inflation climbed to 3.8% from 3.5% in the prior month to mark a three-year high.

Graph 2: US inflation and Money Supply. Its not just elevated oil prices that are providing a tailwind for inflation.

In a bit of good news, a narrower measure of inflation that omits volatile food and energy costs, known as the core PCE, rose 0.2%. That was less than Wall Street expected.

The rate of core inflation in the 12 months that ended in April registered 3.3%, up from 3,2% the prior month.

Real disposable income fell 0.5%, its third straight monthly decline, and the saving rate dropped to 2.6%, the lowest since 2022, according to Bloomberg.

Separately, the BEA revised first-quarter GDP growth down to 1.6% from an initial 2% estimate, reflecting lower inventory investment and consumer spending.

Australia Inflation April:

• The Consumer Price Index (CPI) rose 4.2%, down from 4.6% in the 12 months to March 2026.

• The largest contributors to annual inflation were Housing (+6.3%), Transport (+6.6%) and Food and non-alcoholic beverages (+2.8%).

• Trimmed mean inflation was 3.4% (+0.3%), up from 3.3% in the 12 months to March 2026.

Annual Goods inflation was 4.7 per cent in the 12 months to April 2026, down from 5.5 per cent in the 12 months to March 2026. The main contributor was Automotive fuel, which rose 18.6 per cent in the 12 months to April 2026. This is down from the rise of 24.2 per cent in the 12 months to March 2026, following a fall of 7.0 per cent in the month of April. April was when the fuel excise tax was halved, this returns to its normal level in July.

Annual Tradables inflation (international influences like oil) was 3.2 per cent in the 12 months to April 2026, down from 4.5 per cent in the 12 months to March 2026. The main contributors were Automotive fuel (+18.6 per cent), Accessories (+17.0 per cent) and Audio, visual and computing media and services (+9.6 per cent).

Annual Non-tradables (domestic factors) inflation was 4.7% in the 12 months to April 2026, up from 4.6% in the 12 months to March 2026. The main contributors were Electricity (+22.5 per cent), New dwellings (+4.7 per cent) and Medical and Hospital Services (+4.9 per cent).

Graph 3: Headline inflation falls on lower petrol prices (fuel excise tax cuts) but core inflation keeps rising:

Australian CAPEX and Household Spending:

Total new capital expenditure in Australia jumped 6.5% quarter-on-quarter in the latest March 2026 quarter, reaching an annual increase of 14.6%. This surge was primarily driven by massive investments in data centre equipment, while spending on buildings and infrastructure recorded a brief 3.8% decline.

The ABS also released updated estimate figures for future spending:

· 2025-26 Financial Year: The 6th estimate stands at $207.6 billion (up 4.5% from the previous estimate).

· 2026-27 Financial Year: The 2nd estimate expects a spend of $173.4 billion, which is 9.9% higher than the initial estimate.

· Much of the capex boost is expected to be offset in next week’s national accounts figures due to the corresponding rise in capital goods imports

Separately, household spending figures told a different story. April household spending fell 1.1% month-on-month, more than double the 0.5% decline expected by markets and a sharp reversal from a 1.6% gain the prior month. Discretionary spending bore the brunt, falling 0.8% in its steepest monthly decline since February 2024. Analysts described the discretionary result as the first signs of demand destruction, a signal that higher living costs and borrowing pressures are beginning to bite into consumer behaviour in a more meaningful way.

Graph 4: Data centre investment turbo charges non-mining investment:

Outlook:

Ok so what to do? Are we on a gameshow here? Deal or no deal? I think I’d prefer to be playing with NBC’s cash as opposed to the global economy, but that’s where we live. As noted above we have a range of varying characteristics in different developed economies. Positive and negative output gaps, higher and lower growth forecasts, unemployment here and there and a recession etc etc…. The three things they all have in common is 1. rising inflation which is re-emerging above target and from uncomfortable starting points. 2. Divided rate decision boards where currently the majority of most want to “wait and see”, and the minority want to get going and hike rates to quarantine their economies from the inflation demons that presented in 2021/22 and 3. They are all signalling imminent rate hikes, except the Fed where the market is doing it for them.

So, the question I ask is why not get going? If you’re going to hike…. hike! Stop pussy footing around, if you hike and you’re wrong (which is almost guaranteed with the political hacks that have infiltrated global central banking) you can always reverse it. But if your late (which is highly likely because these morons lack courage and conviction) then we most likely see a repeat of 2022/23, or maybe worse, and an unnecessarily painful hiking cycle.

The misnomer that is being generated is this continuous concept of “transitory inflation”. That term was fit for purpose from the mid 1990’s to 2018ish when there was zero friction in supply chains and relative global harmony, governments had respect for what is now the redundant term “fiscal discipline” and CBs revered their inflation targets, had versatility and impact with the cash rate tool, and stayed in their lanes with their other monetary tools. Now we have deglobalisation and challenges to the global order, most economies have expensive, insecure and unreliable energy deriving from the politicisation of carbon, challenging demographics, fiscal ill-discipline and wildly excessive government spending and CBs who increasingly involve themselves in unsustainable deficit funding and an aggressive expansion of the money supply and liquidity.

“Transitory inflation” is deceased, structural inflation is here, and CBs haven’t or refuse to adapt. Since 2020 we have seen 3 and a halfish major supply shocks in the global economy. In 2020/21 we had Covid. In 2022 we had the Russian invasion of Ukraine. In 2025 we had liberation day (temporary except for Canada) and in 2026 we are seeing the US/Iran war. These events are becoming more frequent, and all resulted in inflation to one degree or another. Inflation was rising again before this conflict began and so to expect to see the current inflation outbreak return to target without a tightening of monetary/financial conditions is at best naïve and at worst borderline insanity. I mean another GFC or serious recession would fix inflation but that’s not on the forecast horizon. Times have changed, we have entered a world with structurally higher inflation, and as a result higher neutral rates, and if CBs are true to their inflation mandates (which is the million-dollar question) then a rapid response is required or otherwise we potentially face a return to the 1970s/80s, whose painful inflation inspired inflation targeting in the first instance. Are we going full circle?

This week we will receive the all-important US employment report where 96k jobs are expected to be added in May with the unemployment rate expected to remain at 4.3%. In Oz we get Q1 GDP which is forecast to print 0.5% and 2.5% yoy. I don’t know what the US will do with this peace deal and Iran, but it appears to me that there is a lot of positive news priced in markets. As I write it appears Trump is reluctant to sign to current version and so this should create a few hiccups to start the week. Overall, I think US equities look stretched, but you can’t stand in from of that freight train right now. Bonds I think the recent moves lower in yield are corrective and counter trend and I think the themes of inflation and CB tardiness will regain some prominence and send yields higher again. This should assist the USD, so I remain neutral on things like AUDUSD and EURUSD right now. A stronger USD and higher bond yields should weigh on Gold and Silver and Bitcoin looks friendless yet again and is getting no lift from the Nasdaq.

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Have a great week!

Cheers,

Riesy

The views in this report are of the author and not investment advice

-Trying to explain US bonds this week is like getting a square in a circle. Something could be up!

The Wrap in 30 seconds:

• Bonds sent mixed signals — long-end yields spiked early on Japan’s stimulus and oil volatility, then fell on Middle East peace optimism, while the US yield curve flattened sharply as short-end yields rose on hotter inflation expectations. Something is brewing beneath the surface.

• Equities powered on — S&P logged its 8th straight weekly gain despite Nvidia and Walmart wobbling, with Europe outperforming and breadth deteriorating as Big Tech carried the market.

• Outlook: it’s all about bonds — rising inflation expectations, Warsh’s new Fed leadership, and upcoming PCE data put fixed income in the driver’s seat. Inflation data in Oz and Canada and rate decisions out of NZ and Korea.

🟢 DAX: 24,888 vs 23,950 (+3.8%)
🟢 DOW JONES: 50,579 vs 49,526 (+2.1%)
🟢 S&P 500: 7,473 vs 7,408 (+0.9%)
🟢 NASDAQ: 26,343 vs 26,225 (+0.4%)
🟢 USDJPY: 159.16 vs 158.73 (+0.3%)
🟢 ASX SPI: 8,630 vs 8,617 (+0.2%)
🟢 UK 10 yr bond: 4.90 vs 5.17 (-27.0 bp)
🟢 AUS 2 yr bond: 4.59 vs 4.80 (-21.0 bp)
🟢 US 2/10 yr YC: 0.44 vs 0.52 (-8.0 bp)
🟢 US 10 yr bond: 4.56 vs 4.60 (-4.0 bp)
🟢 US 7 yr bond: 4.41 vs 4.43 (-2.0 bp)
🟢 IG Index: 5.20 vs 5.22 (-2.0 bp)
🟢 HY Index: 7.47 vs 7.49 (-2.0 bp)
🟢 HY Index (spread): 321 vs 323 (-2.0 bp)

⚪ USD Index: 99.32 vs 99.28 (0.0%)
⚪ US 5 yr bond: 4.26 vs 4.26 (0.0 bp)
⚪ IG Index (spread): 79 vs 79 (0.0 bp)

🔴 AUDUSD: 0.713 vs 0.715 (-0.3%)
🔴 EURUSD: 1.16 vs 1.163 (-0.3%)
🔴 AUDNZD: 1.218 vs 1.224 (-0.5%)
🔴 Gold: 4,510 vs 4,543 (-0.7%)
🔴 Iron Ore: 109.67 vs 110.77 (-1.0%)
🔴 Hang Seng: 25,606 vs 25,962 (-1.4%)
🔴 Bitcoin: 75,653 vs 79,155 (-4.6%)
🔴 Brent Crude: 103.94 vs 109.24 (-5.1%)
🔴 VIX: 16.7 vs 18.43 (-10.4%)
🔴 US 10 yr real: 2.14 vs 2.08 (+6.0 bp)
🔴 US 2 yr bond: 4.12 vs 4.08 (+4.0 bp)
🔴 Jap 10 yr bond: 2.75 vs 2.71 (+4.0 bp)

Ok so it was a very topsy turvy week driven by volatility in the oil price and then, by default, some sharp movements in bond yields. It commenced Monday when the Japanese government announced they were preparing a supplementary budget worth around 3 trillion Yen (around $19 billion USD) to counter the negative economic impacts of the Middle East war by implementing energy subsidies and fuel caps. As a result, Japanese bond yields soared and took global bonds for the ride. The move in bond yields was ably assisted by a rise in oil prices as markets seemed dissatisfied with the lack of progress with weekend peace negotiations between the US and Iran.

The move higher in bond yields got the attention of equities which began the week on the back foot. So, there is some realisation from risk markets that tighter liquidity and financial conditions is a danger zone, but as has been the case of recent times, as soon as bond markets stabilized, notwithstanding at relatively elevated levels, equities felt the liquidity reprieve, dusted themselves off and posted another weekly gain. Now this was mostly driven by falling oil/energy prices as Trump announced that peace negotiations were in the “final stages”, and that traffic through the Strait of Hormuz had increased (26 commercial vessels). It’s interesting that oil prices are so optimistic about some form of peace when it appears, via the language from both parties, that a firm red line has been drawn regarding Iran’s current and future enriched uranium capabilities. Iran wants it and the US is saying you can’t have it.

In any event, the respite in oil prices provided some relief for bond yields which in turn altered the trajectory for equities. Declining bond yields in the UK and Oz were also assisted by some unexpectedly softer employment data with the unemployment rate rising to 5.0% and 4.5% respectively in both countries. This is something to keep a close eye on as any sustained evidence of deterioration in the employment sector will give CB’s the ammunition to park some reluctant hawkishness and shift to a more dovish position, even in the presence of elevated and above target inflation (modern day CB’s really dislike hiking, its politically and societally toxic given the exorbitant levels of government and private sector debt globally).

Overall, it was quite a confusing week! The US yield curve flattened significantly by 8 bp with the shorter end building in further expectations of Fed rate hikes (post the Fed minutes and rising inflation expectations revealed in the Uni of Michigan report (Go Blue!)) this year by around 10% and rising in yield (+4 bp), but the longer end traded off ME peace optimism and declining oil prices and fell in yield (-4 bp), but 10 year real yields rose by 6 bp. Now I imagine you want me to make sense of this, but that’s square in circle stuff! Historically a sharply flattening yield curve driven by a rise in short end yields signals danger that CB mistakes are imminent, but this wasn’t represented in the performance of risk assets or the behaviour in 10-year real yields which is kind of perplexing. Equities currently remain ambivalent to any sustained noise from the bond market, but there were hints of concern early in the week when longer bond yields rose (see my previous article “The Great Duration Divorce”).

The S&P 500 (+0.9%) had its best consecutive run of positive weekly gains (8) since 2023 despite the weekly performance of Nvidia (-5.4%) and Walmart (-8.7%) which revealed some nerves in the AI infrastructure build out and also with the consumer, but Ford hit a record high as it pivots to battery energy storage and data centre production and is now considered an “AI adjacent”. And European stocks really outperformed with Germany (+4.4%), France (3.1%) and the UK (2.9%). Currency markets were uneventful, but the USD did record another positive week. This in combination with higher shorter US bond yields weighed on Gold, but Silver and Copper recorded slightly positive weeks. Credit spreads participated in risk-on and continued to compress, and Bitcoin had a challenging week as Strategy signalled it might sell some of its BTC in late 2026 to optimize treasury management.

A bit more detail or skip to the end for the outlook:

University of Michigan Consumer Sentiment Index: consumer confidence hits a record low as inflation expectations surge.

Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices. Sentiment is now just below the previous historical trough seen in June 2022. The cost of living continues to be a first-order concern, with 57% of consumers spontaneously mentioning that high prices were eroding their personal finances, up from 50% last month.

Year-ahead inflation expectations inched up from 4.7% last month to 4.8% this month. The current reading substantially exceeds the 3.4% reading seen in February 2026 prior to the start of the Iran conflict, along with all 2024 readings. Long-run inflation expectations climbed from 3.5% in April to 3.9% in May, notably higher than the 2.8% to 3.2% range seen in 2024.

Graph of the week: record low US consumer sentiment and soaring inflation expectations

Australian employment Headline Statistics:

• Unemployment Rate: Jumped to 4.5% (up from 4.3% the previous month). Economists had widely expected the rate to hold steady at 4.3%.

• Employment Change: The economy shed 18,600 jobs (compared to a forecast increase of around 15,000 jobs).

• Participation Rate: Slipped slightly by 0.1 percentage points to 66.7%.

Graph 2: Australian unemployment rate rises to highest level since 2022. It’s only one month, but it is worth keeping an eye on, as any sustained employment deterioration could really shift the RBA’s mindset.

Kevin Warsh sworn is Federal Reserve Chair, key comments in his maiden speech:

“I will lead a reform-oriented Federal Reserve, learning from past successes and mistakes, both escaping static frameworks and models, and upholding clear standards of integrity and performance.”

He stated that by pursuing the Fed’s dual mandate with “wisdom and clarity, independence and resolve,” the country could achieve lower inflation, stronger growth, and higher real take-home pay

Cutting back on Fed “noise”: Warsh signalled a desire to reduce the frequency of economic projections and public speeches by Fed policymakers, arguing that too many public predictions make the central bank a “prisoner” to its own model.

AI as a disinflationary force: He has continued to reiterate his stance that artificial intelligence serves as a major structural, productivity-enhancing, and disinflationary wave, which may give the Fed more latitude on rates in the long run

Graph 3: The Fed’s Balance sheet. One of Jay Powell’s last actions was to recommence balance sheet expansion or QE. I think he labelled it a “reserve management program”. Now is QE required when we have another inflation problem? Or is it necessary because the US treasury market is too big, is breaking and needs intervention to function. And can Kevin Warsh reign in the Fed’s ever growing interventionist footprint as promised?

Graph 4: Global bond yields have been surging higher despite a small respite later in the week.

Graph 5: the US 2/10-year yield curve flattened dramatically this week maybe signalling an element of stagflation. Shorter term inflation concerns, longer term growth concerns.

On the earnings front, an overall favourable picture was accentuated by Nvidia’s quarterly earnings—the company reported a larger-than-expected $81.6 billion in fiscal Q1 revenue (up 85% year-over-year) and announced a 25-fold dividend increase and an $80 billion buyback. The company intends to return 50% of its free cash flow to investors this year. This comes as markets anticipate a large IPO pipeline, including SpaceX. – Mohamed A. El Erian

Stock-market performance and breadth are diverging this year at a pace that has never been seen before.

the S&P 500 has tallied the most days where index direction and breadth have diverged at this point in the year according to data going back to 1928:

• The S&P 500’s performance and market breadth are diverging at a record pace in 2026.

• A small number of Big Tech and semiconductor stocks are driving the S&P 500’s rally this year.

• Big Tech stocks contributed 85% of the S&P 500’s advance this month, while 480 other stocks lost market value, see graph below.

Graph 6:

Outlook:

Ok so you might think it’s currently all about equities as the US and European indices make or flirt with all-time highs, but the bond market is becoming more influential as we saw early this week. The global bond market is approximately $150 trillion whereas the global equity market is valued around $130 trillion, and US yields are critical price points influencing numerous different asset classes including mortgages, corporate borrowing, commercial real estate, private equity models, equity multiples and government funding itself. Not only does it signal warnings, but it can also single handedly alter financial conditions. Bonds don’t need equities, equities need bonds! As we have seen in the past, its interest rate strategies like QE and yield curve compression that bail out equities when they get too big for their boots and require a bit of first aid!

This week we saw some alarming developments. Firstly, it was the rise in longer end bond yields early in the week that triggered some initial risk-off, and later in the week it was the aggressive US yield curve flattening which set two conflicting narratives colliding (in my opinion). The first was rising shorter dated bond yields from growing expectations of Fed rate hikes due to rising inflation, and the second was falling longer dated bond yields due to the deflationary effects of ME conflict resolution and falling energy prices. Which one do you want? Take your pick! The point I am trying to make is that over recent weeks the bond markets are increasingly making noise, and when the bond market speaks, you are eventually forced to listen. It might not happen immediately, and it might settle down, and we will have to see the recent moves continue and be confirmed, but when 30-year bond yields make 20-to-30-year highs and we see 8-10 bp of curve flattening in a week then beware and take notice! Something is up!

As I write there is growing expectation of some form of peace deal from the White House but I’m not holding my breath, we have seen this movie before, and not only will this mess take months, maybe even years to normalize, it has given Iran proof of concept on how to control the Strait of Hormuz and leverage the global economy and this alone should embed risk premium into the energy prices. Maybe that is Iran’s nuclear weapon!! There is currently no real reaction from weekend markets.

Going forward my suggestion is to keep a close eye on bond markets. Kevin Warsh was sworn in as Fed chair on Friday so watch closely for any guidance from him on his ambition for “reform”, the Fed’s balance sheet and the path for interest rates. My guess from what we have seen so far is that he will be less communicative than previous leadership and will keep markets guessing. We also receive the US April PCE (The Fed’s preferred measure of inflation) which are forecast to print 0.5% (3.8%) headline and 0.3% (3.3%) core. Watch core, >0.3% and watch out! We also get inflation data in Canada and Australia with the Ozi numbers potentially registering a 5% handle. There are rate decisions in NZ and Korea with both expected to remain on hold, but the expectation is the Korea will signal an imminent hike. Overall, I think it’s all about bonds. If there is an announcement of peace in the ME then bond yields could fall in the short term and risk assets rally further, but I’m inclined to think that equities are pricing all the benefits of peace, whereas bonds have been flirting with some of the lingering downside (i.e. inflation, inflation expectations and higher rates) and eventually there will be catch up where both asset classes are in alignment. Maybe this week, maybe next month….unsure! But I continue to think the path of least resistance is for higher bond yields. This should support the USD, so short term negative on AUDUSD and EURUSD, which will in the short term keep pressure on Gold. Bitcoin might have exhausted its run back up, particularly if Saylor is out there saying Strategy will offload some of its holdings.

Have a great week!

Cheers,

Riesy

The views in this article are of the author and not investment advice.

On Monday Japanese long bonds surged in yield as it was leaked that Japanese PM Sanae Takaichi is planning a supplementary budget to cushion the economy from the impact of the Middle East conflict. Details were scarce with the size and timing still to be determined. As a result, longer dated bond yields surged with the 10-year hitting 2.8% and the 30-year reaching 4.12%, the highest levels since 1996.

Following that, global longer-dated bonds caught the bug and on Tuesday closed at a generational high. US 30-years closing at 5.18%. German 30-years at 3.71%, UK 30-year Gilts at 5.80%, and JGB’s continued to rise closing at 4.14%. All 4 of the world’s major bond markets closed at levels not seen in over 20 years at least (1996-2007). It’s becoming clearer that bond investors have had enough and want a divorce from duration.

Graph 1: No one spared in the bond blood bath.

Investing in 1-month T-bills is like having a fling, 2-year bonds you are meeting their friends, but investing in longer dated bonds is like a marriage….it takes attraction, commitment and most importantly trust. And it appears investors are falling out of love with duration as they are losing trust with central banks’ determination to tackle re-emerging inflation and government’s non-existent fiscal discipline. A bad combination…. like a philanderer with bad hygiene!

This phenomenon has been gathering steam since the forty year bond bull market concluded in 2022. However, it has gained momentum since the ME conflict began in early March which resulted in energy prices spiking and another round of inflation. The problem we face now is that 1. most developed economy CB’s failed to return the 2022/23 bout of inflation back to target and so they are starting from undesirable locations and face an inflation credibility problem. And 2. the end to the ME conflict and the re-opening of the SOH seems very uncertain and so the risks to elevated oil prices appear skewed to the upside.

Graph 2: US long bonds have been simmering since 40 year bull trend broke in 2022

Graph 3: US 30-year bonds at 20-year highs and higher than when inflation peaked in 2022 or the Fed funds rate peaked in 2023/24.

Risk assets can participate in inflation if financial conditions allow. However, if either CB’s or bond markets remove liquidity and increase the price of money, that normally provides a headwind for risk asset performance. Could this be starting to play out right now? CB’s are currently being very patient with rising energy prices and re-emerging inflation, in what is eerily reminiscent of the “transitory inflation” narrative that CBs tried to sell us back in 2021/22. Bond markets however are very much “fool me once, shame on you….fool me twice, shame on me” and look unlikely to be fooled for a second time. 30-year US bonds are currently significantly higher now (5.18%) than they were back in June 2022 (3.3%) when inflation peaked at 9.1%. Whether its fiscal concerns, inflation expectations, war duration etc….the bond market is rapidly losing patience. And if CB’s maintain the “wait and see”/ “look through” approach, bonds might continue to do the heavy lifting, and things could get a lot worse. And if that happens, not only could we see further divorces between bond investors and duration, but broken marriages between investors and risk assets.

Graph 4: Will rising bond yields slow down the advance of equities?

Cheers,

Riesy

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The views in this article are of the author and not investment advice