The Overnight Report: Yields Up, Markets Down

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This story features WESFARMERS LIMITED, and other companies.
For more info SHARE ANALYSIS: WES
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

US and overseas markets fell as global bond yields ratcheted up.

Oil prices advanced as US/Iran tensions escalated.

The Australian market eased yesterday, but recovered off its intraday lows.

ASX200 futures are pointing to another weak start ahead of 2Q GDP data at 11.30 AEST.

Good Morning,

The Australian market slipped -9 points or -0.1% to 9,067 coming off intraday lows on the first day of the historically weaker month of September.

Consumer Discretionary fell -1.8% with Wesfarmers ((WES)) going ex dividend.

To stay in touch with which companies are going ex-dividend, check out the FNArena Calendar https://fnarena.com/index.php/financial-news/calendar/

Don’t forget the FNArena corporate results monitor to see how the August reporting season fared.

https://fnarena.com/index.php/reporting_season/

Today’s Big Picture, J.L. Bernstein extract

Oil Takes Over The Tape

U.S. forces struck Revolutionary Guard targets in Iran after attacks on shipping and American troops.

Brent cleared US$94. The split was clean all day: energy funds hit record highs while airlines, cruise lines and casinos took the hit.

Fuel is a cost for one group and revenue for the other.

This Is A Rates Story, Not A Panic

Gold and bitcoin both fell on a day the U.S. was bombing Iran. That is the tell.

The 10-year got to its highest since January 2025, Japan’s 10-year hit 3 for the first time since 1996, and British yields reached 2008 levels.

When safe government debt pays this much, assets that pay you nothing lose the argument.

The Market Now Expects A Hike

Futures put the odds of a quarter point increase this month at better than two in three.

A week ago it was under four in ten.

Deutsche Bank told clients today a hike is now its base case.

Friday’s jobs report is the last thing standing between here and that decision.

ANZ Bank, Australian Morning Focus

Equity markets were down across the board. The S&P500 was -0.7% lower, the EuroStoxx50 fell -0.8%, and the FTSE100 was down -0.3%. 

The yield on the US 10y Treasury rose 2bp to 4.79%. Oil prices were higher with WTI up 5.1% to US$90.8/bbl. Gold fell -2.5% to US$4,327.9/oz.

US: July’s JOLTS job openings data rose marginally to 7.27m from June’s downwardly revised 7.18m. That left the ratio of unemployed people to vacancies at 1.05, broadly in balance and indicative of an absence of wage push inflation.

The US ISM manufacturing index eased -1pt to 54.6 in August, prices paid were unchanged at 71.1, new orders fell 3pts to 53.7 and employment fell 1.6pts to 51.2. The data show a healthy manufacturing sector.

Euro area: Headline August HICP rose 3.3% y/y, as expected. Core inflation fell modestly, easing -0.1% to 2.4% y/y. Services inflation rose 0.1% m/m and eased to 3.0% y/y versus 3.3%. The data confirmed an absence of second-round effects from the rise in oil prices.

US Fed policy: Financial markets traded defensively as they digest a heightened possibility of a US rate rise this month given the renewed escalation in the Middle East conflict. 

Barr presented a balanced outlook for the policy path. If incoming inflation data show inflation is moderating towards 2.0% the Fed can wait and see, but if it is stronger the Fed should act decisively. That’s a fair assessment of the FOMC’s position. 

Warsh spoke hawkishly at the Jackson Hole symposium but gave no assessment of recent inflation dynamics except to indicate that more than two months of better data is needed to be confident that underlying inflation is easing.

August US PPI and CPI data are out next week and have important implications for the FOMC’s deliberations. 

We are sympathetic to Barr’s assessment. If the inflation data are stronger than expected, the Fed will need to respond by raising interest rates. Headline inflation data will be up, owing to higher oil prices. 

Core is expected to print at 0.2% m/m, up 2.4% y/y versus 2.5% in July.

The breakdown of the data will be important, in particular around durable goods prices, supercore inflation and any evidence of inflation pass-through.

We think there is cautious optimism among most on the FOMC that underlying inflation is moderating, but there is zero tolerance for slippage.

NAB Markets Today Extract

The term “bond market vigilantes” was coined by veteran Wall street economist and strategist Ed Yardeni in 1983 at a time when the US was running large fiscal deficits and investors were worried about a resurgence of inflation.

“If the fiscal and monetary authorities won’t regulate the economy, then bond investors will’ he wrote.

Parallels with 2026 are obvious, the main difference between now and 43 years ago –size and trajectory of the US fiscal deficits and debt aside– is that in the 1980s oil prices were falling not rising. 

Australian Q2 GDP. Following the last of the GDP partials yesterday, NAB continues to expect Q2 GDP growth of 0.2% qoq (1.8% yoy), a little below the RBA’s August SoMP forecast (and market consensus) of 0.3%/1.9%.

We see risks as broadly balanced, with a smaller drag from net exports than previously expected offset by a slightly weaker inventories contribution.

Taken at face value, partial indicators also suggest modest upside risk to our consumption forecast.

Is A Debt Crisis Imminent?, Ed Yardeni & Elias Griepentrog, Yardeni Quicktakes, extract

“You are going to see a crack in the bond market, OK?” JPMorgan CEO Jamie Dimon said in a May 30 speech at the Reagan National Economic Forum.

The US government debt situation is “nearing the point of no return” and approaching a “death spiral” that could threaten the stability of the world’s largest economy, Ray Dalio writes in his new book, “How Countries Go Broke: The Big Cycle,” published June 3.

Dimon and Dalio are smart and influential. We share their concerns. However, anyone who has followed their consistently pessimistic outlook over the past few years has missed a huge rally in the stock market.

As for us, we’ll worry about the government’s debt when the Bond Vigilantes do. If a debt crisis is coming, we should make as much money as we can in stocks and sell just before the crisis hits.

The question is whether the crisis is imminent. Even more important is whether a policy response could stop the crisis from turning into a death spiral. If so, the crisis will be a buying opportunity.

The Bond Vigilantes have been stirring lately, but the 10-year Treasury bond yield remains between 4.00% and 5.00%. We’ve contended that this range is the “old normal,” i.e., the same range as in the years from before the Great Financial Crisis to the Great Virus Crisis.

This suggests the economy is back to normal and growing at a solid pace.

As we explained in our Bond Vigilantes Primer, the Bond Vigilantes tend to be on the loose when the 10-year US Treasury bond yield exceeds nominal GDP. The yield is currently well below nominal GDP.

US debt levels are undoubtedly concerning. Total public debt surpassed $40 trillion in August, roughly double what it was a decade ago. However, about US$7.7 trillion consists of intra-governmental debt, or money the government owes to itself.

Because it is not traded in public markets, it does not directly affect the supply of Treasuries.

Servicing the national debt is becoming a growing fiscal challenge. Treasury net interest outlays have climbed above US$1 trillion on a 12-month basis, putting them on par with national defence spending.

The recent rise in the yield curve, along with mounting debt, will push net interest outlays higher. There is no way to put lipstick on this pig.

Federal spending continues to rise relentlessly. CBO projections show total outlays exceeding US$11 trillion over the next 10 years, driven primarily by mandatory spending and rising interest costs.

CBO projections also show annual budget deficits widening from about US$1.8 trillion today to more than US$3 trillion towards the end of the 2030s.

The federal budget deficit is currently running at around 6% of GDP, a level more commonly associated with recessions than economic expansions. CBO projections suggest deficits will remain above 6% of GDP for years.

Federal debt held by the public is already near 100% of GDP and, according to the CBO, is projected to exceed 150% by the mid-2050s.

Importantly, today’s debt challenge is largely a government debt problem. Household and business debt relative to GDP remains well below its pre-GFC peak, while Treasury debt continues to trend higher.

The AI buildout could temporarily reverse that trend as businesses increase borrowing to fund AI-related investments.

According to BIS data, the US is not the only country with a government debt problem, but it is among the most indebted major developed economies. US government debt now exceeds 110% of GDP, above most peers and far above Germany.

At roughly 250% of GDP, US economy-wide leverage remains below that of France and Canada, but exceeds Italy, the UK and Germany.

China’s debt burden has risen relentlessly over the past two decades. Total debt now stands at roughly 300% of GDP, exceeding US levels and reflecting years of credit-fuelled growth, particularly in the property and infrastructure sectors.

The US remains on an unsustainable fiscal path. Should investors be worried? Again, we will worry about the deficit and rising debt when the Bond Vigilantes start worrying about them. For now, we don’t think we are there yet.

Treasury yields remain in a range broadly consistent with a healthy economy, and we expect the 10-year yield to remain between 4.00% and 5.00%.

Here are a couple of reasons that support this view:

(1) US Treasury Secretary Scott Bessent has taken some actions recently to stop bond yields from rising. He has stated that the Treasury can do much more if necessary. If the 10-year Treasury yield rises to 5.00%, we expect he will announce that the Treasury intends to issue more Treasury bills and use some of the proceeds to buy back Treasury bonds.

His predecessor, Janet Yellen, did that in 2023, and it worked.

Remember, Bessent worked with Stanley Druckenmiller for Soros Fund Management in the early 1990s. Together, they shorted the British pound in September 1992, netting the hedge fund over US$1 billion. They “broke the Bank of England.”

Bessent’s recent actions are a signal to his friends in the hedge fund community that he will break them if they short his bonds!

(2) Fed Chair Kevin Warsh has stated that the Fed is committed to restoring price stability. If inflation remains stubborn, the FOMC will probably raise the federal funds rate in September.

That should restore the Fed’s credibility as an inflation fighter and ease pressure on long-term yields.

We told the Fed to do that in July, but they just won’t listen.

Bond yields rocket to 2-decade high as global sell-off deepens, Nigel Green, deVere Group extract

Millions of investors are sitting on portfolios built for a world that seemingly no longer exists.

A broad gauge of global government bonds surged to 3.72%, its highest since mid-2008, with yields erupting in Japan, Australia and the US after Fed chairman Kevin Warsh’s hawkish Jackson Hole speech collided with a fresh spike in oil prices driven by escalating geopolitical tensions.

This is a two-decade high, and it’s moving fast enough to blow through mortgage rates, corporate loans and pension valuations before most people have even noticed it happened.

Japan’s 10-year yield smashed through levels unseen since 1996, while Australian debt spiked to heights last touched in 2011. The sheer breadth of the move is what should worry investors most.

When Tokyo, Canberra and Washington are all repricing debt at the same time, that’s a huge shift in what it costs governments and businesses to borrow anywhere in the world, not a coincidence.

Anyone still treating long-dated bonds as the safe, boring corner of their portfolio needs a serious rethink.

Gold tearing toward fresh record highs is telling its own story. Money doesn’t flood into gold like this unless investors are genuinely rattled.

But piling in after the surge has already happened is how people lock in the worst possible entry price. The moment to prepare was before the panic, not during it.

The selloff  is not necessarily proof the Fed is about to hike in September, as bond markets have a habit of sprinting ahead of the central banks they’re supposedly forecasting.

Yields have already done the Fed’s job for it without a single vote being cast.

Markets also love to overreact to one speech, and investors who tear up their entire strategy chasing that reaction can end up wrong on the call and wrong on the timing, which is the expensive way to be wrong twice.

Duration risk is the danger hiding in plain sight, and it’s brutal for anyone who ignores it.

Every extra year of maturity on a bond right now is an extra year of exposure to a market that’s clearly still finding its floor.

Shorter maturities, a wider geographic spread, and genuine diversification aren’t optional extras anymore, they’re the difference between weathering this and getting flattened by it.

Rising borrowing costs in Japan, the UK and the US, driven as much by government spending worries as by inflation, add fuel to an already volatile fire.

When bond markets start demanding a premium to lend a country money for the long haul, that’s a verdict on fiscal discipline as much as interest rates.

Portfolios tied to those markets can’t afford to sit on autopilot through a move this size.

Many savvy investors will be getting positioned for higher yields for longer, because this market isn’t going to wait for certainty from the Fed.

Corporate news in Australia:

• Imagine Education has agreed to acquire Eden Academy and dozens of childcare centres in a $250m expansion deal
• A BlackRock GIP-led consortium including Nvidia, Microsoft, MGX and IFM Investors has submitted a non-binding bid for Stack Infrastructure’s Asia-Pacific data centre portfolio, potentially valued at US$18bn-US$30bn
• Bellevue Gold ((BGL)) is reportedly considering a scrip merger with $1.7bn Catalyst Metals ((CYL)), while takeover speculation involving Regis Resources ((RRL)) has resurfaced
• Qube Holdings ((QUB)) could face competition from I Squared and Stonepeak for the circa $6bn sale of Pacific National
• Ramelius Resources ((RMS)) is reportedly interested in Northern Star Resources’ ((NST)) Carosue Dam gold mine, which could be worth around $800m, as activist investor Elliott pressures Northern Star over its portfolio
• Titomic ((TTT)) is seeking to raise $15m from investors following a sharp decline in its share price and weaker half-year revenue
• Firmus is reportedly targeting a $4bn ASX IPO at a valuation of around $15bn, with a prospectus expected in coming weeks

On the calendar today:

-NZ Jul Bldg permits

-NZ RBNZ rates

-AU 2Q GDP

-US Aug ADP employment

-US Fed Beige Book

-US July durable goods

-CA BoC rate decision

-AUSTRALIAN CLINICAL LABS LIMITED ((ACL)) ex-div 9.25c (100%)

-AUSTRALIAN ETHICAL INVESTMENT LIMITED ((AEF)) ex-div 10.00c (100%)

-DOWNER EDI LIMITED ((DOW)) ex-div 16.30c (100%)

-INTEGRATED RESEARCH LIMITED ((IRI)) ex-div 2.00c (100%)

-INTEGRATED RESEARCH LIMITED ((IRI)) ex-div 3.00c (100%)

-KAROON ENERGY LIMITED ((KAR)) ex-div 1.20c (100%)

-LIBERTY FINANCIAL GROUP LIMITED ((LFG)) ex-div 15.00c (65%)

-LIBERTY FINANCIAL GROUP LIMITED ((LFG)) ex-div 8.00c (65%)

-MERCURY NZ LIMITED ((MCY)) ex-div 14.13c

-MONADELPHOUS GROUP LIMITED ((MND)) ex-div 59.00c (100%)

-MEDIBANK PRIVATE LIMITED ((MPL)) ex-div 10.90c (100%)

-NEWMONT CORPORATION REGISTERED ((NEM)) ex-div 25.95c

-OBJECTIVE CORPORATION LIMITED ((OCL)) ex-div 8.00c (100%)

-ORIGIN ENERGY LIMITED ((ORG)) ex-div 30.00c (100%)

-PRIME FINANCIAL GROUP LIMITED ((PFG)) ex-div 0.92c (100%)

-PLS GROUP LIMITED ((PLS)) ex-div 5.00c (100%)

-STEADFAST GROUP LIMITED ((SDF)) ex-div 12.75c (100%)

-SEEK LIMITED ((SEK)) ex-div 25.00c (100%)

-SONIC HEALTHCARE LIMITED ((SHL)) ex-div 63.00c (60%)

-SHRIRO HOLDINGS LIMITED ((SHM)) ex-div 1.00c (100%)

-SHAVER SHOP GROUP LIMITED ((SSG)) ex-div 5.50c (100%)

-SOLVAR LIMITED ((SVR)) ex-div 2.50c (100%)

-SOLVAR LIMITED ((SVR)) ex-div 6.00c (100%)

-TRIBECA GLOBAL NATURAL RESOURCES LIMITED ((TGF)) ex-div 10.00c (100%)

-UNIVERSAL STORE HOLDINGS LIMITED ((UNI)) ex-div 17.00c (100%)

-WHITEHAVEN COAL LIMITED ((WHC)) ex-div 6.00c (100%)

-YANCOAL AUSTRALIA LIMITED ((YAL)) ex-div 7.00c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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