Higher and Higher

0:00Bondy old still at multi year highs driven by inflation concerns driven by oil prices which are still rising and expectations for rate hikes from central banks and we know that the Fed will be doing that tomorrow morning but what happens after there will be a lot of focus on that because we still get the dots plot for now. It's Wednesday, it's the 16th of September, 2026 is the morning call from NAB. Good morning. Well, the US dollar is a quarter percent stronger this morning. The Aussie is down a little to 71.3 US cents. The big fall though has been in the yen which has fallen half a percent. Shares are down again and 0.8 percent falling in the Nasdaq half percent lower for the S&P. The Euro stocks 50 finished their session down 0.4 percent as did the FTSE 100 and the CAT current a little less for the DAX. Ten year bond yields are generally higher, one basis point for ten year treasuries, two or three basis points across Europe. Aussie ten years rose eight basis points yesterday to 5.41 percent. They are a bit higher than that now on futures this morning and oil, well it's not getting

1:04any better. A 2.8 percent rising Brent, upper and 109 a barrel, WTI is up by 4.3 percent and over 105 a barrel and Skymasters joins me today from NAB in Sydney so Aussie bond yields first off. They are rising quite a bit yesterday. I'm looking on futures, it looks like they're higher this morning. I'm not quite sure whether they are or not. But I mean when were they last this high? They seem to be just keep climbing. Yes, good morning Phil and you're correct. We saw a reasonable sell off in bond yields or Australian bond yields in yesterday's session so it's up at 5.54. No, no. Sorry, 5.42. Yeah, I go, you got to shop to a few people. I'll be reaching for their phones all of us at the show. No, I apologize for that. Shocking everyone, 5.42. It is that and your question in terms of when was it last at this level just looking at Bloomberg and history, back in when was it like 2010?

2:062009, we were back at these high levels. So I guess more of the same sort of themes, global yields are pushing higher. The move in Aussie rates, look we did underperform yesterday against treasuries. But the move in Aussie rates is in line with what we're seeing globally. As you've been talking about over the last couple of weeks, the big moves in, move high, move higher in bond yields as city investors sort of navigate what's going on in energy prices, what's going on in inflation and then the implications for central banks. And so as we know markets and economists have revised their outlook for central banks and now expecting rate hikes and this is all feeding through into bond yields. But if I look at price action overnight, so if I look at sort of what what what of the

3:06moves been since since the Sydney close, movements and bond yields have actually been fairly contained. We did see yields pushing higher early on in the session. You did see US 10 years touch 504, but they have come back. So US turns are currently at 5%. So down 2.3 basis points from Sydney's close and Aussie 10 year futures are down to down around prices are up around the same amount. So yields are down around two basis points as well. So that at 5.04 is the highest yield they've had for 10 year treasury since 2007. So we sort of like you know, things that are happening now that are happening that haven't happened for a long time. But it is all because it's a busy week, presumably for central banks. So we've got the Fed, we've got the bank of England, we've got the Bosch all this week. But the Fed tonight, obviously the number one concern, but we know, I mean, over 90% chance of a hike, it's the then what question is that?

4:06Yeah, exactly. Phil, the market has very much shifted its expectations for the FMC this week. So in terms of the OIS curve, it's pricing a 94% chance of a hike of 25 base point rate hike, economists a little bit more split than the market. But there is a consensus few amongst the economic community that the Fed will also tighten policy tonight. So really, if they do deliver that, I mean, wild moves if they don't, but if they do deliver that rate hike, I think really what the focus is is on their statement. You know, were there any dissenters? What were the main reasons behind why they they tightened policy? What does the dot plot point tell us? Possibly that's going to go next year, but for now the dot plot is still there. So what does that tell us in terms of the outlook?

5:08Are the Fed members still pointing to rate cuts in 2027 or not? So these are things that investors are going to be looking at to try and firm up the pricing past this week's meeting. So for now, the OIS curve is pricing the funds rate to be peaked around 450 by the middle of 2027. So the market is pricing in several rate hikes from the Fed. So we'll be wanting some confirmation from the commentary that that's on the card. So Japan's yields reached 3.04%. That's a lot less than anywhere else it seems. But still, this is the higher since 1996. And if you want to have a feel for how long ago that was Bill Clinton was just getting into his second term, the spice girls were just becoming a thing. Google was just starting to index the web as a search engine. Dolly the sheep was cloned and Charles and Die separated.

6:09That's the last time Japanese 10 year bonds were this high. And did I help you on this? No, a little bit maybe. But yeah, they were this high because there's a Bloomberg report that Japan is considering uping its defense spending. So here they are worried about spending anyway, and lack of capacity in the economy. But here they are. 3.5% is what they want to do for their defense spending up from 1.9% of GDP. So in other words, more spending, more bonds. That's driven this impact. Yes, it has. They're up there, not just because of that announcement. Obviously, JGB yields have been pushing higher for some time now, on expectations of tightening a policy, but also on the fiscal backdrop what's going on globally. But you're correct. Yesterday, 10 year JGBs or JGBs did push higher in yield. 10 year JGBs are up around five basis points.

7:11And it was off the back of that Bloomberg report that said that Japan, as you've said, was considering a new medium term defense spending target of 3.5% of GDP. So that would be up from 1.9%. So now that would put it in line with NATO and other US allies. So maybe there has been expectation that that would happen. But obviously, what investors are looking at is sort of well, the implications of that. Where are they going to get the money from that? It's going to put pressure on the budget position. It's probably going to mean more JGB issuance in a world where sovereign bond yields in a glut. So similar themes that we're seeing globally in terms of pressure in longer data bond yields, sovereign bond yields. And China's data yesterday, retail sales for August, moved slower than expected, just 0.4% growth. That year and year, not for the month, falling from 0.6% for the year to July. Their unemployment rate ticked up a little bit, fixed asset investment, falling 7.2% year and year.

8:17So which is also a deterioration on the month before house prices down 3% and the idea of any significant stimulus still seems off the agenda. So yeah, disappointing story for China doesn't seem to be any resolution to it either. You correct, it was some disappointing data coming out on the on the consumer from China. So a soft consumer, but ongoing strong industrial production. As Pantheon wrote in their post data report, they said China's below power, lopsided growth pattern continued in August with robust export demand, propping up industrial output despite soft domestic consumption and extended slump in fixed asset investment. So yeah, on the consumption side, it was weak, but not as weak as a headline print suggested. So the weakness in retail sales seems to be in three key areas. It's coming from areas where subsidies have brought demand forward.

9:18So eG home appliances, it's being seen in the property related sector. And it's also being seen in gold and silver sales, but elsewhere demand appears to be OK. So maybe soft, but maybe not as soft as the headline print suggested. As you said, fixed asset investment remains quite soft. And the decline in the month was across three main sectors, manufacturing infrastructure and property. And obviously driving that weakness, it's stuff that we've talked about before, but it sort of remains the excess capacity due to early stimulus policies. And then also very, very weak demand. But on a positive sense, the industrial production report came in sort of stronger than expected. Manufacturing sector remains quite robust. And it's being supported by exports. And on that front, it's your high tech, which is posting double digit growth. So that's obviously being driven by the AI boom, but it's also being driven by strong,

10:20sort of EV vehicle sales. So a bit mixed there, but obviously the focus is sort of well, will they provide further targeted growth support in the form of fiscal policy? So wait and see on that front. So the UK unemployment rate was expected. It might tick up a little bit yesterday, but it didn't. It stuck at 4.9 percent, although the claimant can't increase a little bit. Average earnings for July rose by 3.5 percent, which was the same as last time. And it was as expected. So no big surprises in that. Interestingly, we don't actually know what the Bank of England's going to do this week. We're expecting the Bosch will lift rates, almost certainly the Fed will. The Bank of England, well, it's only 25 percent priced in at this stage, I think. Yes. So the, as you said, the markets not as convinced that the BLE will go this week. So I've got it at around 23 percent priced. I think tonight's CPI, I think it's tonight's CPI print, will be more in focus in terms of what it means for the BLE.

11:23Probably not for this week's meeting, but going forward. But so, I don't think the UK Labor market data, it obviously didn't shift the dial in terms of expectations for the BLE. It didn't shift anything, did it really? Because it didn't really move very much. No, no, no. No, it didn't. But we also had US Empire Manufacturing report out overnight. Now, that was weak. It was. It was, no, it came in at 7.6. So down from 20.6 and quite a bit below expectations, the consensus had settled around an index level of 14.6. So big move there, but I think we need to remember that this print has actually been quite volatile on a month-to-month basis. So I'm reading that, you know, you're better off looking at your three-month moving average and on that basis, the index level is at its highest level since February, 2022. So, you know, I think on a broader perspective, that's sort of pointing

12:30to a manufacturing sector that is still doing okay within the detail, employment and capex intentions. They were down, but only monocely and they both remain above their 12-month average. So an OK report, I think what is worth looking at, and I've noticed that the FT has an article on it, is the cost pressures that the manufacturing sector is feeling at the moment. Yeah. So the report... Because they are expecting it to rise. That price has paid, as you say, the higher-since July 2022, 26 years after Charles and Diet got divorced. That is said, that they are expecting the prices are going to rise even more. I mean, that's what the survey is saying. Yes. So the price has paid index. It rose from 58.6 to 63.1 in September. So that push, cost pressure pushes is continuing. And so, you know, the concern here is, is, you know, how strong is the economy consumer can, can businesses pass those increased cost pressures onto

13:35the consumer? And then, you know, if they do, obviously that keeps inflation sticky and above target. And this is a similar theme that we saw in the Nav Business Survey that came out last week that businesses are feeling the pressure in terms of costs, costs continue to rise. But in Australia's context, they're not necessarily yet pushing all of that onto the consumer, but that's concern. Yeah. They'll want to, at some point, won't they? When I'm trying to claim some of that back. So we get US retail sales today, the NAHB housing market survey. And yes, the Fed's Funds rate, which we've talked about expected to rise to 4%. All eyes are going to be on that. We will talk about that first thing tomorrow morning. Excellent. Thank you, Phil. And we will be talking there, Fed with Gavin Friend from Nav in London tomorrow morning. So join us for that. I'm Phil W. ForNAHB. I'll see you then.