• Bond yields. Bonds still in the driver’s seat. Worries about government debt widen spreads across Europe. EUR lower, USD higher. AUD still on backfoot.
• Data pulse. US ISM in ‘expansionary’ territory. Eurozone CPI & US jobs report due tonight. More volatility in interest rate expectations & FX likely.
Global Trends
Gyrations in global bond markets continue to be front of mind for investors. Bond yields were volatile overnight and this flowed through to other asset classes. The combination of inflation pressures (brent crude rose ~5.2% to US$103/brl), central bank rate hike expectations, greater government bond supply due to high/rising debt, and ‘crowding out’ because of increased debt issuance by tech firms to fund AI-related CAPEX spending are factors at play. In the US, the 10yr rate touched a fresh 24-year high near ~5.34% before retracing. The UK 30yr yield traded north of 6% for the first time since 1998, Japan’s 10yr yield is up around mid-1990’s levels (now ~3.13%), and the Australian 10yr (now ~5.40%) is at a ~15-year peak. In Europe, worries about relative fiscal positions and the trajectory of government debt is causing sharper moves in a few nations with the spread between the France 10yr and Germany 10yr widening to ~140bps, a region last traded in 2012 (see chart). Concerns about fiscal risks across the region weighed on European bank stocks, broader equity markets, and the EUR (now ~$1.1242, lowest since May 2025).
Elsewhere, US equities whipped around but ended the day in slightly positive territory (S&P500 +0.2%). In FX, the USD index strengthened with the weaker EUR compounded by a dip in GBP (now ~$1.3194, the bottom end of its year-to-date range) and uptick in USD/JPY (now ~158.07). Cyclical currencies such as the NZD (now ~$0.5607, a low since last November) and AUD (now ~$0.6930, mid-July levels) remain on the backfoot. In addition to the bond market pressures the USD was also supported by more solid US data. The ISM manufacturing survey held up in ‘expansionary’ territory with hiring intentions and new orders improving, and prices paid (a gauge of the inflation pulse) increasing.
We believe the Eurozone government debt nervousness might continue for a while and may broaden out further across the region. But as has happened a few times before, if spreads widen too far and/or create worries about the economic outlook the ECB could step in to cap yields and/or narrow spreads. They have intervened repeatedly over the years and as recently as 2022 for Italy and Spain. Indeed, back then the ECB introduced a new policy tool, the Transmission Protection Instrument, to normalize this type of action if required going forward. Macro-wise, Eurozone CPI is out tonight (7pm AEST), as is the monthly US jobs report (10:30pm AEST). Based on the resilience of the US economy over recent months we see a chance the US employment data exceeds predictions of softer momentum in September. If realised, this could bolster views the Fed has more work to do. We remain of the opinion that the outlook for further US Fed policy tightening, elevated oil prices (given the US’ status as a ‘net energy exporter’), and shaky risk sentiment can continue to underpin the USD over the near-term.
Trans-Tasman Zone
Swings in global bond yields and shaky risk sentiment, coupled with a firmer USD exerted more downward pressure on the NZD and AUD overnight (see above). At ~$0.5607 the NZD is around its lowest since November 2025 with elevated oil prices and NZ’s status as a ‘net energy importer’ also weighing on the currency. The AUD (now ~$0.6930) is back at mid-July levels, ~4.3% from its early-September high. However, the AUD has been a bit more mixed on the cross-rates over the past 24hrs with gains against EUR (+0.6% to ~0.6165), JPY (+0.2%), GBP (+0.3%), and NZD (+0.2% to ~1.2358) coming through, and modest falls versus the CAD (-0.3%) and CNH (-0.1%) recorded.
The Australian economic calendar is limited until the next employment report is released in mid-October. Hence, global forces are likely to remain in the driver’s seat over the period ahead. As discussed above, the macro focal point for markets is tonight’s US jobs report (10:30pm AEST). We see a risk the data comes in stronger than predicted which if realised could give the USD more support (and drag down the AUD a little further). As could more gyrations in global bond markets and/or a further bout of risk aversion.
As mentioned before, the strong support for the AUD generated by the series of RBA rate rises earlier in the year is behind us. FX is a relative price and other central banks are now on the move, and arguably have more work to do than the RBA from here. Markets are factoring in another ~31bps of RBA rate hikes by next June, while over the same period the US Fed is expected to deliver ~73bps of tightening, the ECB is predicted to raise rates by ~62bps, and the RBNZ is projected to lift its policy rate by ~98bps. As stressed, a higher RBA cash rate should translate to a higher average level in the AUD compared a few years ago (i.e. AUD averaged ~$0.6525 over 2024/25), but it does not equate to more AUD upside given yield spreads look to have peaked and are starting to shift the other way. We also think the more worrisome domestic economic environment created by higher interest rates, government tax changes, and elevated fuel costs, combined with fragile risk sentiment and a firmer USD are headwinds for the AUD.
