Yields Continue Ascent

MACRO FRAME

July’s inflation reports showed persistent underlying price pressures, reinforcing the case for a hawkish Fed stance, though the timing of any rate hike remains uncertain ahead of Wednesday’s meeting minutes.

STOCK INDEX FUTURES

Equity index futures were lower overnight, with the Nasdaq leading a risk-off pullback amid the expiry of the US-Iran ceasefire. Iran says negotiations on a permanent end to the war have stalled and that it is shifting to a “fully offensive” posture; the US has ruled out extending the temporary ceasefire, leading oil prices and Treasury yields to trade higher. A durable peace deal now looks less likely in the near term, keeping the risk premium elevated. On the corporate front, Home Depot’s results show consumers are still funding necessary, lower-ticket household projects, even as elevated rates and poor housing affordability discourage home transactions and larger remodels. The consumer heading into Q4 looks resilient but increasingly value-conscious.

Despite rising to a two-week high today, the VIX is near its lowest level of 2026, indicating unusually low demand for S&P 500 downside protection and reinforcing already-easy financial conditions. Importantly, the calm is not confined to AI-linked megacaps: equal-weighted and ex-mega-cap equity measures have also set highs, pointing to broader participation. Strong earnings and revenue growth have helped validate that optimism, although outsized margin gains in semiconductors and financials leave some room for potential downside. With few major catalysts this week, seasonal August thinness may be further suppressing realized and implied volatility; the July FOMC minutes are the key event before Nvidia earnings and Jackson Hole next week.

Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure amid the renewed fighting.

CURRENCIES

US DOLLAR: The USD index is little changed at 99.66. The overnight rise in oil prices and Treasury yields are offering the dollar some support alongside elevated risk premium from a lack of progress on the US-Iran front. The broad implication is that the dollar’s near-term weakness remains tied to Fed repricing, but renewed safe-haven flows from the Middle East are beginning to cap further downside. Last week’s data materially lowered market expectations for a September rate hike, weakening near-term support for the dollar, which fell below the 100 level and repeatedly failed to reclaim it. Still, while July’s inflation data saw traders push back expectations of a September rate hike, the reports did reveal that underlying inflationary pressures remained, which could be confirmed in Wednesday’s Fed minutes. As such, and given the lack of forward guidance from the Fed, a September rate hike remains firmly on the table.

Watch point: US inflation data shows underlying price pressures remaining firm, which does justify hawkish policymakers’ views that Fed policy should move upwards.

EURO: The euro is little changed at $1.1576 as markets await tomorrow’s Fed minutes and further developments in the middle east. PMI data for August from France, Germany and the eurozone on Friday will be the highlight in a quiet week of data for the bloc. Recent rises in energy prices and the stalemate between the US and Iran would appear to present risks for a drop in the headline PMI figure. Traders have continue to expect a September hike from the European Central Bank. That has narrowed the implicit year-end policy spread between the Fed and ECB in favor of the EUR. Money markets are pricing an 89% chance of a hike. ECB and Fed policy expectations will continue to play an outsized role in EUR price direction and currently favors the upside for the EUR in the near-term. Traders are pricing around 39 bps of further ECB tightening this year.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling fell lower to $1.3531 as data pointed to a broad cooling in hiring and wage pressure, modestly weighing on sterling and strengthening the case for the Bank of England to remain on hold despite markets still pricing some tightening by year-end. Unemployment held at 4.9% in the three months to June, vacancies dropped to 707,000, the lowest since 2021, and private-sector regular pay growth slowed to 2.8% YoY to mark the weakest pace since 2020. Taken together, the data suggest employers are becoming more cautious on hiring and pay. Still, markets remain priced in for a rate hike by year-end. For the BoE, the central question is whether energy costs create durable second-round effects in wages and services pricing. Today’s payroll data argue against that scenario for now.

JAPANESE YEN: The yen is little changed overnight at 159.65 yen per dollar. Traders are monitoring both the risk of renewed intervention and the BoJ’s next meeting. Failure to validate either of those expectations could renew pressure toward the 160 area. Q2 GDP figures missed expectations; Japan’s economy grew at an annualized 1.1% in April–June. The yen remains sensitive expectations over potential BoJ tightening and developments in the middle east, which will impact US yields and oil prices. The US–Japan intervention succeeded in curbing disorderly moves, but it has not changed the fundamental drivers of yen weakness, wide rate differentials, Japan’s imported-energy exposure and concerns over fiscal credibility. The burden now shifts to the BoJ: markets are pricing a 67% chance of a September hike after the July meeting revealed a more hawkish debate, but a failure to validate those expectations could renew pressure on the currency.

Watch point: With the recent intervention in the currency, the yen will need strong monetary policy support from the Bank of Japan to prevent further depreciation.

AUSTRALIAN DOLLAR: The Aussie is 0.13% higher at $0.7111. Ahead of Wednesday’s data on wage growth. a key figure given that inflation remains elevated. Thursday will hold employment data, where the unemployment rate is expected to rise modestly from its current 4.4%. Markets imply around a 51% chance of a hike in December and see 14 bps of tightening by year-end. The dovish element from the meeting came from the bank’s reference to falling house prices and weaker housing credit, which could potentially raise the bar for further tightening. Q3 inflation figures will serve an outsized role in determining whether or not the bank raises rates this year after second-quarter inflation came in below forecasts.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields are modestly higher across the curve but kept a narrow range overnight. The 30-year Treasury yield has risen to its highest level since 2007; the 10-year yield is around 4.74%. The selloff in long-duration government bonds is being driven by Brent holding around $91bbl and rising Iran-war escalation risk resulting in traders asking for more compensation for Treasury duration given large US financing needs and recent long-end auction sensitivity. Long-end rates are rising even as markets reduce odds of a September hike, signaling a higher inflation/term-premium regime rather than a simple higher Fed funds story. 30-year bonds were auctioned at the highest yield since 2001, as a worsening fiscal outlook, AI-driven corporate duration supply, are leading to a more price-sensitive buyer. Wednesday’s Fed minutes are likely to influence policy expectations, where views over underlying inflation trends will be closely watched. A Reuters poll surveying economists showed that Fed policy is expected to remain unchanged through year-end. However, against the US-Iran backdrop and oil prices about 25% above pre-war levels, markets are pricing in one hike by year-end. For Fed policy, without any forward guidance, the September decision will likely remain a close call. For yields, a tight range is expected to hold until Wednesday’s data, absent any major geopolitical developments.

Watch point: Mainly, the prospect that inflation will remain sticky reinforces a hawkish backdrop for the Fed over the medium-term, while Friday’s report has raised concerns that a slow labor market may be emerging.

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