Category: Banks & Interest Rates

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Australia’s biggest recession risk isn’t interest rates | Macrobusiness

By: Leith van Onselen | MacroBusiness | 28 September 2026
Re-published with permission.

The interest rate futures market overwhelmingly expects the Reserve Bank of Australia (RBA) to lift the official cash rate by 0.25% on Tuesday.

The futures market has also priced in a high probability of two further rate hikes over the next six months, which would take the cash rate to 5.10%.

Given that mortgage payments are already taking a near-record share of household income, the prospect of two to three rate hikes has economists warning that the economy could be pushed into a technical recession next year.

While the prospect of rate hikes is indeed worrying, it is not the greatest threat to the Australian economy: fuel shortages, particularly diesel, are.

As illustrated below by Alex Joiner from IFM Investors, Australia is easily the largest importer of diesel fuel in the world:

Global diesel imports

“Australia is uniquely exposed to this diesel price shock given our reliance on imported product, which is by far the highest in the world, not as a % of GDP or per capita but outright”, Joiner wrote on X (Twitter).

“This comes as other countries have scaled back imports and Australia’s have accelerated due in part to refinery closures”.

To add further insult to injury, Sky UK posted the following chart showing that Australia has very low stocks of diesel in reserve:

Diesel stocks in reserve



Source: Sky UK

Thus, with the two straits in the Middle East effectively shut and oil flows ceasing, Australia is the most exposed economy on earth to diesel shortages.

The following chart from CBA shows what a 10% reduction in diesel supply would mean to key sectors of the Australian economy – namely mining, construction, transport, and agriculture:

Diesel fuel shortages

The economic impact would be enormous, effectively shutting down large swathes of the economy. Unemployment would also rise materially.

Even if shortages are avoided, the economy faces severe energy cost inflation, resulting in significant cost-push inflation as firms pass on higher costs.

Diesel Price Forecasts



Diesel Price Forecasts (Source: Global Energy Flow)

As a result, overall CPI inflation would rise, increasing pressure on the RBA to hike further.

Higher interest rates alongside rising unemployment would exacerbate the housing downturn, impacting consumption (via the wealth effect) and industries reliant on turnover (e.g., state budgets via stamp duty, real estate agents, mortgage brokers, banks, and retailers).

Indeed, HSBC has forecast a 13% peak-to-trough decline in capital city home values, alongside a 1% reduction in GDP growth, due to slower consumer spending and reduced housing turnover.

Thus, rising fuel prices and/or shortages, higher interest rates, and an accelerating housing downturn have left Australia’s economy facing a technical recession in 2027, alongside a deep per capita recession.

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RBA Hikes, ASX 200 Rallies

Key Points

  • The RBA hiked its cash rate target by 25 basis points to 4.6% today.
  • Monthly CPI jumped to 4.0% in August, up from 3.5% in July.
  • A further rate hike is expected at the next RBA meeting.
  • The ASX 200 rallied to test resistance at 8800.

The RBA has grown more hawkish since its last meeting, spurred by a sharp rise in diesel and petrol prices that threaten to feed through into higher prices.

RBA Cash Rate Target

The average diesel retail price increased to 286.7 cents last week, with the wholesale price rising to 273.5 cents per liter.

Australian Diesel Price

CPI jumped to 4.0% in August from 3.5% in July, while the trimmed mean held steady at 3.6%.

Australian CPI & Trimmed Mean CPI

Tradables inflation (2.9%), reflecting prices for imported goods, rose sharply on higher fuel prices. Non-tradables (4.5%) reflect strong domestic inflation for services such as rent and education.

Australian CPI: Tradables & Non-Tradables

Annual inflation of 5.7 per cent for Housing reflected rising costs for both New dwellings and Electricity. New dwelling prices rose 5.4 per cent in the 12 months to August as builders passed on higher costs for materials and labour.

Transport was the second largest contributor to annual inflation in August, rising by 5.6 per cent due to higher automotive fuel prices.

On a monthly basis, Automotive fuel prices rose 14.8 per cent in August, compared to a rise of 7.5 per cent in July. This was driven by higher world oil prices and the unwinding of the remainder of the federal governments fuel excise relief measures in August. (ABS)

Nominal GDP slowed slightly to 5.3% for the June quarter.

Australian Nominal GDP Growth

Australian bond yields, at 4.95% for the 2-year and 5.25% for the 10-year, closely shadow nominal GDP growth, indicating the RBA is maintaining neutral monetary policy.

Australian Government Bond Yields

However, private credit is still growing at an annual rate of 8.4%, well above NGDP growth, suggesting that further tightening is necessary.

Australia: Credit and Broad Money Growth

Westpac Chief Economist Luci Ellis says “the bar for a November rate hike is very low” and she now expects a further hike to 4.85%.

The ASX 200 shrugged off the rate hike, rallying to test resistance at 8800.

ASX 200 Index

Conclusion

The cure for high prices is high prices. Credit growth will likely fall if the 2-year AGB yield rises above nominal GDP growth.

Diesel shortages in the coming months could do far more damage than a rate hike.

Acknowledgments

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Something Has to Break

Key Points

  • The S&P Global US Composite flash PMI shot up to 58.4% for September.
  • 10-year Treasury yields jumped to 5.114%.
  • We expect 10-year yields to climb higher, causing a correction in stocks.
  • The S&P 500 retreated, heading for a test of support between 7500 and 7600.

The S&P Global US Composite flash PMI shot up to 58.4%, the fourth consecutive month of accelerating growth and the strongest expansion in private-sector activity since July 2021.

S&P Global Composite PMI

The move was echoed by a healthy rise in the European Union’s equivalent flash PMI to 53.1%.

S&P Global Composite PMI

The surge in economic activity boosted market expectations of further Fed rate hikes, with the 2-year Treasury yield jumping to 4.876% compared to the current Fed funds target range of 3.75% – 4.00%.

2-Year Treasury Yield

The 10-year yield broke through resistance at 5.0%, closing at 5.114%, the highest level in more than 20 years. We expect a retracement to test the new support level, but respect will likely confirm another advance. Our medium-term target is 6.0%.

10-Year Treasury Yield

The S&P 500 retreated to 7700 and is headed for a test of support between 7500 and 7600. A breach would signal a correction to test primary support at 7300.

S&P 500

The Outlook for Treasuries

The spread between the 10-year and 2-year Treasury yields is shrinking as in previous Fed rate-hiking cycles (red arrows below). A dip below zero typically precedes a recession. The dip below zero from 2022-2024 was an exception, caused by the unprecedented scale of fiscal and monetary stimulus during the pandemic.

10-Year Treasury Yield minus 2-Year Yield

The Atlanta Fed’s GDPNow model projects real GDP growth of 5.1% in the third quarter, a 3.6% increase from Q2.

Atlanta Fed GDPNow

Even without an increase in the GDP deflator, driven by rising energy prices, we expect nominal GDP to jump from an annual rate of 6.6% in Q2 to more than 10.0% in Q3.

10-Year Treasury Yield & Nominal GDP Growth

The strong divergence between nominal GDP and the 10-year Treasury yield would provide further stimulus to an already overheating economy, causing a sharp increase in inflation.

Conclusion

The Fed is trapped in an inflationary boom that will likely drive long-term yields much higher than 5.0%. Rising interest rates will increase the interest cost on the US Treasury’s $40 trillion debt, expanding the budget deficit above $2.0 trillion.

The Fed is constrained by its swollen balance sheet and will likely resist further QE to suppress long-term interest rates and assist the US Treasury.

Surging economic activity, compounded by crude oil and diesel supply shortages, is also expected to drive a sharp increase in inflation, adding to the Fed’s challenges.

Something has to break, and we are adopting a highly defensive posture, heavily overweight in Gold, short-term financial instruments, and defensive stocks with strong pricing power and stable income streams.

Acknowledgments

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Warsh Hikes While Trump Fumes

Key Points

  • The FOMC voted unanimously to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.
  • President Trump criticized the FOMC decision, demanding that the Fed slash interest rates to “1% or less” on Truth Social.
  • Backing a rate hike was a politically brave move by the new Fed Chair, Kevin Warsh, as it will likely sour his relationship with the President.
  • The Fed hike likely avoided a sharp spike in long-term Treasury yields as the bond market was growing restless over loose monetary and fiscal policy.

Fed Chair Kevin Warsh cemented his reputation as an inflation hawk, voting in support of a unanimous FOMC decision to hike the Fed funds rate by 25 basis points to a target range of 3.75% to 4.00%.

President Trump condemned the move, demanding on Truth Social that the Fed slash interest rates to “1% or less.”

“We are ‘carrying’ almost every country in the World, and that cannot go on any longer,” Trump wrote in a Truth Social post.

“LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!” he wrote. (CNBC)

Updated dot plot projections show a strong majority of Fed officials expect another rate hike this year. Warsh did not submit a projection, but 16 of 18 participants expected at least one more rate hike in 2026, of which 4 projected 2 hikes.

FOMC Dot Plot

The 2-year Treasury yield climbed to 4.73%, pricing in 3 further rate hikes.

2-Year Treasury Yield (CNBC)

10-year Treasury yields held firm at 5.0%.

10-Year Treasury Yield

A failure of the Fed to act would likely have caused a bond sell-off, with the 10-year yield spiking upwards, reflecting bond market disappointment with perceived lax monetary and fiscal policy.

Long-term yields will likely still rise, but at a more measured pace than if the Fed’s commitment to stable prices were in doubt.

The Fed Chair gave three factors that are driving long-term yields higher:

  1. The economy is strengthening and at close to full employment;
  2. Increased competition for capital as AI hyperscalers seek to fund capital spending; and
  3. Geopolitical instability.

He did not mention lax fiscal policy, with $40 trillion of federal debt and annual deficits approaching $2 trillion a year, which we consider a fourth factor driving higher yields.

Conclusion

We may have misread the new Fed Chair as a “political animal.” He has delivered on his commitment to fight inflation despite opposition from President Trump. In doing so, he has likely placated the bond market, which was driving long-term yields higher. We still expect long-term rates to rise, but at a more measured pace.

“The era of free money is definitely over,” Kim Crawford, fixed-income portfolio manager at JPMorgan Asset Management, told the Financial Times today. “The bond market is looking for discipline.”

We expect further rate hikes if the economy continues to grow faster than existing capacity allows, fueling increased inflationary pressure.

Credit growth above 4.0% is not consistent with low inflation. A 4.0% target would be consistent with the 2.3% projected real GDP growth and 1.7% inflation (below the Fed’s 2.0% target).

Bank Credit Growth

Acknowledgments

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Fed’s Warsh Hawkish But Won’t Hike

Key Points

  • Fed Chair Kevin Warsh’s keynote speech at Jackson Hole had a distinct hawkish tone.
  • Financial markets responded with a sharp jump in the 2-year Treasury yield to 4.36%.
  • However, Warsh’s hands are tied by political considerations, and no rate hike is likely.

We are convinced that the FOMC will not hike rates at its September meeting despite the Fed Chair’s hawkish speech at Jackson Hole on Friday, August 28.

The new Fed Chair set a hawkish tone in his keynote address to the Fed’s Jackson Hole economic symposium in Wyoming.

“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,” Warsh said.

….”The Fed’s predominant focus right now should be on prices.”

The 2-year Treasury yield jumped by 9 basis points within 20 minutes of Warsh’s speech and ended Friday up 13 basis points at 4.36%, more than 60 basis points above the Fed’s current target range of 3.5-3.75%.

2-Year Treasury Yield (CNBC)

However, Warsh is unlikely to support a rate hike before the November midterms because of the political implications.

Warsh has strong Republican credentials, having served in President George W. Bush’s White House and as the youngest board member in the Federal Reserve’s history. He has also spoken about the importance of free trade, the Fed’s political independence, and a strong Dollar — views that could lead to conflict with the current President. However, he has close links with Treasury Secretary Scott Bessent, having worked as partners at Stan Druckenmiller’s Duquesne Capital. He also has strong MAGA ties through his father-in-law, Ronald Lauder, son of Estee Lauder, who is a decades-long friend and ally of Donald Trump.

One of Warsh’s two appointees at the Fed is Paul Winfree, who authored the chapter on the Federal Reserve in the Project 2025 blueprint. The other is Daniel Heil, a fellow at Stanford’s conservative Hoover Institution, where Warsh served before joining the Fed.

Warsh enjoys the trust of President Trump, who regularly consults him on economic matters. A far stretch from the strained relationship with his predecessor, Jerome Powell, whom Trump did his best to undermine, including having him investigated by the Justice Department.

President Trump has a long history of turning on his political allies if they do not do his bidding. He repeatedly criticized his earlier appointee, Fed Chair Powell, for not lowering interest rates, going so far as to suggest that Powell was a bigger threat to the United States than Chinese President Xi Jinping. Powell insisted that the Fed made decisions based on data without regard to politics, but that did not seem to placate the President. The Fed then cut rates in September 2024, two months before the last presidential election, which seems to have convinced Trump that Powell was politically motivated.

We believe that Kevin Warsh is politically astute, having won nomination as Fed Chair despite his old-school Republican values. As a recent Trump appointee, presiding over a Fed that hikes rates two months before the upcoming midterm elections would likely be taken by the President as a betrayal of his trust. It would invite similar persecution to what his predecessor faced. That would be politically stupid.

Conclusion

The new Fed Chair is unlikely to convince President Trump of the need to hike rates ahead of the November midterm, and is unlikely to support such a move without his assent.

The President will not want to upset his predominantly blue-collar MAGA base, especially after the Iran debacle, when he needs a strong turnout in the November midterms. Your typical MAGA voter is not that sophisticated and is unlikely to be persuaded by arguments that higher interest rates will reduce inflation in 12 months’ time, but will instead be incensed by an increase in interest payments on their car loan and credit card.

This is kitchen table economics. That is what is driving Fed monetary policy.

Acknowledgments

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Australian CPI Sticky But No Rate Hike

Key Points

  • Australian CPI remains stubbornly high, with a 1.0% monthly increase in July.
  • Trimmed mean CPI was unchanged at 3.6% on a year-on-year basis.
  • However, the unemployment rate rose to 4.5% in July, suggesting the RBA is unlikely to raise rates.

Australian CPI remains stubbornly high, with the Trimmed Mean, the RBA’s favored measure, holding firm at 3.6% for the 12 months to July.

Australian CPI & Trimmed Mean CPI

Headline CPI eased to 3.5% for the 12 months, but that reflects base effects from the 1.3% increase in July last year compared to a jump of 1.0% in July 2026.

Australian CPI - Monthly & Annual

Strong CPI in July increases the motivation for another RBA rate hike, but Justin Smirk at Westpac points out that the labor market is softening.

Unemployment rose to 4.5% in July, up from 4.4% in June.

Australia: Unemployment

Monthly hours worked declined by 12.5 million hours in July to 1,998 million hours in seasonally adjusted terms, a monthly fall of 0.6%.

Australia: Aggregate Monthly Hours Worked

Conclusion

We agree with Westpac that the RBA is unlikely to raise rates:

Market services inflation is above target but a softer than expected labour market and wage outcomes reduce the likelihood of a November rate hike. We believe the RBA is likely to remain on hold for the remainder of this year.

However, credit is growing at an annual rate of 8.5% and broad money supply at 8.0%. Real GDP growth of 2.5% for the 12 months to March 2026 suggests that underlying inflation is between 5.5% and 6.0% (the spread between the two measures and growth in output/GDP).

Australia: Credit and Broad Money Growth

Our calculation of underlying inflation is more than 1.0% higher than the RBA’s current cash rate target of 4.35%.

We will likely be stuck with high inflation for a while.

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ~ Milton Friedman

Acknowledgments

Notes

  1. Credit and money supply represent two sides of the same coin: bank lending and bank deposits. They only tend to diverge when the RBA injects liquidity to rescue the economy from a deflationary spiral, as in 2008, 2010-2013, and 2020.
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4 Key Takeaways for the Week

Key Points

  • Long-term Treasury yields climbed after the Fed kept rates unchanged.
  • The Japanese Yen is weakening as the Bank of Japan slow walks rate hikes.
  • Gold absorbs selling pressure as long-term rates rise.
  • China’s economy is slowing.

Treasury Market

The bond market has been anticipating a rate hike. This has been signaled since the 2-year Treasury yield broke above the Fed funds target range in March 2026.

2-Year Treasury Yield & Fed Funds Target (Upper Limit)

The FOMC voted to keep the Fed funds rate unchanged, with a target range of 3.5% to 3.75%. There were 3 dissenting votes, calling for a rate hike. The new Fed Chair, Kevin Warsh, is encouraging opposing views, and we can expect more dissent in the future. Warsh has also avoided forward guidance, which is likely to increase volatility in the bond market and consequently the term premium.

10-year Treasury yields climbed to 4.745% on Friday, reflecting market concern that the FOMC is not taking a more hawkish stance on inflation.

10-Year Treasury Yield

GDP grew at 6.5% over the 12 months to June, suggesting that the 10-year yield needs to rise by at least 175 basis points if the Fed is serious about containing inflation. Long-term interest rates below nominal GDP growth (the rate of return on new capital investment) encourage rapid credit growth, with demand expanding faster than output.

10-Year Treasury Yield & Nominal GDP Growth

Japan & the Sovereign Bond Market

Japan’s GDP grew by 3.6% over the 12 months to March 2026. The 10-year JGB yield is 2.8%, indicating that monetary policy remains stimulative, but less so than the US.

10-Year Treasury Yield & Nominal GDP Growth

The Bank of Japan kept its policy rate at 1.0% at last week’s meeting despite an upturn in CPI to 1.7%. The weakening Yen drives higher inflation.

Japanese CPI Inflation

The low BOJ policy rate and ongoing bond purchases aimed at suppressing long-term JGB yields undermine the currency. The Yen has steadily weakened, breaking above 160 against the Dollar in June 2026 to reach its highest level in 39 years. Japan’s Ministry of Finance intervened on Thursday to support the Yen, driving the exchange rate to 157 against the Dollar. However, the effect of these MoF interventions is short-lived because of BoJ policy.

Japanese Yen

Rising long-term yields in sovereign bond markets reflect growing concern over sovereign debt levels and the risk of fiscal dominance. When central bank policy is dominated by government bond markets’ need for support, with lower interest rates prioritized above containing inflation, the currency’s purchasing power is eroded, as in Japan.

The US 30-year Treasury yield has climbed to 5.275%, reflecting concerns over currency debasement.

30-Year Treasury Yield

The Japanese JGB yield is lower at 3.98%, but this reflects sizable ongoing QE by the Bank of Japan aimed at suppressing long-term rates.

30-Year JGB Yield

The Bank of Japan has higher debt levels relative to GDP than the UK and should theoretically trade at a higher yield. The difference in the 30-year Gilt yield lies in central bank monetary policy: the Bank of England is steadily shrinking its balance sheet, while the BoJ is actively buying JGBs in the secondary market to suppress yields.

30-Year UK Gilts Yield

Dollar & Gold

Rising short-term yields are strengthening the Dollar, with the 1-Year Treasury yield gaining more than 50 basis points in the last 6 months.

1-Year Treasury Yield (CNBC)

Gold has softened considerably from its peak of $5,500 per ounce and has been testing primary support at $4,000 over the past 8 weeks.

Spot Gold

Gold ETF inflows slowed in the first half of 2026 but remained positive, driven by continued inflows into Asian funds. North America experienced an outflow of $7.7 billion, European inflows slowed to $3.2 billion, while Asia recorded a strong inflow of $12 billion.

Gold ETF Flows

Average daily trading volumes surged to a record $488 billion in the first half of 2026.

Gold Average Daily Trading Volumes

OTC trading, led by the LBMA, averaged US$249bn/day, substantially above 2025 levels and underscoring the depth of institutional participation. Exchange-traded volumes also jumped, reaching US$227bn/day – 22% higher than the 2025 average – supported by elevated investor activity. Meanwhile, global Gold ETF trading averaged US$12bn/day – up 73% from 2025 – fueled primarily by robust trading in US funds as investors increasingly turned to Gold amid heightened macroeconomic and geopolitical uncertainty.

Comex futures net longs increased to 538 tonnes, up 16% since May, and the highest month-end level since January despite a weakening gold price. A closer look shows retail participation (non-reportable net longs declined in June, while other reportables, which capture large trades outside the managed money category, were up 16% from May. Managed money net longs remained broadly stable, declining by just 43 tonnes year-to-date. Again, H1 investor behavior differed: retail positioning largely tracked short-term price movements while larger traders’ positions have, in general, stayed stable since mid-March. (WGC)

Comex contracts standing for delivery jumped to 13,123 in July from 8,838 in May, and a 9.0% increase over July last year.

Spot Gold

China

The Chinese NBS Manufacturing PMI fell to 49.2 in July, down sharply from 50.3 in June. Values below 50 indicate a contraction in the manufacturing sector.

China: NBS Manufacturing PMI

The OECD Composite Leading Indicator for China fell to 98.6 in June, below its long-term average of 100, signaling a contraction.

OECD: China Composite Leading Indicator

The RBA’s activity indicators for China show industrial production is holding up, boosted by record exports. However, real retail sales growth has stalled, while fixed asset investment has contracted sharply following Trump’s tariff blitz last year.

OECD: China Activity Indicators

Household credit growth (purple below) has also stalled. Business credit has taken up the slack, but government credit growth is also contracting.

OECD: China Total Social Financing

Conclusion

10-year US Treasury yields jumped to 4.745% after the Fed kept its funds target range at 3.5%-3.75%, reflecting bond market concerns over inflation.

The new Fed Chair’s strategy is to keep short-term rates low and allow long-term rates to rise, to slow the rate of demand growth in the economy and curb inflation. However, nominal GDP is growing at an annual rate of 6.5%, which means that 10-year Treasury yields would need to rise by 175 basis points to keep inflation in check. An increase to 6.5% would likely cause a sharp contraction in stocks.

Japan’s Ministry of Finance has intervened to support the Yen. However, the effects will likely be short-lived, as the Bank of Japan continues to maintain stimulative monetary policy, which fuels inflation and undermines the currency.

Rising long-term sovereign debt yields reflect bond market concerns over rising sovereign debt and the risk of fiscal dominance, as in Japan, where the central bank has prioritized maintaining an orderly bond market above price stability. Erosion of the currency purchasing power is the inevitable outcome.

Gold has found strong support at $4,000 per ounce, with long-term investors prepared to wait out the turmoil in the Middle East. Demand from Asian investors has been particularly strong, but could be undermined if China goes into recession.

China’s economy shows increasing signs of contraction, precipitated by a decline in business investment following President Trump’s 2025 tariff attack. Household credit and real retail sales have stalled, and the NBS Manufacturing PMI fell to 49.2, signaling a contraction. Higher fuel prices would be an added headwind that could tip the economy into recession.

Acknowledgments

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Brent Flat, Bitcoin & Gold Sink Again

Key Points

  • Brent Crude tests support at $70 per barrel.
  • Gold tests support at $4,000 per ounce.
  • The Dow closes at a new high.
  • Bitcoin breaches support at 60,000, signaling risk-off across financial markets.

Brent Crude prices remain flat at close to $70 per barrel despite on-again/off-again peace talks.

Brent Crude

We are entering the summer driving season in the US, when demand for gasoline peaks. Gasoline prices will likely remain high as refiners enjoy wide profit margins, with the 3-2-1 crack spread2 above $60 per barrel for the first time since Russia’s invasion of Ukraine in 2022.

Energy Channel: 3-2-1 Crack Spread

Bitcoin1 broke primary support at 60,000. Expect retracement to test the new resistance level, but respect will likely confirm another decline. Falling Bitcoin prices signal a market-wide shift to risk-off.

Bitcoin (BTC)

However, the Dow Jones Industrial Average closed at a new high. The replacement of Verizon (VZ) in the Average with Alphabet (GOOGL) on June 29 may have something to do with this.

Dow Jones Industrial Average

The S&P 500 also rallied, testing resistance at 7500. A follow-through above the recent high would offer a target of 8000.

S&P 500

Dollar & Gold

The Dollar retreated slightly, but all eyes are on the Japanese Yen, which weakened to its lowest point against the Dollar in more than 40 years. Expected intervention by Japan’s Ministry of Finance would temporarily strengthen the Yen but would be self-defeating, as it would increase selling pressure in Japan’s bond market. Rising bond yields force the Bank of Japan to intervene by buying bonds. That weakens the Yen and negates the MOF’s earlier move.

Japanese Yen

This is a difficult trap to escape from. If the BOJ raised its policy rate from the current low of 1.0%, it would strengthen the Yen but increase upward pressure on bond yields, forcing the Bank to buy more bonds, thereby weakening the Yen.

Gold is testing primary support at $4,000 per ounce again, with declining Trend Index peaks warning of secondary selling pressure.

Spot Gold

Plunging open interest on Comex Gold futures indicates that speculators are losing interest in the precious metal.

Gold Futures Open Interest

However, one major player is buying the dip. Bloomberg reports:

Imports were around 163 tons last month, the highest since March 2024, according to customs data released on Saturday. Volumes for the first five months of 2026 were about 692 tons, up by about 76% from a year earlier.

China: Nonmonetary Gold Imports

Conclusion

We expect Brent Crude to remain around $70 per barrel, provided there is no interruption to shipping in the Strait of Hormuz. This eases inflation expectations, but existing pressures persist and prevent the Fed from cutting rates.

Stocks remain bullish, but Bitcoin warns of rising risk aversion.

Gold will likely remain under pressure while negotiations with Iran continue, but China has increased its imports of nonmonetary Gold, buying the dip. We expect the uptrend in Gold to continue for decades, interspersed with regular sell-offs like the present, curbing speculators’ enthusiasm and enabling long-term players to build their positions.

Acknowledgments

Notes

    1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
    2. The 3-2-1 crack spread is calculated on the theoretical refining margin if a barrel of oil is split 2:1 between gasoline and diesel. A spread of $60 indicates that refiners’ margins would have tripled from $20 in January 2026.
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Shift from Growth to Value

Key Points

  • The Dow jumped 1.7% to a new high above 51500, outstripping the S&P 500, which gained 0.4%.
  • The Russell 1000 shows a shift from Growth to Value.
  • Bitcoin is testing primary support at 62000, signaling a market shift to risk-off.

The Dow jumped 1.7% to a new high above 51500, boosted by a strong shift to value stocks in the blue-chip index. Rising Trend Index troughs confirm buying pressure.

Dow Jones Industrial Average

The S&P 500 lagged, with a 0.4% gain, though it remains in a strong uptrend.

S&P 500

The recent rally in Growth stocks (IWF) relative to Value stocks (IWD) in the Russell 1000 threatens to reverse with a break of the rising trendline.

Russell 1000 Large Cap Value ETF (IWD) vs. Russell 1000 Large Cap Growth ETF (IWF)

A shift from Growth to Value would reinforce the Bitcoin1 risk-off signal below. A breach of primary support at 62,000 would signal another decline, reflecting market attempts to shed risk assets.

Bitcoin (BTC)

The war with Iran has also upended the Treasury market, with the 2-year Treasury yield jumping above 3.6% at the beginning of March, ending the primary downtrend. The reversal signals no more rate cuts, with the rally now exceeding the Fed funds target range of 3.5% to 3.75% as expectations for rate hikes grow.

2-Year Treasury Yield

The economy is at full employment, with job openings exceeding unemployment for the first time in 12 months.

Job Openings

Inflation is rising, with CPI likely to follow Brent crude higher.

CPI & Brent Crude

It would be unreasonable to expect the new Fed Chair to push for rate hikes at his first meeting, but we are likely to see a switch to a tightening bias.

Conclusion

The Dow is gaining on the S&P 500 as financial markets shift to a risk-off stance.

Kevin Warsh will chair his first FOMC meeting on June 16-17. 2-year Treasury yields indicate the bond market does not expect further rate cuts. The FOMC will likely switch to a tightening bias to calm market fears of rising inflation.

Acknowledgments

Notes

  1. Cryptocurrencies are the highest-risk asset class, and we analyze Bitcoin (BTC) solely to identify risk sentiment in financial markets. Our analysis is not a recommendation to buy or sell BTC, nor is it a commentary on the merits of cryptocurrency.
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Bipolar Disorder

Key Points

  • The University of Michigan Consumer Sentiment Index fell to a new record low since the series started in 1960.
  • The Dow Jones Industrial Average broke through resistance at 50,000, confirming a fresh bull market advance.

The University of Michigan Consumer Sentiment Index fell to a new low of 44.8.

University of Michigan: Consumer Sentiment

A plot of the 3-month moving average since 1960, when the Consumer Sentiment series started, shows that consumer sentiment is at a record low.

University of Michigan: Consumer Sentiment

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