30.09.2026 - Softer Inflation — No Relief for Bonds
US inflation data came in softer than expected today, but the details deserve a closer look.
The PCE price index rose 0.3% month-on-month, while core PCE increased by only 0.2%, below expectations of 0.3%. On an annual basis, core PCE inflation came in at 3.4%, compared with expectations of 3.7%.
At first glance, this looks like meaningful progress on inflation. However, there is an important caveat.
The Bureau of Economic Analysis implemented its annual update of the National Economic Accounts today, incorporating more complete source data as well as methodological improvements affecting, among other measures, the PCE price index. This means that part of the decline in previously reported inflation reflects revisions rather than a sudden improvement in underlying price pressures. The 3.0% annual core PCE figure should therefore be interpreted with some caution.
At the same time, the US economy appears to have been considerably stronger than previously estimated. Second-quarter GDP growth was revised sharply higher to an annualized 2.2%, from the previous estimate of 1.5%. Consumer spending and business investment were stronger than previously reported.
Bond Yields Remain Elevated
The 10-year Treasury yield remains above 5.2%, close to its highest level since 2007, while the 30-year yield remains around 5.5%, after recently reaching levels not seen since 2002.
Markets:
Equities: Mixed, Europe down while US markets hold up well with Tech outperforming
Bonds: yields little change after - US 2y yield above 4.85%, US 10y yield above 5.24%, Japan 10y yield 3.07%
Commodities: Oil prices higher, WTI at USD 91/barrel and Brent around USD 99/barrel;
Precious metals prices almost unchanged, gold USD 4’185/oz, silver USD 60/ozCurrencies: US dollar falls slightly - Japanese Yen unchanged USDJPY 157
Cryptos: moving higher - Bitcoin above USD 84k
Volatility: The VIX index lower, back below 16 (good level for hedging!)
My View: Anyone expecting today's softer inflation data to trigger a significant bond rally has so far been disappointed.
I continue to see little fundamental justification for materially lower yields. Inflation remains well above the Fed's target, economic growth has just been revised significantly higher, and energy prices remain elevated.
While softer monthly inflation reduces some of the immediate pressure for further monetary tightening, the stronger GDP figures point in the opposite direction.
This leaves the Federal Reserve in an increasingly uncomfortable position: inflation remains too high, while economic activity is proving more resilient than previously thought.
I continue to expect the Fed to raise interest rates again at its October meeting. Market pricing still clearly favors unchanged rates. In my view, investors may therefore have to adjust to an interest-rate environment that remains higher for longer, and moves even higher than currently anticipated.
The implications extend far beyond the bond market. With the US 10-year Treasury yield above 5.2% and the 30-year yield around 5.5%, financing conditions are becoming increasingly challenging. Governments, companies, consumers and highly leveraged investors are all facing a substantially higher cost of capital.
The longer yields remain at these levels, or continue to rise, the greater the pressure on the financial system.
The question is increasingly becoming: Where does something break first?
For equities, I increasingly see the current environment as one of the last opportunities to reduce exposure before risks potentially accelerate.
The AI investment cycle, which in my view has already shown clear signs of overshooting, is now beginning to show cracks.
That does not necessarily mean a financial crisis is imminent. However, at current levels of leverage and financing costs, it may not take much for an initial shock to trigger a much broader and faster market adjustment.
Tonight, Micron Technology's earnings release after the US market close will provide another important test of the extraordinarily optimistic expectations embedded in the AI and semiconductor sector.
The warning lights continue to flash. Yet financial markets remain remarkably complacent.
In my view, the risk is no longer simply that markets have underestimated the challenges ahead. It is that when investors finally begin to price in those risks, the adjustment could be both rapid and severe.
Become a Member to access more valuable market updates like this
