Macro
Stronger US activity reduced near-term slowdown risks while making the inflation challenge harder to resolve. September’s flash composite PMI rose to 58.4 from 56.0, with manufacturing and services both strengthening alongside new orders and employment. Business investment provided supporting evidence: August core capital goods orders increased 1.6% month-on-month and shipments rose 0.6%, suggesting the improvement extends beyond surveys. Initial jobless claims below 200,000 also indicated limited deterioration in employment. The combination supports a firmer near-term growth assessment, although nominal investment data do not establish the scale of real growth and the contribution from AI cannot be isolated from the PMI release. Relative to last week, the consequential change is stronger evidence that demand can withstand restrictive policy, even as supply constraints persist.
Improving Hormuz flows provided partial supply relief, but diplomatic setbacks left the energy outlook vulnerable. Brent finished Friday at $104.32 per barrel, up just 0.4% over the week, masking substantial shifts in expectations around shipping and negotiations. US officials reported recovering transit volumes, while Saudi Arabia increased shipments through Hormuz to compensate for the existing East–West pipeline disruption. The passage therefore remained contested and disrupted rather than fully closed. Qatar-mediated discussions subsequently produced an Iranian proposal linking reopening to relief from the US blockade and sanctions, but Trump rejected the proposal on September 26. Iranian media then reported attacks on vessels using unauthorised routes, although indirect talks were expected to continue. The macro distinction is between a recovery in physical shipments and a durable normalisation of access: the former offers relief, while the latter remains unresolved.
Potential fuel-export restrictions and sanctions enforcement could amplify the energy shock independently of Hormuz. Trump continued to consider a US diesel export ban, but no measure had been implemented by the cutoff and administration statements remained contradictory. Such a restriction would initially retain diesel domestically while reducing availability for overseas buyers; subsequent refinery adjustments could complicate the effect on US fuel prices. Europe would be particularly exposed through transport and industrial costs. Separately, Indian refiners were reportedly considering lower Russian crude purchases following new US sanctions legislation. Purchasing intentions have not yet established a sustained reduction in flows, and rerouting Russian barrels would not necessarily remove them from global supply. The risk is nevertheless greater trade friction, higher delivered costs and less flexibility in an already disrupted energy system.
Persistent supply shocks are becoming more consequential because demand remains strong enough to support price pass-through. The US PMI showed rising input and output prices alongside longer supply delays and growing backlogs. That combination suggests inflation pressures extend beyond the immediate fuel-price impulse. Fed communication reinforced concern that repeated shocks could influence expectations and pricing behaviour, with Williams emphasising that persistent effects cannot simply be ignored. This does not mean every energy increase requires a policy response; duration, pass-through and expectations determine the macro consequences. Stronger activity provides room to restrain demand, but prolonged tightening would increasingly weigh on interest-sensitive spending and fiscal flexibility.
Europe’s services recovery improved the near-term activity outlook, but weak household confidence leaves the expansion exposed to energy costs. The eurozone composite PMI reached 53.1, with services strengthening and Germany and France returning to services expansion. Manufacturing PMIs eased in both countries, making the acceleration less uniform than the headline improvement suggests. Meanwhile, Germany’s GfK confidence reading fell to −30.6, below the full range of forecasts, and eurozone consumer confidence deteriorated. These surveys do not establish that consumption is contracting, but they indicate limited household confidence in the recovery. The UK showed a less favourable combination, with composite activity slowing while inflation pressures intensified. Sustained European expansion will depend on whether employment and real incomes can offset higher energy bills.
The US–China agreement reduced immediate trade uncertainty without resolving the principal constraints on investment and supply chains. The trade truce was extended to 2027-01-10, accompanied by plans for more favourable tariff treatment on approximately $30 billion of goods in each direction, Chinese coal-purchase commitments and new channels for trade, investment and technology dialogue. These represent tangible progress beyond diplomatic signalling, although implementation will determine the economic benefit. EV tariffs, advanced-chip restrictions and rare-earth controls remained unresolved. The agreement consequently improves near-term commercial visibility while leaving businesses exposed to renewed restrictions and continued pressure to diversify supply chains.
China’s trade relief does little directly to repair the imbalance between industrial activity and household demand. The latest comprehensive hard data, covering August and released on 2026-09-15, showed industrial production growing 5.2% year-on-year against retail sales growth of just 0.4%, alongside continuing weakness in investment and property. These are background conditions rather than new weekly releases, but they explain why improved external relations alone are unlikely to deliver a broad domestic recovery. Reports of stronger September housing transactions in selected major cities offer tentative encouragement without establishing nationwide stabilisation. The next tests are whether production strength broadens into domestic orders and consumption, while US PCE on 2026-09-30 and payrolls on 2026-10-02 will help assess whether stronger American activity is compatible with easing underlying inflation.
Rates
Higher real yields and weak auction demand drove a Treasury selloff that steepened the curve and outpaced other sovereign markets. Ten-year yields rose approximately 17bp to 5.17%, while thirty-year yields finished near 5.50%; ten-year Bund, gilt and JGB yields increased a more moderate 7–9bp. Almost nine-tenths of the ten-year Treasury move came from real yields, which rose approximately 15bp to 2.83%, while breakevens increased only 2bp to 2.34%. Investors therefore demanded materially higher inflation-adjusted returns without a comparable rise in inflation compensation. The adjustment is consistent with higher expected real policy rates and greater compensation for duration risk, although it does not establish how much came from either component, or prove a higher neutral rate.
Hawkish Fed communication kept further tightening in play, but October remained a close call at Friday’s close. Following September’s 25bp increase to a 3.75–4.00% target range, officials stressed persistent inflation and the risk that repeated supply shocks could affect price-setting behaviour. Barr indicated that further increases were likely needed; Williams and Paulson also supported additional tightening. Yet October’s hike probability closed near 54%, broadly unchanged from the previous Friday after reaching higher levels during the week. December OIS implied an overnight rate near 4.23%, or roughly 33bp of further tightening against the model’s current overnight reference. Bessent’s September 27 call to consider productivity gains offered a counterargument to additional hikes, but did not represent a change in Fed guidance.
The curve shifted from midweek front-end pressure to persistent long-end weakness, creating distinct risks across maturities. The 2s10s spread briefly narrowed to approximately 17bp on September 23 before closing the week at 30.9bp, almost 6bp wider; 5s30s widened from 47bp to approximately 51bp. Friday’s divergence was particularly revealing: two- and five-year yields fell around 7bp while thirty-year yields continued higher. Supply amplified the adjustment. The $70bn five-year auction cleared at 5.033%, tailing the when-issued yield by 3.1bp, with bid-to-cover of 2.21 against a recent average near 2.33. The subsequent $44bn seven-year sale tailed only 0.7bp and elicited little immediate reaction, suggesting uneven absorption rather than uniformly impaired demand. The weak September 17 TIPS auction provided additional context for investor caution, although it preceded the reporting window.
Positioning expanded during the selloff, while flows showed selective demand rather than a wholesale retreat from duration. Open interest rose across all five benchmark Treasury futures contracts, including approximately 261,000 additional five-year and 210,000 ten-year contracts. These figures measure outstanding positions, not trading volumes, and do not identify which investor groups added directional risk; they provide little support for a simple liquidation-driven washout narrative. Within the seven-ETF sample, TLT attracted approximately $956mn, short-duration funds received smaller inflows, and IEF and TLH experienced redemptions. Demand therefore remained differentiated across maturities even as the MOVE index increased more than 30% to 104, signalling substantially greater rates uncertainty.
Orderly funding limited evidence of a financing squeeze, although Treasury cash management remained relevant to liquidity. SOFR adjusted following the Fed hike without material disruption in the reported funding indicators. Treasury’s cash balance above $1tn and prospective bill supply nevertheless kept reserve distribution in focus. Its examination of investing excess cash in repo could return liquidity to secured funding markets if implemented, but remained a proposal rather than an intervention supporting that week’s trading. Meanwhile, reluctance to use Fed repo facilities can sustain larger precautionary liquidity buffers, limiting how readily available backstops translate into market funding capacity.
The positioning debate favoured selective forward steepeners, with renewed front-end repricing the principal opposing risk. The strategy research highlighted forward-starting SOFR steepeners that could benefit if tightening expectations moderate while longer rates remain supported by term premium. Higher ten-year real yields also improve prospective inflation-adjusted income, though outright duration remains exposed to further policy and term-premium increases. These tactical opportunities differ from Morgan Stanley’s medium-term bear scenario, which projects approximately −35bp in 2s10s at the Q3‑2027 yield peaks; its baseline instead envisages a broadly flat curve through mid-2027 before steepening towards +20bp by year-end. September payrolls, due October 2, are the next major test: stronger data could renew front-end pressure and challenge steepeners, while weakness could support a reversal of tightening expectations.
Credit
Credit’s initial resilience gave way to a broader repricing, with high yield absorbing the larger spread adjustment and investment grade the greater duration loss. US investment-grade spreads widened 5bp to 80bp, while high yield widened 27bp to 294bp. Weekly total returns were −1.07% and −0.92%, respectively: the larger investment-grade loss reflected its greater exposure to rising government yields, despite substantially smaller spread widening. European cash credit proved more resilient, with investment-grade spreads widening approximately 3bp to 87bp and high yield approximately 14bp to 300bp. The distinction between yield and credit value remains central. Higher all-in yields improve prospective income, but comparatively tight spreads leave limited compensation for deteriorating fundamentals or further volatility.
Primary markets remained accessible, but heavy issuance increasingly required concessions and more favourable execution windows. US investment-grade supply reached $36 billion, below the previous week, while high-yield issuance surged to $33.6 billion. The broadcast’s reported $11.1 billion SoftBank transaction illustrated the terms needed to clear substantial speculative-grade borrowing: a 5.5-year tranche yielded 9.75%, alongside reportedly strong subscription. Activity subsequently stalled, with no US investment-grade issuance on Friday. AI investment and acquisition financing remain important sources of prospective supply, creating the possibility that new deals reprice outstanding bonds across affected sectors. For investors, the opportunity lies in concessions that compensate for both issuer fundamentals and further issuance, with particular caution where repeated borrowing could weaken balance-sheet flexibility.
Investor demand became more selective as high-yield outflows contrasted with continued allocations to floating-rate loans. The supplied flow report recorded $2.5 billion leaving US high-yield mutual funds, against $0.6 billion of investment-grade outflows and $0.7 billion entering leveraged loans; these reporting windows should be distinguished from Friday-to-Friday market performance. Loan prices nevertheless softened, demonstrating that limited duration does not eliminate credit risk. Emerging-market dollar debt also faced pressure from higher Treasury yields, while reporting through September 27 described investors reducing their riskiest exposures. Without a consistent EM spread series, the evidence does not establish how much of the loss reflected credit deterioration. Across markets, demand for income remains supportive, but its durability increasingly depends on quality, liquidity and the price of new supply.
The widening divide between stronger and weaker borrowers favours selective senior exposure over indiscriminate purchases of higher-yielding debt. CCC loan discount margins were reported at nearly 4.5 times those of single-B borrowers, highlighting stress beneath aggregate credit indices. European software adds a specific refinancing vulnerability: Moody’s warned that AI displacement risk could undermine valuations and access to funding for issuers reliant on payment-in-kind debt. Advancion’s distressed exchange provided a separate example of liability restructuring already occurring. These developments strengthen the case for examining cash interest coverage, free cash flow and refinancing capacity together. Senior CLO tranches offer one way to retain floating-rate income with subordinated protection, although collateral quality and coverage-test headroom remain decisive; structural seniority reduces exposure to underlying losses without removing it.
Municipal credit pressures reinforce the importance of sustainable revenues and creditor protection. The school-district report discussed in the broadcast indicated that roughly half of the districts surveyed ran operating deficits, as expiring federal support exposed recurring expenditure commitments and enrolment-related funding pressures. Reserves, state support and the ability to adjust spending will increasingly differentiate borrowers. Separately, reported preparations for a Brightline Chapter 11 filing highlighted the consequences of financing infrastructure against ridership forecasts that fail to materialise. Continued operations would not establish bondholder recoveries, which depend on security, creditor ranking and restructuring terms. Both cases demonstrate why apparently durable demand for an essential service or transport asset must be assessed separately from its capacity to service the existing debt.