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US credit markets are the most hawkish they’ve been in the last 2 years, pricing in one and probably two 0.25% rate hikes by Christmas – not that long since their last rate cut by 0.25% in Dec’25, the final move in an aggressive 1.75% easing cycle. Markets have increased rate hike expectations this month following hawkish Fed signals, renewed inflation concerns from higher oil prices, and rising long-term bond yields as heavy government borrowing increased. A cooler-than-anticipated inflation print (CPI) earlier in the month helped, but the oil price quickly became the overriding factor.
However, the correlation between bond yields and equities has been mixed: The traditional inverse relationship (higher rates → lower equities) held clearly during stress periods (late 2024 – early 2025), but broke down during the AI-driven bull run of 2025–2026, when earnings growth dominated the rate sensitivity narrative. The current implied rate of ~4.07% with the S&P 500 at 7,412 sits well above historical norms, suggesting equities remain richly valued relative to the rate environment, or, equity investors still believe rates will come down.
- The current correlation of -0.85 is the most negative in a decade, highlighting the unusual combination of structurally high interest rates and AI-driven optimism in equity markets.
NB: The value of -0.85 means equities and bonds are moving in strongly opposite directions; when equities rise, bond prices fall (yields rise), and vice versa
For the S&P 500 to continue pushing higher into 2027, either bond yields need to fall, or strong US earnings momentum must be maintained, unless, of course, we see this particular elastic band stretched even further.
The RBA has been on a far more hawkish path than the Fed in 2026 having already hiked 3-times, fully reversing its three 0.25% cuts in 2025 – at least there’s hope that things can change when least expected. The current levels of implied rates at Christmas are 4.63% for the RBA and ~4.09% for the Fed – a Spread of +54bps. Markets now expect the RBA’s cash rate to sit meaningfully above the Fed’s into 2027, an unusual backdrop given the Fed has held the higher policy rate for more than 80% of the past decade. The divergence reflects Australia’s stickier inflation and the RBA’s more cautious approach to easing, largely because the Federal Govt doesn’t have the fortitude to rein in spending.
Although the negative correlation between the ASX200 and the RBA’s implied December 2026 rate has faded recently, it’s still a relative headwind for Australian equities compared to their US peers. With the Aug 5th RBA meeting “live” for a further hike to 4.60%, and the Fed on hold at 3.75% this week, this spread could widen further, reaching levels not seen in a decade.
There are two simple takeouts at this stage:
- The ASX is likely to struggle against the S&P if the RBA hikes again in 2026 – we still think there is a good chance they will not hike rates, or hike one at, implying credit markets/bond yields are too hawkish.
- Global equities feel rich if central banks are going to embark on another hiking cycle – President Trump needs to get the oil price down asap! A 5% drop this morning is a start!
The Australian February reporting season was a volatile affair, with earnings revision momentum the strongest since mid-2022, but markets have short memories. The August 2026 season is imminent, and faces a more complex backdrop: higher rates, oil-driven inflation, and geopolitical disruption versus the tailwinds of copper strength, bank margin expansion, and energy sector re-rating. The 2Q inflation print due this week will set the macro tone into reporting season.
- It’s easy to form a pessimistic, or at least cautious, argument into August, but the appetite for stocks remains strong into dips.
