The monthly review for August 2026

US equities extended the run in August, and the gain was broad rather than narrowly positive. The large-cap benchmark closed the month at 7,686.14¹, up +2.6%², while the Nasdaq composite closed at 26,370.89³, up +3.9%⁴. Both continued the advance already in place across the year: the benchmark is up +12.3%⁵ year to date and the Nasdaq +13.5%⁶.

The advance was concentrated in the final week, which points to demand for risk rather than a steady drift. The Nasdaq added +1.5%⁷ in that week alone, most of its +456.99⁸ four-week gain, and the large-cap benchmark added +0.4%⁹. Neither index finished at its high for the year: the benchmark peak was 7,798.99¹⁰ and the Nasdaq peak 27,093.90¹¹, so August closed short of the ceiling set earlier.

The gap to those highs is the observable that settles the next leg: a close above them would confirm that firm labour demand is still being read as growth rather than as a rate risk, while a failure there would mark August as the top of this run. Leadership resting on the growth complex makes the index more sensitive to the short end of the curve than to earnings breadth.

Policy did not move in August, and the July decision that set the stance was itself a hold: the Committee chose to "maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent"¹². The hold was not unanimous, as three members "preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting"¹³. That places the month within an unbroken run of no change while the internal balance shifted toward tightening.

The case for standing still rests on demand strength rather than on price relief. The statement recorded that "Job gains have kept pace with the workforce, and the unemployment rate has changed little"¹⁴, while prices are described as "elevated relative to the Committee's 2 percent goal"¹⁵. Governor Cook was blunter, judging that "Inflation is too high"¹⁶, and set an explicit trigger: "If I do not see signs of continued disinflation soon, I am prepared to act"¹⁷.

The next core inflation print is the condition that settles the direction: another firm reading points to a rate increase, a clear step down points to a further hold. With labour demand steady, the employment side is unlikely to argue against tightening.

The curve flattened further in August as the front end pushed higher and the long end did not follow. The two-year rose to 4.34%¹⁸, up +6bp¹⁹ on the month and +87bp²⁰ on the year, close to its twelve-month high of 4.37%²¹. The ten-year ended the month unchanged at 4.75%²², itself the twelve-month high, and is up +57bp²³ year to date. The thirty-year eased -2bp²⁴ to 5.25%²⁵. The two-to-ten spread narrowed -6bp²⁶ to 0.41%²⁷, continuing a year in which it has compressed -30bp²⁸.

The move was a real-rate and policy-expectation move rather than an inflation move. The policy target held at 3.75%²⁹ and has not changed all year, so the front-end rise reflects pricing of what comes next rather than what has happened. Ten-year breakevens rose only +3bp³⁰ to 2.31%³¹, below the twelve-month high of 2.50%³², while the ten-year real yield sits at 2.44%³³, up +51bp³⁴ on the year.

Further front-end pressure is likely if labour demand stays firm, since that is what keeps easing out of the price. The spread may invert should the two-year continue to rise while the ten-year holds at its high.

Credit compressed where risk appetite is priced and stood still where it is not. The high yield spread ended August at 2.63%³⁵, narrowing 22bp³⁶ on the month and 18bp³⁷ on the year, and finished close to its twelve-month low of 2.60%³⁸. The high yield total return index gained +1.0%³⁹ in August and +2.6%⁴⁰ year to date, ending near its twelve-month high of 1,918.22⁴¹. Investment grade did not participate: the spread was 0.80%⁴², wider by 1bp⁴³ on the month and 1bp⁴⁴ on the year, movements too small to mark any deterioration, and it sits well below the twelve-month high of 0.94%⁴⁵.

The month continued the quarter's pattern rather than breaking it, with the compression concentrated in the lower-rated part of the market where firm demand and risk appetite show up first.

Spreads at these levels are likely to hold while labour demand stays firm, since default expectations rather than duration are what price them here. A rise in the investment grade spread through its twelve-month high would signal that the compression is reversing; continued high yield tightening would confirm it is not.

The dollar weakened over August while crude held its year-to-date gains, both consistent with demand-led firmness rather than disinflation. The broad dollar index fell to 118.57⁴⁶, a move of -1.14⁴⁷ on the month and -1.18⁴⁸ on the year. Against advanced foreign economies the dollar also slipped on the month, by -0.7%⁴⁹, leaving it still up +0.8%⁵⁰ year to date. Crude split by benchmark: WTI ended at 87.03⁵¹ after a monthly gain of +0.87⁵², while Brent fell -7.20⁵³ on the month to 89.75⁵⁴. Both remain far above their year-end starting points, with WTI up +29.77⁵⁵ and Brent up +28.40⁵⁶ this year.

A softer dollar alongside energy prices well above last year's level keeps imported cost pressure in place, which points to overheating persisting. The condition is Brent: continued monthly declines toward the lower end of its yearly range would cut that pressure, while a return toward the highs would deepen it.

Labour demand carried August. Payrolls reached 159,075⁵⁷ thousand, adding +162⁵⁸ thousand on the month and +643⁵⁹ thousand since December, and the level is the highest of the past year at 159,075⁶⁰ thousand. Unemployment was unchanged at 4.10%⁶¹, down -0.30pp⁶² year to date and equal to its low of the past year at 4.10%⁶³. August continued the quarter rather than breaking it.

Prices rose without accelerating. Core PCE stood at 130.66⁶⁴ in July, up +2.2%⁶⁵ year to date, and headline CPI up +2.1%⁶⁶; the index level is the highest of the past year because the year-to-date pace has been steady, not because it has quickened. Growth tracking was the strongest of the past year at 4.75%⁶⁷, up +0.51pp⁶⁸.

Demand, not price acceleration, is what sustains the overheating reading into the autumn. If the year-to-date pace of core prices steepens while payroll gains hold, the case for an unchanged policy range weakens; if that pace holds or eases, firm employment alone is unlikely to force a move.

Gilt yields extended their rise in August, continuing the year's move higher. The ten-year ended at 5.06%⁶⁹, up +0.04pp⁷⁰ on the month and +0.60pp⁷¹ on the year; the five-year rose +0.04pp⁷² to 4.59%⁷³. Sterling firmed to 1.3550⁷⁴.

Bank Rate was unchanged at 3.75%⁷⁵, with the Committee voting "by a majority of 6–3 to maintain Bank Rate"⁷⁶ and judging "the risk of strong inflationary pressures was greater than the risk of weak inflationary pressures"⁷⁷. UK unemployment stood at 4.90%⁷⁸ in the spring.

If energy prices stay elevated and pay settlements come in higher, the next move in Bank Rate is likely to be up rather than down. If underlying disinflation continues instead, the long end may retrace.

Euro area yields rose across the curve in August, extending the year's move rather than pausing it. The ten-year ended at 3.34%⁷⁹, up +0.11pp⁸⁰ on the month and +0.39pp⁸¹ on the year, while the two-year rose +0.10pp⁸² to 2.86%⁸³, both at their fifty-two-week highs. Policy did not move, holding at 2.25%⁸⁴.

Demand, not policy, drove the repricing: growth was carried by domestic demand, with the ECB noting "the quarter-on-quarter growth of 0.4% in the second quarter of 2026"⁸⁵. High yield spreads narrowed -0.06pp⁸⁶ on the month.

Yields are likely to stay near these highs if domestic demand keeps carrying growth. A renewed widening in credit spreads would be the signal that this support is fading.

Japanese yields rose across the curve in August, extending the year's repricing rather than pausing it. The two-year rose to 1.74%⁸⁷, up 24bp⁸⁸ on the month and 58bp⁸⁹ on the year; the ten-year rose 14bp⁹⁰ to 2.94%⁹¹, its fifty-two-week high. The Nikkei gained 3.0%⁹² on the month and 31.7%⁹³ on the year, and the yen weakened to 159.74⁹⁴.

Policy stayed put: the Board voted to keep the call rate "to remain at around 1.0 percent"⁹⁵, with one member proposing a higher guideline against "upside risks to prices caused by demand shocks"⁹⁶.

Front-end yields are likely to keep rising if the next Board vote records further dissent toward a higher call rate, and to stall if the vote returns to unanimity. A weaker yen alongside firm equities would sustain the overheating reading; a reversal in the currency would narrow it.

Canadian yields extended the year's rise in August. The two-year climbed to 3.01%⁹⁷, up 10bp⁹⁸ on the month and 43bp⁹⁹ on the year, close to its twelve-month high of 3.07%¹⁰⁰; the ten-year rose to 3.73%¹⁰¹, up 8bp¹⁰² on the month. The policy rate did not move, holding at 2.25%¹⁰³ all year. The currency firmed to 1.3862¹⁰⁴, a monthly gain of 0.0166¹⁰⁵. Labour slack narrowed, with unemployment at 6.40%¹⁰⁶ in July against -0.40pp¹⁰⁷ year to date, and output rose +0.9%¹⁰⁸.

With the policy rate steady and the front end pressing its highs, the market is likely to keep pricing firm demand rather than easing. If unemployment falls further from its current level, that pricing extends; if it turns back toward its twelve-month high, the front end gives back ground.

Emerging market risk pricing eased sharply in August. Implied volatility fell to 24.34¹⁰⁹, down -32.8%¹¹⁰ on the month, though it is still up +40.7%¹¹¹ on the year. Sovereign spreads narrowed to 1.37%¹¹², within a hair of the fifty-two-week low of 1.36%¹¹³, and high yield tightened to 2.90%¹¹⁴.

Currencies carried the same direction. The won strengthened by 68.56¹¹⁵ to its fifty-two-week low of 1,368.25¹¹⁶, and the broad emerging market dollar index fell -1.2%¹¹⁷; the real weakened by 0.1098¹¹⁸.

Further spread compression depends on the dollar continuing to soften, and a renewed rise in the broad index would stall it. With volatility already back near its yearly range low, the scope for repricing from here is smaller than the month's move suggests.

Policy action in August was administrative rather than fiscal. The month's executive orders committed no new spending: the space workforce order directs a commission to deliver "a report proposing key details for the establishment of the Space Academy"¹¹⁹, and states that it "shall be implemented consistent with applicable law and subject to the availability of appropriations"¹²⁰. The Great Lakes order renames a shared body of water and asserts that "Canada has invested far less in similar initiatives over the same period"¹²¹, placing the friction in symbolism rather than tariffs or quotas.

Absent an appropriation or a tariff schedule, these measures are unlikely to alter domestic demand in the coming quarter. Should the commission's report be followed by a spending request, fiscal impulse becomes the condition to watch, and it would add to an already firm labour market.

The regime classification did not change in August. The economy stayed in the overheating quadrant it occupied in the prior period, so the month continued the run rather than interrupting it, and the quarter reads as a single unbroken stretch of the same label.

The label rests on demand. Growth sits above its reference path while the model's inflation gap sits below, and that gap is a distance from trend rather than a statement about the level of prices: core inflation can be high and still print below the path the model expects, which is what the reading captures. Firm labour demand and risk appetite are doing the work in the classification, not price relief.

The classification is likely to persist while the growth gap stays positive and the transition probability toward overheating stays dominant. A run of core prices back toward the model path alongside softer payrolls would be the observable that shifts the label toward contraction.