The quarterly review for the three months to 11 September 2026

Equities rose over the quarter, then gave part of it back. The S&P was +3.6%¹ over the three months to the eleventh of September, and the Nasdaq Composite was +2.0%². Over twelve months the gains were larger: the S&P at +16.2%³ and the Nasdaq Composite at +19.5%⁴. The run of the past year continued, but the last weeks of the quarter ran the other way.

The late slippage was broad. The S&P was -0.8%⁵ on the week to the eleventh of September, and the Nasdaq Composite was -0.7%⁶. On the month the S&P was -0.9%⁷ and the Nasdaq Composite -0.4%⁸. Both indices closed the period below their highs of the past year: the S&P at 7,656.98⁹ against a high of 7,798.99¹⁰, and the Nasdaq Composite at 26,333.04¹¹ against 27,093.90¹². The S&P had stood at 7,728.2¹³ on the eleventh of August, above where it ended the period. Equity prices kept rising while the price of money repriced higher, and only in the closing weeks did the two pull apart.

The quarter's gain is likely to hold only if earnings keep pace with the higher cost of money. The condition to watch is the direction of long yields: further rises point to more of the late-quarter drift, while a pause in them points back to the twelve-month run. A break below the year's lows would mark a reversal rather than a pause, and nothing in this period has come near that.

The Federal Reserve left policy unchanged through the quarter. At its July meeting the Committee decided to "maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent"¹⁴, holding the setting steady rather than extending the earlier run of cuts. The decision was not unanimous: the statement was approved "by a 9 – 3 vote"¹⁵. Three dissenters "preferred to raise the target range for the federal funds rate by 1/4 percentage point at this meeting"¹⁶.

The pause rests on inflation that has not returned to target. The Committee wrote that "Inflation remains elevated relative to the Committee's 2 percent goal"¹⁷, and pointed to supply shocks in energy among the causes. Governor Waller set out the same picture with a softer edge in early September, noting that "Three-month inflation has fallen steadily from 4.76 percent in February"¹⁸. On that basis he said that, if the improvement held, "I would be inclined to support holding the target for the federal funds rate at its current setting"¹⁹. He also judged that "policy is currently only slightly restricting aggregate demand"²⁰, and added that "if inflation comes in hot, I would consider a rate hike"²⁰. Activity gave the Committee no reason to move either way: it described the economy as "expanding at a solid pace"²¹.

The observable that settles the next decision is the August inflation reading, and the reaction function around it has been stated plainly. Continued disinflation in that reading points to a further hold, while an upside surprise points to a rise in the target range. With the easing cycle already interrupted and dissents running towards tightening, the balance of risk around the policy rate has shifted away from further cuts. Should longer-term inflation expectations climb, that shift would harden quickly.

American yields rose across every maturity over the three months to the middle of September. The two-year Treasury yield rose by 0.51²² percentage points to 4.56²³%, its highest in a year. The ten-year Treasury yield rose by 0.50²⁴ percentage points to 4.95²⁵%, also a twelve-month high. The thirty-year Treasury yield rose by 0.42²⁶ percentage points to 5.37²⁷%, matching its own high for the year. The gap between ten-year and two-year yields narrowed by 0.07²⁸ percentage points to 0.33²⁹%, close to its narrowest of the past year at 0.27³⁰%. The run of the preceding year continued rather than broke: over twelve months the two-year yield rose 1.04³¹ percentage points and the ten-year 0.94³².

The move was in the real price of money, not in expected inflation. The ten-year inflation-protected yield rose by 0.39³³ percentage points to 2.55³⁴%, the highest in a year. The ten-year breakeven inflation rate, the compensation investors demand for future inflation, rose only 0.07³⁵ percentage points to 2.36³⁶%, inside its range for the year. Policy did not drive it either. The upper bound of the federal funds target was unchanged over the three months at 3.75³⁷%, having been cut by 0.75³⁸ percentage points over the preceding year.

With the policy rate held and real yields at their highs, the next move in American rates is more likely up than down. The observable that settles it is the breakeven rate: if it climbs out of its recent range, short yields rise further and the curve flattens again. Should breakevens fall back while real yields hold, the pressure sits on long maturities instead.

Investment-grade credit lost money this quarter, and the loss came from yields rather than from credit. The corporate index spread widened by 0.05³⁹ percentage points over the three months, to 0.80⁴⁰%. That sits close to the low end of the past year's range, which ran from 0.73⁴¹% to 0.94⁴²%. High-yield moved the other way: the spread narrowed by 0.08⁴³ percentage points over the three months, to 2.70⁴⁴%, against a twelve-month low of 2.60⁴⁵%.

The total return figures show where the damage sat. The investment-grade total return index fell 2.0%⁴⁶ over the three months and 0.7%⁴⁷ over the year. The high-yield total return index rose 0.4%⁴⁸ over the three months and 3.4%⁴⁹ over the year. Long duration was the cost, not default risk: the higher-yielding, shorter-duration index gained while the longer-duration one lost, with both spreads still near their yearly lows. That is the pattern of a market repricing the cost of money, not one pricing a slowdown.

Credit is likely to keep absorbing higher yields without stress as long as high-yield spreads hold near their lows. A widening in the high-yield spread back toward the top of its yearly range would mark the change, and would point to a growth problem rather than a rates problem. Absent that, further investment-grade losses say more about duration than about borrowers.

Oil led the quarter. Brent crude rose by 16.67⁵⁰ dollars a barrel over the three months to 109.51⁵¹ dollars, and West Texas Intermediate rose by 5.68⁵² dollars to 97.26⁵³ dollars. Both gains came late: Brent added 16.25⁵⁴ dollars in the final month alone, and WTI added 12.49⁵⁵ dollars. Over twelve months Brent is up 42.26⁵⁶ dollars, so the quarter continued a run rather than starting one. Brent still sits below its twelve-month high of 138.21⁵⁷ dollars and well above the low of 59.93⁵⁸ dollars.

The dollar went the other way. The broad trade-weighted dollar index fell 1.7%⁵⁹ over the three months to 118.07⁶⁰, and is down 1.6%⁶¹ on the year. Against advanced-economy currencies alone the dollar fell 1.1%⁶² to 111.74⁶³, but is still up 1.0%⁶⁴ over twelve months. A cheaper dollar and dearer crude both push imported costs up at once.

If crude holds near these levels, headline inflation will rise again into the next quarter and keep policy tight. A rebound in the broad dollar index back through its twelve-month range would blunt that, and its failure to rebound would confirm the overheating reading.

American consumer prices rose 0.5%⁶⁵ over the three months to August, and stood +3.0%⁶⁶ above a year earlier. The index itself, at 334.13⁶⁷, is the highest of the past year, matching the twelve-month high of 334.13⁶⁸. Core personal consumption prices tell the same story more slowly, up 0.2%⁶⁹ over three months and +2.9%⁷⁰ on the year. Measured against the Federal Reserve's stated goal, that is an overshoot, not a shortfall; a statistical reference path fitted to the wider regime can sit below the observed series without contradicting it.

Growth drove the prices. The Atlanta Fed's GDPNow estimate for the third quarter reached 4.42⁷¹%, up 2.88⁷² percentage points from the second-quarter reading and the highest of the past year. Employers added 183⁷³ thousand jobs over the three months to August, taking payrolls to 159,075⁷⁴ thousand. Unemployment fell by 0.10⁷⁵ percentage points to 4.10⁷⁶%, the low of the past year. Households noticed: the University of Michigan sentiment index rose 11.5%⁷⁷ over three months to 55.20⁷⁸.

Demand this strong keeps price pressure alive into the final quarter. The observable that settles it is the monthly core personal consumption reading: another quarter at this pace confirms the overheating call, while a run of flat months would mark the turn.

British gilt yields rose across the curve over the three months, and the rise reached the long end. The ten-year gilt yield stood at 5.19⁷⁹%, up 0.31⁸⁰ percentage points over the three months and at its highest of the past year. The five-year yield rose 0.30⁸¹ percentage points and the twenty-year yield rose 0.28⁸² percentage points. Over twelve months the ten-year yield is up 0.57⁸³ percentage points, so the quarter continued the run rather than broke it.

Bank Rate did not move, holding at 3.75⁸⁴%. The Monetary Policy Committee split, voting by a majority of 6–3 to maintain Bank Rate at 3.75%"⁸⁵, and judged the risk of strong inflationary pressures was greater than the risk of weak inflationary pressures⁸⁶. Sterling firmed by +0.0184⁸⁷ against the dollar over the three months.

If pay settlements for the coming year come in above the rates consistent with target, the long end is likely to price a higher terminal rate still. A durable fall in energy prices would point the other way and allow the cutting cycle to resume.

Euro area yields rose across the curve in the three months to the September date. The ten-year benchmark yield climbed 0.42⁸⁸ percentage points to 3.50⁸⁹%, its highest in a year. The two-year yield rose more, by 0.49⁹⁰ percentage points to 3.10⁹¹%, and is up 1.15⁹² points over twelve months. This continued the run rather than broke it.

The policy rate did the driving, rising 0.25⁹³ percentage points over the quarter to 2.25⁹⁴%. The Governing Council said it had decided "to raise the three key ECB interest rates by 25 basis points"⁹⁵ because "inflation is set to remain well above target for an extended period"⁹⁵. Consumer prices were +2.7%⁹⁶ higher than a year earlier. The euro firmed by +0.0103⁹⁷ against the dollar over the three months.

Further tightening is likely if energy costs keep feeding into services prices. A fall in headline inflation towards target would settle the question the other way.

Japanese yields rose across the curve over the three months to the second week of September. The two-year yield climbed by 0.40⁹⁸ percentage points to 1.82⁹⁹%, and the ten-year by 0.24¹⁰⁰ points to 2.92¹⁰¹%. The thirty-year yield rose by 0.17¹⁰² points to 4.00¹⁰³%. The run of the past year continued: the ten-year is up 1.33¹⁰⁴ points over twelve months.

The Bank of Japan raised its policy rate in June and held it in July, saying it will encourage the overnight call rate "to remain at around 1.0 percent"¹⁰⁵. It named the "risk of underlying CPI inflation deviating upward to a level above the price stability target"¹⁰⁶. The yen firmed by 4.40¹⁰⁷ yen against the dollar, and the Nikkei two-two-five ended little changed at -0.3%¹⁰⁸ over three months.

Further increases in the policy rate are likely if consumer price inflation holds above the target. A pause would follow only if crude oil prices fall back and household income growth stalls.

Canadian yields rose across the curve over the three months, in step with the global move. The ten-year yield climbed 0.53¹⁰⁹ percentage points to 3.94¹¹⁰%, its highest in a year. The two-year yield rose 0.54¹¹¹ percentage points to 3.31¹¹²%, also a twelve-month high. Over the year both rose further still, the two-year by 0.81¹¹³ percentage points. This continued the run rather than broke it.

The Bank of Canada held its policy rate at 2.25¹¹⁴%, unchanged over the three months, and said financial conditions had tightened, with "Long-term bond yields have moved up globally, including in Canada."¹¹⁵ Unemployment eased to 6.40¹¹⁶% in July, the low of the past year. The Canadian dollar firmed, with the US dollar buying 1.3834¹¹⁷ Canadian dollars.

If oil prices stay high, the Bank is likely to hold rather than cut again. A retreat in gasoline prices would reopen the case for easing.

Emerging market credit spreads narrowed through the quarter even as yields rose across the major bond markets. The spread on emerging market corporate bonds fell by 0.17¹¹⁸ percentage points over the three months to 1.31¹¹⁹%, its lowest in a year. High-yield emerging market spreads narrowed by 0.29¹²⁰ percentage points to 2.79¹²¹%, also a twelve-month low. The dollar did the rest of the work: it fell 2.2%¹²² against a basket of emerging market currencies over the three months, and slipped to 6.7108¹²³ yuan. The won gained most, with the dollar down 184.46¹²⁴ won over the same span. Expected volatility in emerging market equities fell 37.0%¹²⁵ over the quarter, though it rose 13.1%¹²⁶ in the final week.

A weaker dollar is the condition holding these spreads down, and a turn in it would widen them again. If volatility keeps climbing from its early September level, the credit move is the first to reverse.

Trade policy tightened rather than eased over the three months, and the tightening ran through tariffs on Canada. The President found that "Canada reneged on its commitment, ceased negotiating in good faith"¹²⁷, and the suspended duties took effect. A further proclamation then narrowed and extended the measure, determining that "the public interests require modifying the scope of products subject to the additional ad valorem duties"¹²⁸. Some Canadian goods stay under the "additional ad valorem duty of 50 percent imposed pursuant to Proclamation 11048"¹²⁹, while others come out from under it.

The same week brought a wider claim on domestic supply, with Defense Production Act energy authorities delegated so that the Secretaries may act "independently of the other"¹³⁰.

Tariffs applied to a close trading partner keep goods costs rising into the next quarter, which sits awkwardly with any case for lower policy rates. The condition to watch is whether Canada removes the disputed motor vehicle measures; if it does, the duties lapse and the price pressure fades, and if it does not, the pressure persists.

The regime classification stayed in overheating, and the quarter did nothing to dislodge it. Growth continues to run above the model's reference path, and the model puts most of its weight on overheating among the four states it considers. The prior period carried the same label, so this quarter continued the run rather than interrupting it. The nearest alternative, stagflation, is the only other state with meaningful weight; contraction and goldilocks are close to dismissed.

The growth side is what drives the call. The model's inflation gap is measured against a slow-moving reference path, not against the observed price level, so it can sit below that path while consumer prices run at the top of their twelve-month range and the Committee describes inflation as elevated relative to its goal. Read together, strong activity and firm realised prices are the overheating case, and the quarter's synchronised rise in long and short yields is its market expression.

The transition weights point to overheating persisting into the next period rather than giving way. The condition that would change that is the growth gap closing: if activity falls back toward the reference path while prices stay firm, the label turns to stagflation, and if both ease together, contraction.