The quarterly review for the three months to 18 September 2026

Equities added little over the three months, and what gains there were went to the broad market rather than to technology. The large-cap US index rose +1.8%¹ over the three months to the middle of September, or +137.18² index points, while the Nasdaq composite fell -0.4%³, or -99.63⁴ points, across the same span. The large-cap index closed at 7,637.76⁵ and the Nasdaq at 26,418.30⁶. Both stand far above their levels of a year earlier, up +15.2%⁷ and +17.6%⁸ respectively, so the three months interrupted the annual advance rather than reversing it.

The final month ran against the quarter's own direction. The large-cap index fell -0.7%⁹ over the month to the middle of September and -0.3%¹⁰ over the final week, while the Nasdaq rose +0.5%¹¹ and +0.3%¹² over the same two windows. Neither index is near its extreme. The large-cap index sits below its twelve-month high of 7,798.99¹³ and far above its low of 6,343.72¹⁴; the Nasdaq sits below 27,093.90¹⁵ and far above 20,794.64¹⁶. The quarter was therefore a stall at an elevated level, not a drawdown, and the equity market gave up leadership to fixed income without giving up ground.

A resumption of the annual advance is likely to require the long end of the curve to stop rising, since the flat quarter came with yields climbing. If the technology index regains its relative advance, the pressure from rates has eased; if it continues to lag the broad market, that pressure persists. A fall through the twelve-month troughs would mark a change in the equity market alone and would say nothing about the growth and inflation gaps that define the macro regime.

Policy tightened in the quarter rather than easing. The September decision was to "raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent"¹⁷, which reversed the hold agreed at the previous meeting and marked the front end as the active part of the policy stance. That reversal explains why short rates in the United States moved with, and not against, the broader rise in yields across the quarter.

The stated grounds were the level of prices alongside firm activity. The Committee recorded that "Economic activity is expanding at a solid pace"¹⁸ and that "Inflation remains elevated"¹⁹, adding that "Today's policy action will support a timelier return to the Committee's 2 percent goal"¹⁹. The level and the momentum are separate things, and the quarter showed them moving apart: in early September Governor Waller said that "recent data suggest we are finally seeing some signs of disinflation"²⁰ and that "Three-month inflation has fallen steadily from 4.76 percent in February"²¹. He also said he did "n't see elevated energy prices and tariffs now as a significant source of ongoing inflation pressure"²². The hike therefore rests on the twelve-month level and on growth running strong, not on a fresh acceleration in monthly price pressure, which is consistent with subdued current inflation alongside above-trend activity. The conditional he set out was explicit: "if inflation comes in hot, I would consider a rate hike"²³.

If monthly core prices continue to decelerate while growth stays firm, the Committee is likely to stop at this single increase and hold. If instead the three-month run rate turns back up, further tightening becomes the base case and the front end carries it. The observable that settles the question is the sequence of monthly core price readings before the next meeting.

The Treasury curve sold off across every maturity over the three months to the eighteenth of September, and the move was led by real yields rather than inflation compensation. The ten-year rose to 5.01%²⁴, up +0.55pp²⁵ over the three months and +0.90pp²⁶ over twelve, a fresh fifty-two week high at 5.01%²⁷. The two-year rose by the same three-month amount, +0.55pp²⁸, to 4.74%²⁹, and the thirty-year rose +0.45pp³⁰ to 5.35%³¹. The two-to-ten spread was unchanged over the three months at 0.27%³², sitting at its fifty-two week low of 0.27%³³; the steepening seen through August was given back, with the spread down -0.25pp³⁴ over the final month.

The composition of the move points to real rates. Ten-year real yields rose +0.47pp³⁵ over the three months to 2.68%³⁶, their fifty-two week high, while the ten-year breakeven rose only +0.08pp³⁷ to 2.33%³⁸, well inside its fifty-two week high of 2.50%³⁹. The front end moved with policy: the upper bound of the federal funds target was raised to 4.00%⁴⁰, +0.25pp⁴¹ above its level three months earlier, though it is still -0.25pp⁴² below where it stood a year ago.

A further flattening from here would signal that the front end is pricing more tightening than the growth path can carry. If breakevens stay near their current level while real yields keep rising, the sell-off is a growth and term-premium story rather than an inflation one. A renewed rise in inflation compensation would point the other way.

Credit spreads did not drive the quarter. Investment grade corporate spreads ended at 0.78%⁴³, wider by +4bp⁴⁴ over the three months and by +3bp⁴⁵ over twelve, leaving them close to the low of the past year at 0.73%⁴⁶ and far from the high at 0.94%⁴⁷. High yield spreads tell the same story, at 2.70%⁴⁸ after a three-month move of +4bp⁴⁹ and a twelve-month move of -1bp⁵⁰, with the year's high at 3.46%⁵¹ never approached. In the final month both measures tightened, by -4bp⁵² in investment grade and -5bp⁵³ in high yield, so the quarter's widening came earlier and then partly reversed.

The damage was in duration, not in compensation for default. The investment grade total return index fell -2.2%⁵⁴ over the three months and -0.6%⁵⁵ over the year, while high yield lost only -0.1%⁵⁶ over the quarter and gained +2.9%⁵⁷ over the year. A four basis point spread move cannot account for a loss of that size in the longer-duration index; rising yields can, and the shorter, higher-coupon index was insulated.

Credit will continue to transmit rate risk rather than credit risk as long as spreads stay near the bottom of their one-year range. A break above the year's spread high would mark the change in regime, and until then further total return losses in investment grade are likely to come from yields alone.

Crude was the dominant move of the quarter. Brent rose by +51.45⁵⁸ dollars a barrel over the three months to 130.80⁵⁹, and WTI rose by +26.67⁶⁰ dollars to 107.02⁶¹. The gain accelerated into the final weeks: Brent added +35.51⁶² dollars over the last month and +12.74⁶³ dollars in the closing week alone. Over twelve months Brent is up +62.97⁶⁴ dollars, and the latest level sits near the fifty-two week high of 138.21⁶⁵ against a low of 59.93⁶⁶, so the quarter extended a year-long climb rather than interrupting it.

The dollar moved the other way, but by far less. The broad index fell -1.8%⁶⁷ over the three months to 118.21⁶⁸, and the advanced-economy index fell -1.7%⁶⁹ to 111.77⁷⁰. Over twelve months the broad index is down -1.2%⁷¹ while the advanced-economy measure is up +1.2%⁷², so the quarter's softness is concentrated against emerging market currencies. Energy costs rose against a weaker dollar, adding to price pressure in dollar terms rather than offsetting it.

If crude holds near current levels, headline inflation is likely to rise even with underlying pressure subdued. A further fall in the broad dollar index would widen that gap, while a recovery in the dollar would narrow it.

Growth ran well above trend through the three months to mid-September. The Atlanta Fed nowcast stood at 5.08%⁷³, up +3.54⁷⁴ percentage points over three months and +1.61⁷⁵ over twelve, and at its highest reading of the past year at 5.08%⁷⁶. That reverses the soft second-quarter reading of 1.54%⁷⁷ rather than extending it. The labour market matched the acceleration: payrolls reached 159,075⁷⁸ thousand after gains of +183⁷⁹ thousand over three months and +527⁸⁰ thousand over twelve, and unemployment fell to 4.10%⁸¹, down -0.10⁸² over three months and -0.30⁸³ over the year, equalling the low of the past year.

Price pressure was subdued against that activity but not against the target. Headline CPI rose +0.5%⁸⁴ over three months and +3.0%⁸⁵ over twelve; core PCE rose +0.2%⁸⁶ and +2.9%⁸⁷ respectively. The three-month pace sits far below the pace of output, while both twelve-month rates remain above the stated objective, which is the level a tightening bias answers. Household sentiment recovered to 55.20⁸⁸, up +11.5%⁸⁹ over three months but only +0.2%⁹⁰ over the year.

The overheating combination is likely to persist while the nowcast holds near its high and unemployment holds at its floor. If the twelve-month core measure falls back toward target while payroll gains hold, the case for further tightening weakens. A renewed drop in sentiment alongside slower payrolls would be the first sign the activity run is ending.

The gilt market carried the quarter in Britain, as it did elsewhere, and the front end led. Five-year yields rose over the three months to +0.66pp⁹¹ and ended at 4.93%⁹², ten-year yields rose +0.64pp⁹³ to 5.36%⁹⁴, and twenty-year yields rose +0.51pp⁹⁵ to 5.74%⁹⁶. That extended a twelve-month repricing of +0.93pp⁹⁷ at five years. Bank Rate did not move over the three months, and overnight rates were unchanged, so the whole adjustment sat in term premium and expected policy beyond the next meeting. Sterling gained +0.0296⁹⁸ against the dollar to 1.3524⁹⁹, leaving it near flat over the year.

The July decision explains the shape: the Committee voted "by a majority of 6–3 to maintain Bank Rate at 3.75%"¹⁰⁰, judging that "the risk of strong inflationary pressures was greater than the risk of weak inflationary pressures"¹⁰¹.

If evidence of second-round effects in pay settlements emerges, the next move in Bank Rate is up rather than down. If energy prices subside instead, short gilt yields are likely to retrace faster than long ones.

The euro area's move was in rates, and it was concentrated at the short end. The two-year yield rose to 3.17%¹⁰², up +0.61pp¹⁰³ over the three months to mid-September, while the ten-year rose to 3.53%¹⁰⁴, up +0.55pp¹⁰⁵ and within a basis point of its fifty-two week high of 3.54%¹⁰⁶. The quarter extended the year's run, with the two-year up +1.19pp¹⁰⁷ over twelve months. Credit and currency were quiet by comparison: high-yield spreads widened +0.15pp¹⁰⁸ to 2.74%¹⁰⁹ and are unchanged over twelve months, and the euro gained +0.0134¹¹⁰ against the dollar to 1.1604¹¹¹.

Policy drove it. The Governing Council raised the deposit rate to 2.50%¹¹², citing a conflict that continues to generate inflation pressures, and inflation is set to remain well above target for an extended period¹¹³, with growth revised up on the greater than expected resilience of the euro area economy¹¹⁴. Consumer prices were +3.1%¹¹⁵ higher over twelve months while output rose +0.8%¹¹⁶.

Further tightening is likely if underlying inflation holds above target through the autumn prints. A retreat in energy prices would ease the short end first.

Japan's bond market carried the quarter while equities gave back ground. The two-year rose to 1.87%¹¹⁷, up +47bp¹¹⁸ over the three months and +98bp¹¹⁹ over the year, the largest move on the curve; the ten-year reached 2.99%¹²⁰ after +36bp¹²¹, and the thirty-year 4.05%¹²² after +31bp¹²³. The Nikkei fell -9.7%¹²⁴ over the same three months, interrupting a year still up +41.6%¹²⁵. The yen strengthened, with the dollar rate down -7.66¹²⁶ to 153.71¹²⁷.

Policy drove the front end. The Bank of Japan raised the overnight call rate target, judging that underlying CPI inflation has been approaching 2 percent¹²⁸ and that there is a risk that it will deviate upward to a level above the price stability target of 2 percent¹²⁸. Activity supported it: real GDP was +1.1%¹²⁹ higher over the year and unemployment fell to 2.40%¹³⁰.

Further tightening is likely if consumer price increases keep spilling over from business-to-business prices, and the short end would lead again. Should the yen keep appreciating, the pass-through the Bank names as its trigger weakens and the pace of increases may slow.

Canadian yields joined the global move higher, with the front end leading. The two-year rose to 3.35%¹³¹, up +57bp¹³² over the three months and +87bp¹³³ over the year, while the ten-year rose to 3.92%¹³⁴, up +54bp¹³⁵ on the quarter and +73bp¹³⁶ on the year. Both sit near their twelve-month highs of 3.37%¹³⁷ and 3.95%¹³⁸. The move extended, rather than interrupted, the run of the previous periods.

Policy did not do the work. The Bank of Canada held at 2.25%¹³⁹ through the quarter, unchanged over twelve months apart from -25bp¹⁴⁰, and in September noted that "Long-term bond yields have moved up globally, including in Canada."¹⁴¹ Labour market slack narrowed, with unemployment at 6.40%¹⁴², down -0.70pp¹⁴³ on the year. The Canadian dollar firmed against the US dollar, to 1.3864¹⁴⁴ from -0.0278¹⁴⁵ over three months.

Front-end yields are likely to keep rising if core inflation measures move away from target. A decline in gasoline prices would instead point to an earlier easing.

Emerging market credit tightened through the three months to mid-September, extending the year's move rather than interrupting it. Corporate spreads ended at 1.34%¹⁴⁶, narrower by 0.07pp¹⁴⁷ over three months and 0.10pp¹⁴⁸ over twelve, close to the year's low of 1.31%¹⁴⁹. High yield spreads at 2.81%¹⁵⁰ were 0.17pp¹⁵¹ tighter over the quarter.

The dollar did the work. The emerging market dollar index fell 1.9%¹⁵² over three months and 3.5%¹⁵³ over twelve, with the renminbi at 6.7080¹⁵⁴ and the won stronger by 200.34¹⁵⁵. The rupee was the exception, weaker by 1.220¹⁵⁶. Implied equity volatility fell 28.0%¹⁵⁷ over the quarter but sits 55.9%¹⁵⁸ above a year ago.

Further spread tightening is likely only if the dollar keeps falling against Asian currencies. A renewed rise in implied volatility toward its twelve-month high would point the other way.

Fiscal and trade policy produced no measurable instrument over the three months to the middle of September; the period's executive output was sectoral rather than macroeconomic. The single order issued at the end of the period addressed federal fisheries management, directing agencies to "eliminate unnecessary restrictions that harm our coastal economies"¹⁵⁹ and to modernize catch data collection.

The trade content of the period is confined to that order's instruction that named agencies "actively address international and domestic barriers to sustainable shark fisheries"¹⁶⁰, alongside a review of listings and fisheries agreements. This is a narrow sectoral measure, and no broader tariff or border measure was set in the period. The remainder of the executive record is appointment withdrawals and a commemorative proclamation.

Fiscal and trade policy is unlikely to account for the next leg in yields, since no measure of aggregate size was enacted in the period. The condition that would change this is the appearance of a borrowing or tariff instrument large enough to register in aggregate flows.

The regime did not change over the three months to the middle of September. The classification stayed at overheating, and it matched the prior classification, so the quarter continued the run rather than interrupting it. Growth sits above trend while inflation pressure sits below it, and that combination is what the overheating label rests on. The transition probabilities point overwhelmingly to the same state persisting into the next period, with contraction, goldilocks and stagflation all carrying small weight.

The drivers are the two gaps themselves. The growth gap is positive but small, which is why the classification is held rather than reinforced, and the inflation gap is negative by a wider margin, which keeps the reading away from stagflation. No document in the pack records a decision or statement bearing on the classification, so the persistence of the regime is read from the gaps alone.

The regime is likely to remain in overheating into the following quarter unless the growth gap turns negative. A move of the inflation gap up towards trend would shift the balance towards stagflation rather than end the overheating reading. Equity index levels are not a signal of the regime, which turns on the two gaps alone.