Rate Hikes on the Horizon

• The monthly household spending indicator for July came in very strong, rising 1.1% for the month and 7.0% over the year, well above market expectations, with households clearly still willing to spend.
• Combined with the strong inflation data, this has driven a sharp repricing and steepening of the curve. The RBA had been looking to see through near term pressures while the labour market slowly cooled, but that now appears increasingly unlikely.
• Short end yields have risen accordingly, with around 50% now priced for a hike in September against roughly 10% before the CPI print, and more than one hike fully priced by year end.
• Recent data has made clear that we are not yet at the top of the rate cycle. That, alongside a geopolitical backdrop which remains unfavourable for markets, has pushed the Australian 10yr to 5.12%, its highest level since 2011.
• Looking ahead, US Fed Chair Warsh speaks tonight in Jackson Hole, markets will be listening for any hawkish signals ahead of the mid-September Fed meeting.