Bonds Pare Recent Gains as an Oil Price Reversal and Upbeat Econ Data Lift Fed Hike Probabilities: Aug. 26, 2026

Bonds are paring recent gains in response to a reversal in crude prices alongside upbeat econ data that is increasing both inflation expectations and Fed hike probabilities. Fixed income appreciated meaningfully in the last two days but is failing to extend the winning streak as fuel costs rise on the back of an Iran and Oman agreement that seeks to ensure safe transit across the Strait of Hormuz. Anecdotal evidence, though, suggests that Washington is opposing the deal, which is driving uncertainty related to whether the US will allow the countries to collectively control the critical waterway without Uncle Sam’s influence. Indeed, on top of applying sanctions designed to pressure the Persian economy, President Trump has threatened to take action against governments that work, help or transact with Tehran, adding another layer of geopolitical angst regarding a potential White House reaction to an accord inked in its absence. This morning’s economic calendar additionally challenged Treasuries by dishing out stronger-than-expected durable goods, inflation and household expenditure numbers that were accompanied by an upward revision to second -quarter consumer spending. The curve is climbing in bear-flattening fashion, led north by the monetary policy sensitive shorter tenors ahead of Chair Kevin Warsh’s pivotal Jackson Hole presentation this Friday, where he will provide an update of the central bank’s posture. In markets, risk appetites for stocks and cryptocurrencies are being hurt by tighter financial conditions paired with a firmer greenback prior to the week-end main event; however, equities, Bitcoin and Ethereum are holding up better than debt assets, with each category having swung from green to red several times already today. At the moment, the four major domestic benchmarks are sinking modestly amidst 5 of the 11 principal sectors advancing. Non-energy commodities are getting crushed, meanwhile, as an increasingly restrictive credit environment and a heavier dollar weigh on demand for precious metals and cyclical inputs. Elsewhere, hedging interest is quite subdued as signaled by relatively flat volatility protection instruments while prediction markets are catching bids.  

Fuel Prices Ease but Inflation Strengthens

Cost pressures accelerated last month as fuel charges reversed from a significant suppressor in June to just a modest reliever in July. The Personal Consumption Expenditures (PCE) Price Index rose 0.2% month over month (m/m) and 3.7% year over year (y/y), a tenth of a percentage point ahead of expectations on both fronts. In June, the gauge posted -0.1% and 3.7% m/m and y/y changes. The core segment, which excludes energy and food due to their volatile characteristics, climbed 0.2% m/m and 3.3% y/y, exactly as projected and similar to the previous publication’s 0.1% and 3.3%. The services category’s stickers expanded 0.2%, durable goods were relatively unchanged and nondurables fell 0.1%. Gasoline retreated 0.1% m/m. Consumer spending and incomes jumped 0.2% and 0.4%, hotter than the 0.1% and 0.2% anticipated and near the preceding report’s 0.3% and 0.2%. The negative differential between outlays and earnings drove the first increase in the savings rate since January, as this morning’s reported climb to 3% follows five consecutive months of declines.

Aircraft Orders Bolster Durable Goods

Durable goods orders rose for the second consecutive month in July as broad growth across categories drove the headline beat. Transactions expanded 1.1% m/m, exceeding the 0.5% median estimate, which would have been unchanged from June. Aircraft purchases were the top performer, catching a 12.7% m/m lift while the general defense, primary metals and machinery categories climbed 4.9%, 1.5% and 1.2%. The motor vehicles and parts, fabricated metal products, communications equipment and other segments experienced increases of 0.9% or less. Conversely, the computer/electronics products and the electrical equipment sections saw declines of 1.1% and 0.4% m/m. Nondefense capital goods excluding jets, a proxy for business investment, slowed from 1.7% to 0.2% m/m, significantly missing the 0.9% projection.

GDP Revision Is Unchanged

Second-quarter real gross domestic product growth was unrevised at a seasonally adjusted quarter-over-quarter (q/q) annualized rate of 1.5%, as stronger than originally reported consumer spending countered the revised report depicting a heavier trade deficit than in the preliminary print. 

Wall Street Waits for Nvidia as Tech Pauses

Among the four major domestic equity benchmarks, the tech heavy Nasdaq 100 is the furthest from its record high, indicating a need for a fresh burst of enthusiasm in the AI sector to keep this bull market going. It’s been almost three months since the index reached its last all-time peak on June 3, and reassurances from Nvidia CEO Jensen Huang after the bell about how the modern technology remains in its early innings of adoption can certainly bolster animal spirits for stocks. It’s precisely the AI buildout and the use of the related innovations that have expanded corporate earnings immensely this year via capital expenditures, cost-cuts and enhanced productivity while a potential increase in confidence of an extended runway could cause investors to run back to the space. But expectations for this evening’s specific quarterly report are in the nosebleeds, and the company must do more than just post the typical beat-and-raise to woo Wall Street. It must signal that the overall economy needs many more semiconductor chips and associated AI integration programs to continue expanding profitability well into the future to power stock gains on Thursday.

International Roundup

Price Pressure for Japan Corporate Services Heat Up

Soaring international shipping charges contributed to Japan’s Corporate Services Index depicting a 3.6% y/y price increase, which exceeded both the economist consensus estimate of 3.2% and June’s upwardly revised 3.4% result.

When excluding international transportation, the gauge was less severe, climbing 3.1%. In July, prices for ocean freight transportation and international air freight soared 67.4% and 7.2%, a considerable acceleration from 52.2% and 4.5% in June. Broadly speaking, the closure of the Strait of Hormuz has jacked up fuel costs while causing shipping companies to use more expensive alternate routes. Japan’s weak yen has further increased the cost of fuel, which is traded in US dollars.

On m/m basis, the gauge was up 0.4% following June’s 0.3% descent. The metric ascended because of ocean freight and domestic air travel becoming 11.4% and 11.1% more expensive, which drove the price for the broader transportation and postal activities category north by 1.4%. Most other categories experienced smaller increases as follows:

• Finance and insurance, 0.4%
• Real estate services, 0.2%
• Information and communications, 0.1%
• Leasing and rental, 0.2%
• Other services, 0.3%

The advertising services category bucked the broader trend with a 1.2% decline. Television and radio advertising slipped 0.9% and the category consisting of internet, newspapers, magazines and other advertising services sank 1.4%.

In July, the Bank of Japan held its key interest rate at 1%, but it cautioned that inflation could exceed the organizations 2% target as soon as September.

Australia Monthly Inflation Strengthens

Australia’s Consumer Price Index was up 0.6% m/m in July after falling 0.1% in the preceding period, according to the Australian Bureau of Statistics. On a y/y basis, however, the gauge eased from 3.8% in June to 3.5% last month. For the annual print, the largest contributors to inflation and the extent of their changes were as follows:

• Housing, 5.0%
• Food and non-alcoholic beverages, 3.2%
• Recreation and culture 2.6%

For the monthly result, transportation and the group consisting of recreation and culture became 2.4% and 1.3% more costly. Other categories and the amount of their changes were as follows:

• Alcohol and tobacco, 0.9%
• Furnishing, household equipment and services, 0.8%
• Clothing and footwear, 0.7%
• Health, 0.4%
• Education, 0.4%
• Communication, 0.3%
• Insurance and financial services, 0.3%
• Food and nonalcoholic beverages, 0.3%

Conversely, housing costs fell 0.3%

While Building Activity Falls

The total value of construction completed during the April through June period dopped 2.1% q/q, largely a result of engineering volume falling 6%. Actual construction increased by 1.7% and 0.5%, but the gain didn’t completely offset the weakness in the engineering sector. Relative to the year-ago period, the value of total construction was up 2.7% despite engineering services sinking 5.1%.

And Australian Leading Indicator Stays Below Trend

The Westpac-Melbourne Institute Leading Index climbed from -0.4% in June to -0.2% last month. The index indicates the likely pace of economic growth three to nine months into the future. The gauge has fallen 0.14 percentage points this year, a result of the Reserve Bank of Australia hiking its key interest rate. Labor market conditions and declining commodity prices have also detracted from results, but industrial production, dwelling approvals and less downbeat results for consumer expectations have been tailwinds.