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The Daily Fix: Strong Economic Growth Comes at a Cost As we move into Thursday’s trading session, with Asian trade set to ramp up, it looks like a tough day at the office for the Australian equity market, which we’re calling down around 1.2%. It’s also not the best lead for Japanese equities and the cash bond market, which reopen after a three-day hiatus. While we expect a positive open for the Nikkei 225, the anticipated sell-off at the long end of the JGB curve could quickly call that opening strength into question, with sellers potentially taking control from the outset. If Tuesday’s trade was buoyed by a barrage of positive headlines that lifted risk sentiment, the opposite was true through Wednesday’s session, and those dynamics should spill over into today’s trade across Asia and subsequently Europe. Bond yields take centre stage The focus has been squarely on the rampant sell-off and buyers strike across the US Treasury curve, although we’ve also seen aggressive moves higher in UK gilt and European government bond yields. Good news is bad news for risk, it seems, when the rate of change in bond yields is this aggressive. A significant upside surprise in the S&P Composite PMI resonated with bond sellers and pushed yields higher across the curve. That move was compounded by aggressive buying in Brent crude, driven predominantly by a defiant speech from Iranian officials at the UN General Assembly, which reinforced the view that the path towards any tangible agreement remains highly conditional. A poor US Treasury auction adds fuel Pressure intensified following the US Treasury’s $70 billion five-year auction, which was poor to say the least. The auction covered just 2.21 times, while the yield tailed by 4.3 basis points. Demand was weak, leaving primary dealers to take down a sizeable share of the issuance. That provided another catalyst for yields to move sharply higher, and we could soon see almost all parts of the Treasury curve above 5%, with the two-year yield itself not far away at 4.89%. Real yields deliver the bigger shock Importantly, this wasn’t simply an inflation shock. Breakevens moved more modestly, while two-year US inflation swaps increased by only around five basis points. The more aggressive move and key influence driving nominal UST yields came through real yields, with the US 10-year real yield closing at 2.76%, a new cycle high, after rising 13 basis points on the session. Interest rate markets have also contributed to the move at the front end. The market is now pricing a 61% probability of a Fed rate hike at the October meeting, with around a 40% chance of a follow-up hike in December. Terminal Fed pricing has also moved materially higher. September 2027 SOFR future pricing increased 15 basis points from the session lows to 4.88%. This isn’t simply a more aggressive repricing of the next Fed meeting, as the expected level of rates across the broader cycle has shifted higher. The US dollar finds strong demand That repricing has naturally supported the US dollar, with the DXY gaining around 0.6% and pushing firmly above 101. EURUSD traded to a low of 1.1370, while USDJPY continues to make a strong run higher. AUDUSD was the weakest performer in G10, with risk being taken out of the system and significant demand for volatility coming through the options market. LATAM currencies have also come under pressure, while cyclical currencies have been hit hard as broad US dollar inflows dominate. Gold feels the pressure The combination of a stronger US dollar and sharply higher real yields has also brought gold sellers back into the market. The yellow metal fell from $4,360 during Asian trade to a low of $4,275, representing a decline of 2% across the high-to-low range. With real yields pushing to fresh highs and the US dollar finding renewed demand, the macro headwinds for gold have become considerably stronger. The US economy run's hot S&P PMI releases come and go in terms of their influence for markets, and few had this report marked down as a major risk event. However, the sheer magnitude of the upside surprise, and the level of real GDP growth it signals, has brought the overheating debate firmly back into focus. With unemployment at 4.1% and growth running above trend, the US economy is showing signs of modest overheating. The Federal Reserve will therefore be firmly on notice. If the next inflation readings continue to print hot, policymakers may conclude that aggregate demand needs to be brought lower through the blunt tool of higher interest rates. Growth supports the dollar, but tests equities Given the relative strength of US growth and increasingly aggressive Fed rate-hike pricing, the US dollar continues to stand firm in its attraction to own. Equities are more complicated. Strong economic growth continues to support corporate earnings, but the speed and magnitude of the rise in bond yields represents a clear valuation headwind. For now, earnings growth is helping equities absorb the rates shock. The question is: for how long? Good luck to all.

The Daily Fix: China fires up it's IPO machine as Anthropic reportedly waits in the wings The IPO scene cranks up today, with humanoid robitics powerhouse Unitree set to list on the STAR Market, with pre-market trading building from 11:15AEST and full trade from 11:30 AEST. Our Unitrree pre-IPO market pricing implies an open around CNY640, which, if correct, would see the stock open at a premium to the IPO price of +330%. Not quite the opening percentage gains we saw in memory play CXMT recently, but certainly the sort of move you'd be fairly comfortable with, if lucky enough to have got a fill in the IPO process. Unitree has played the PR angle incredibly well, releasing its Superman humanoid robot to global coverage. While Unitree has an impressive reputation and is a highly respected brand within mainland China, on a global stage, if you hadn't heard of Unitree two weeks ago, there's a better chance you have now, with images of humanoid robots, sweeping social media, jumping over two metres from standing starts and sprinting on indoor tracks at speeds faster than Usain Bolt. China's perception of humanoid robots is incredibly positive, but the same can't be said in many Western countries, with many fearing an accelerated roll-out will lead to job losses over time and conjuring up images of Terminator and Robocop. But the movement has started, commercialisation is building, and China is by far the dominant player. The investment case for Unitree looks compelling, even if the valuation set at IPO is lofty. Anthropic adds to the IPO story This comes with reports surfacing from the Wall Street Journal today that Anthropic may be looking to IPO in the coming weeks. There was some conjecture over whether OpenAI would also follow suit, but that was later corrected, detailing they're not looking to IPO immediately. Given that OpenAI has sufficient funding in place for now, the thought-process is that they will hold out until early 2027 to IPO, rather than compete for insto capital with Anthropic, and potentially also Moonshot in China, with reports that it may look to IPO in HK later this year, if not early 2027. But with Anthropic having the revenue growth momentum and more compelling operating margins, as well as the edge in its impressive product suite, Anthropic may have come out on top had we seen a two-horse race to attract capital. China has made a statement to the world with its IPO rollout of late and the prospects are high for more companies in the AI and tech space, as well as the consumer space, come to market and tap investor capital for their respective expansion plans. And so, we watch the open today for Unitree and whether that spills into further gains from what is expected to be a huge initial move, as those who missed out on the IPO, which we know are plentiful given how incredibly oversubscribed it was, look to chase the opening tick. Anthropic's ARR weighs on the AI trade Anthropic hit us only recently with numbers detailing annual recurring revenue of $65 billion. Its revenue numbers are accelerating relative to those of OpenAI, and its operating margins seem to be in a better place as well. The ARR number of $65 billion is certainly strong in absolute terms, but it has been marked as one of the deciding factors behind why we saw US tech, semis and AI names across the board markedly weaker on the overnight US session. While an iniital rise to new breakout highs in long-end US Treasury yields were a source of concern, some have also pointed to the reported earnings and outlook from Fabrinet, a key component in the optical supply chain, where its Datacom division underperformed expectations. The combination has been another factor weighing on semis and the wider AI spectrum lower on the day, although volumes across the suite of listed equities in the space were lower than the 30-day average. This all seems fairly convenient, with a story being used to fit the price action and we'll see the degree to which that translates into selling of semis and tech through Asia, with our opening call for the Nikkei weaker on the day and the underperformer of the region. Higher UST yields add another headwind There's been focus on the crude markets, as there has been on US Treasury yields, with a move in UST 10s and 30s into new breakout highs on the day also acting as a headwind for these duration assets. That's not necessarily just because of how higher yields impact valuations and present values, but also because the higher cost of capital increases the hurdle rate for the enormous AI build-out. I'm not sure how much weight I put on crude being an influence across markets, as while we did see a move up to $92 in front-month Brent futures, the high-low range on the day was only $1.39, with price settling around the 50th percentile of that range. That's incredibly tight relative to what we've seen recently. There wasn't much movement in US-2yr Treasuries or US inflation expectations to back this up either. USD calm, gold trades like a risk asset The US dollar has been fairly calm. We've seen the Dollar Index push into 100 again, but ranges have been tight across the G10 space, and certainly in EURUSD. What we did see was a reasonable move to the downside in gold, with the yellow metal seemingly locked onto Nasdaq futures and semis and trading as an out-and-out risk asset as opposed to the safe-haven play we may have expected to see. A challenging backdrop, but Unitree is a different beast With high-beta assets under some pressure on the equity side, term premia rising in bond markets, and semis and AI trading heavy, it's perhaps not the day where companies would ideally want to list an IPO. But Unitree is a different beast and unique in many regards. It is the first major humanoid robotics company to come to market in what is going to be a major growth thematic for investors to deal with, and it has first-mover advantage here. We watch the open, but good things are clearly expected... Good luck to all.