Market Week in Review

Hi, welcome to the market week in review for the week ending 21st of August 2026. I'm Luke Pierce, part of the investment strategy team here at Russell. It's been a pretty light week on the data front, at least in the US. Anyway, uh but we have had some important data come out of the UK as well as some volatility within fixed income markets following an announcement from the US Treasury regarding their buyback operations and that's probably a good place to start given that it has been one of the biggest drivers of markets this week. Uh so the Treasury announced that from September it will at least double its purchases of US treasuries in the 10 to 20 and also the 20 to 30 year sectors moving from 2 billion pound per operation up to4 billion or more and that will run through to the next quarterly refunding announcement in early November. I think the announcement offered quite a bit of relief for long-end US bond yields u which had been under quite a bit of pressure since the last fed meeting. Uh so on the day 30-year yields fell around about 10 basis points or or so although at the time of recording they have retraced almost about half that move. Um we also saw the US dollar fall quite sharply. Um and interestingly we haven't seen those losses be huge brace. So those dollar losses have have been kept so far. And interestingly, we've seen gold rally quite sharply as well, extending what has been a pretty decent rebound in the commodity over the last month or so. I think there's probably just a couple more points to to make on this buyback operation uh or the announcement around it. I think first is that the signaling here is probably more important than the actual size of the purchases. I think this is really just another indication of the US administration's sensitivity to elevated bond yields. Uh we saw something pretty similar after liberation day where the administration walked back to the initial set of tariffs that were announced and we also saw something a little bit more recently um with regards to the coordination with Japan around the yen. Uh that was also partly born out of uh poly aimed at sort of preventing further selling of US treasuries as well. I think the second point here is that this isn't quantitive easing or it's not yield curve control at least in in my mind. So the Fed isn't creating reserves to buy bonds. It's not even the Fed actually purchasing the bonds. It's it's the US Treasury nor is it trying to kind of pin yields at any particular level. I think instead what's really happening is just the US Treasury is buying less liquid i.e. off the run uh longer maturity bonds and it's effectively funding those purchases through the issuance of short-term bills. Um so in a way this is much closer uh at least sort of economically in spirit to uh the Fed's so-called operation twist back in 2011. Uh so that was when it purchased longer maturity bonds and sold shorter maturity bonds. Although the numbers that we are talking about here, they are in order of magnitude smaller uh than what we saw from the Fed back in 2011. So this isn't nothing. Uh and Treasury Secretary Besson has already suggested that actually the size of the operations could increase even further what than what has already been announced. But ultimately I still think long end bonus will continue to move as the economic outlook moves as fiscal policy moves and the perception around all of that. Moving closer to uh my home here in the UK uh we had a couple of important data releases on inflation and the labor market. So we saw headline CPI pick up in the UK to just shy of 3% year-over-year which was broadly in line with expectations. A lot of that increase reflects the higher energy price cap uh which is feeding through into household bills uh rather than this kind of renewed acceleration in any kind of underlying inflationary pressures. And in fact, if you dig beneath the surface of that inflation report, if you look at services inflation, and this is really the part of inflation that has been a bit of a headache for the Bank of England for some time now, that continues to gradually decelerate. Um, but looking at the kind of rest of the year, the way that energy prices feed into the inflation data, we are likely to see headline inflation stay elevated or perhaps even rise a little bit further. Uh I think for the Bank of England though the key question is whether inflation is just heading higher or not but it's also whether those higher inflation expectations turn into higher wage expectations and whether that feeds through into the kind of broader domestic price pressures. So far based on the evidence that that we can see there isn't a lot of evidence of that and actually this week's employment report was also if anything on the sort of touch a soft softer side of things. Uh, so wages were actually a little slightly stronger than than expected, but the broader trend remains one of a labor market that is considerably less tight than it was a few years ago. So I think putting that all together, I don't think this week's data materially changes the picture for the Bank of England. Clearly, there are risks around higher and more volatile energy prices. That's been the case for a few months now. But ultimately, I still think the 40 to 50 basis points of hikes that are priced in for the Bank of England over the next year or so, I still think that's too much given the limited evidence of second round inflationary effects. So, we are seeing value in UK guilts uh particularly at shorter maturities. That's all for this week. Hopefully, see you next time. >> Hi, I'm Sophie Antaly, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.