The Daily Brief

Sterling ended September with a bounce rather than a break. The pound recovered from Tuesday's 13-week low near 1.3203 to close yesterday's session around 1.3265, a gain of roughly 0.5% in two days, as quarter-end rebalancing and short-covering met an upward revision to second-quarter growth. The composition of that recovery matters more than its size: much of it was the mechanical unwinding of positions built during a month in which the pound lost around 2% against the dollar, and month-end demand of that kind does not roll over into October.

The data offered firmer footing than the price action suggests. Second-quarter GDP was revised up to 0.5% from 0.4%, leaving annual growth at 1.4%, the strongest in over a year, while the current account gap narrowed to £19.9bn, its smallest in seven quarters. A smaller external deficit reduces the UK's reliance on foreign capital at the margin, which is precisely the vulnerability that has punished sterling while gilt yields rose for fiscal rather than monetary reasons. Stronger growth also hands the committee's hawkish majority more cover than this week's dovish dissent implied, which helps keep November hike pricing above 80% intact.

The gilt market remains the constraint. Ten-year gilts climbed back to around 5.41% yesterday from 5.37% on Tuesday, deepening September's sell-off, and now sit only around 13 basis points above Treasuries after the latest US climb. The premium that had been read as compensation for fiscal risk has narrowed without sterling being re-rated, which leaves the pound tethered to the dollar side of the equation: when Treasury yields rise for term-premium reasons, as they did yesterday, sterling has little domestic momentum to lean against them.

Sterling opens near 1.325, about 0.4% above the 1.3203 low and roughly 2% below where September began around 1.355, which leaves it in the lower fifth of the month's range despite the bounce. With quarter-end support now spent, the balance of risk still leans towards a retest of 1.32, with June's 1.3142 behind it, before any recovery to 1.33: the domestic data have improved, but the dollar is being driven by long-end yields that UK news cannot reach. A move back through 1.33 most likely needs Treasury yields to retreat first, and Friday's US payrolls are the nearest test of that.

August PCE gave the Federal Reserve the softer print the doves wanted. Core prices rose 0.2% on the month against 0.3% expected, taking the annual rate to 3.0% rather than the 3.3% consensus, and headline PCE eased to 0.3%. The policy-sensitive end of the market responded as expected, pulling the probability of an October hike to roughly 38% from 51% before the release. What it did not do is buy duration. The 10-year closed at 5.29% and the 30-year near 5.63%, and the Dollar Index sits at 101.61 this morning, its strongest in 14 weeks.

Yesterday's brief argued the dollar's floor had moved from the Fed to the long end of the curve, and PCE was the test of that view. It held: policy expectations fell, long-dated yields rose, and the dollar finished higher. What is new is the growth evidence underneath it. Second-quarter GDP was revised up to 2.2%, real consumer spending rose 0.6% in August, the strongest in 17 months, private payrolls beat expectations at 90,000 and the Chicago PMI jumped to 58.8 against 51.2 expected.

An economy running this hot gives bond investors little reason to accept lower term premium, and a dollar supported by long-end yields is harder to dislodge with soft inflation data than one supported by the Fed alone. That changes how the rest of the week should be read. The 28 October meeting now hangs on less than even odds, and Friday's September payrolls report, with consensus around 90,000, becomes the swing factor. A strong number would reopen the hike debate PCE has just narrowed and land on a curve already carrying elevated term premium, a combination that would lift yields and the dollar together.

A weak number would trim hike odds further, but the long end showed yesterday that it is prepared to look through helpful data. At 101.61, the Dollar Index has now pushed through the 101.5 level that capped it earlier in the week, sits about 2.9% above its four-month low near 98.7 and is closing on its highest level since April 2025, while the quarter-end model estimate near 100.1 sits some 1.5% below the market. With October hike odds back at 38%, there is more room to reprice hawkishly on strong data than dovishly on weak, and a yield-driven bid means any dips are likely to be shallower than the data alone would justify. A sustained move back below 101.5 probably needs the 10-year under 5.2% rather than another soft inflation print.

R20.5 billion. South Africa's August trade surplus came in at close to six times the R3.5 billion expected, the widest in five months, and it landed alongside a run of local data that all leaned the same way. The budget deficit narrowed to around R29 billion against roughly R50 billion forecast, producer inflation slowed to 5.0% from 5.7%, private credit growth beat expectations at 7.47%, and second-quarter direct investment inflows were the largest since 2023. The 2035 benchmark bond rallied in yesterday's session, its yield falling around 10 basis points to 8.73%.

The composition of the trade number is less flattering than the headline. Imports fell 7.8% to a five-month low, with purchases of components, chemicals and vehicles all lower, while exports also slipped 5.8% as shipments of mineral products and precious metals declined. A surplus built on weaker import demand is partly a signal of soft domestic activity rather than export strength, which matters in an economy that contracted in the second quarter. For the rand, though, the short-run arithmetic is what counts: fewer dollars needed to pay for imports eases one source of structural pressure just as the October fuel adjustment is about to add another.

Yesterday's session showed where the binding constraint sits. The rand firmed to around 16.33 by mid-afternoon as the data rolled in, then surrendered most of that gain into the close as Treasury yields pushed to fresh highs and the dollar recovered its post-PCE dip. It opens near 16.44 this morning. A day in which domestic news was unambiguously supportive still ended close to where it started, because the external driver, the rising cost of long-dated dollar funding, outweighed it.

This morning's Absa manufacturing PMI, last at 45.8, will test whether the import slump is a symptom of contraction on the factory floor. A print still well below 50 would reinforce the reading that the surplus is cyclical weakness in disguise, and that last week's rate increase is landing on an economy with little momentum to absorb it. At 16.44, the rand sits near the top of its 16.05 to 16.50 September range, with the early-August peak at 16.98 marking the outer edge of the band it has held since.

The domestic confirmation that was missing a day ago has now arrived, which argues against South Africa itself being the reason for a break above 16.50 and keeps the 16.29 model estimate reachable on fundamentals alone. The asymmetry, though, is external: while the US 10-year holds above 5.25%, a test of 16.50 remains more likely than a return to 16.30, and a soft US payrolls print on Friday is the most plausible route back into the lower half of the range.

This weekend's OPEC+ meeting arrives with the group's central problem having partly solved itself. With Gulf exports already back close to pre-war volumes, the newest signal is in the strait itself: flows through Hormuz have climbed to around 13.2 million barrels a day and Saudi Arabia has restarted loadings at Yanbu, while US crude inventories unexpectedly rose last week. Brent is trading near $96.94, down 1.1% overnight. The group is expected to leave November quotas unchanged, which in a market where physical supply is normalising faster than diplomacy amounts to letting price discover the residual risk on its own.

That residual risk is political rather than physical. Tehran has confirmed it received a US proposal on reopening the strait after submitting its own conditions last week, but both sides continue to claim control of the waterway and no agreement is in sight. The result is a barrel that has lost most of its supply-shock justification yet still trades around 50% above its level a year ago, the clearest measure of how much of today's price is insurance against a breakdown rather than payment for scarcity.

Bond markets are telling a different story from oil. Long-end yields are rising even as crude eases: Japan's 10-year has edged up to 3.10% after the Bank of Japan's latest summary of opinions pointed to scope for faster tightening, Australian yields are pushing toward 2011 highs, and gilts hold near 5.41%. Equities are splitting along sector lines rather than moving together. The Nikkei is up around 2.9% on a technology rally and US futures are up around 0.5% after the S&P 500 and Dow closed September with monthly losses, while the ASX 200 has dropped more than 2% as higher domestic rates bite. Gold is steady near $4,176.

Brent near $97 sits about 7% below the $104.5 quarter model estimate and only around $1.50 above the $95.5 area where it closed in early September, the level that marks whether the month's political premium survives. Holding above it into the weekend would say the market still prices a meaningful chance of talks breaking down; a close below would hand back September's gains and signal that diplomacy, rather than supply, has become the swing factor. With quotas unchanged and flows near normal, the path below $95.5 needs a signed Hormuz agreement, while a collapse in talks would put the $104 area back in play quickly, a skew that keeps energy-linked cost exposures expensive to leave open even on a morning when the barrel is falling.