US troops out of Iraq, Australian rates back in play, and the bond market finds a floor

The withdrawal is a textbook case of what happens when a great power's stated goals and its actual staying power diverge. The US entered Iraq in 2014 with a specific, limited mission: degrade Islamic State. That mission was, by most measures, completed years ago. What kept troops there longer was the broader logic of forward presence, the idea that having soldiers in a country deters rivals and reassures allies. The cost of that presence, in money, political capital and the occasional casualty, eventually outweighed the benefit in Washington's calculation.

The precedent worth reaching for is the Soviet withdrawal from Afghanistan in 1989. The parallel is imperfect: the US is leaving Iraq on agreed terms, not after a military defeat, and the Iraqi government asked for the exit rather than collapsing. But the dynamic that followed in Afghanistan, rival factions moving fast to claim ground once the external power left, is exactly what France 24 and DW are flagging for Iraq now. The honest limit of that comparison is that Iraq has a functioning, if fragile, state and an army. Whether that is enough to hold the line against well-funded militias is the question nobody can answer yet.

The jump from 3.5% to 4% is a cost-push story, meaning prices are rising because of higher input costs rather than because Australians are suddenly spending more. The treasurer pointed directly at global oil prices, which feed into fuel, freight and eventually the price of almost everything on a supermarket shelf. In the AD/AS model you cover in Economics, this is a leftward shift of the short-run aggregate supply curve: the same level of output now costs more to produce, so the price level rises even without any increase in demand.

The RBA's dilemma is that the standard cure for inflation, raising the interest rate it charges banks to borrow overnight, works best against demand-pull inflation, where people are simply spending too much. Against a cost-push shock driven by oil, rate rises do not reduce the cost of fuel. What they do is slow borrowing and spending enough that firms cannot pass on their higher costs without losing customers. That works, but it is slow and painful, and with four hikes already delivered, the RBA has to weigh whether a fifth will cool prices or just cool growth. One month of data is not proof of a new trend, but the direction is clear enough that markets are not waiting.

The number that matters here is not the yield itself but what it is measured against: the Federal Reserve's current policy rate. The gap between the two, called the term premium, is the extra return investors demand for locking their money up for 30 years rather than rolling over short-term loans. When that gap widens, as it has been doing, it tells you that investors are worried about something beyond just where the Fed sets rates next month. The two main candidates are persistent inflation, which erodes the real value of a fixed bond payment, and the sheer size of US government borrowing, which means a lot of new bonds hitting the market.

The RBI's situation in India is a direct consequence of this. When US yields rise, money tends to flow out of emerging markets like India and into US bonds, because the return on a safe American asset has become more attractive. That puts downward pressure on the rupee, which in turn makes India's oil import bill more expensive in rupee terms, which feeds back into domestic inflation. The BofA forecast in today's news, that the RBI may raise its own rate by a full percentage point by mid-2027, is partly a response to this chain. Whether the Fed's next move is a cut or a hold will do more to determine the rupee's path than almost anything the RBI does on its own.

China's warning is a use of what trade economists call countervailing threat, the promise to impose costs on a trading partner if they act first, in order to deter that action before it happens. The logic is the same as a tariff war's opening move: make the other side calculate that the pain of retaliation outweighs the benefit of the restriction they were planning. It works best when the threatening country has genuine leverage, meaning the other side exports something it cannot easily sell elsewhere. Europe exports cars, machinery and luxury goods to China, and Chinese consumers are a large enough share of the market for brands like LVMH or Volkswagen that the threat is credible.

The harder question is whether deterrence holds when both sides have domestic political pressure pushing them toward restriction. European manufacturers have been lobbying for protection from cheaper Chinese goods, and Beijing has its own industrial-policy reasons to keep exports flowing. The US-China deal signed last week complicates this further: if Washington and Beijing are quietly reducing tariffs, Brussels risks being the odd one out, facing Chinese retaliation while its main ally has already cut a separate deal. That asymmetry is what makes this worth watching, even if no concrete measure has been announced yet.

The BofA forecast puts the RBI in a position that sits at the heart of the open-economy macroeconomics unit: the impossible trinity, or the idea that a central bank cannot simultaneously control its exchange rate, keep capital moving freely across borders, and set its own interest rate independently. India has chosen to prioritise exchange-rate stability and independent monetary policy, which means accepting that capital will flow in and out in response to rate decisions. If the RBI raises rates while the Fed holds or cuts, the interest-rate gap between the two countries widens, making Indian assets more attractive and pulling dollars in, which supports the rupee.

The risk the RBI is managing is that inflation in India is not purely a domestic story. Global oil prices, which are set in dollars, feed directly into India's import bill. A weaker rupee makes that bill larger in rupee terms, which pushes up the cost of fuel, then freight, then food. Raising rates helps by strengthening the rupee, but it also slows the economy. I'd argue the BofA forecast is more a signal of how serious the inflation risk looks from the outside than a certainty about what the RBI will do: the committee has surprised markets before by holding when a hike was expected. The October meeting will be the first real test of whether the new inflation data changes the committee's mind.