CIO market update for August 2025

In this CIO market update, Rob Hogg reviews August’s key market drivers. Powell’s dovish Jackson Hole speech boosted global equities. US small caps outperformed, while long-dated bond yields kept rising worldwide. Australian data now suggests a weaker case for further RBA cuts. Inflation and tariffs remain central themes. Reporting season revealed improving sentiment but also new risks for corporate confidence

Jump to ⏬:  USA  |  AUS  |  Outlook

 

Key during the month was US central bank Chair Jay Powell’s Jackson Hole speech on August 22, when he suggested that “with [monetary] policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance“. With this statement being considerably more conciliatory than the market had expected, indicating that the US central bank might cut rates at its upcoming September meeting, Powell’s words led to strong price gains for both equities and bonds on the day of the speech.

The renewed possibility that a US rate cut might occur in September led to a sharp fall in shorter-dated US interest rates (2-year bond yields fell by 0.34% over the month) and the strong performance of US small companies, which are regarded as most sensitive to any policies designed to boost domestic US growth (The Russell 2000 index returned 7.0%).

Supported by Powell’s comments, most global equity markets rallied alongside US equities during August. However, European equity markets performed the poorest, with the French market suffering in particular from rising political uncertainty.

Reporting season adds momentum to market gains

The US reporting season proceeded solidly, and in the midst of our domestic reporting season, the Australian share market returned a solid 3% with Small Caps returning an even stronger 8%.

A global theme during the month was the continued weakening of long-term bond prices, reflected by rising yields of 30-year bonds across the globe. The reason for this weakening is not entirely clear, but it appears to be related to a sense that governments globally will be more fiscally expansive in the future than they were before COVID, running larger budget deficits and issuing more debt.

As noted above, US bond yields fell over the month, more so at the shorter maturity end, as rate cut expectations increased and the yield curve “bull-steepened”, with yields falling the most for shorter maturity securities. Global markets followed a similar pattern with curves steepening globally.

Australian bonds followed the steepening pattern in the US, but the move here was a “bear steepening”, with yields rising at the longer end of the curve while remaining little changed at the shorter maturity end.

After appreciating in July, the US dollar reverted to its weakening calendar 2025 trend, slipping by 2% in trade-weighted terms over the month (DXY index). The Australian dollar was slightly stronger against the USD over the month, rising from 0.6430 USD/AUD to 0.6545 USD/AUD.

Key market movements over the month were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) rose 3.2%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index rose 8.4%.
• The US equity market (S&P 500) rose 2.1%.
• The Australian 10-year bond yield was basically flat at 4.27%.
• Australian 3-year bond yield fell slightly to close at 3.37%
• The US 10-year bond yield fell by around 0.16%, closing at 4.23%, while 2-year yields fell by 0.34% to end at 3.62%
• The Australian dollar moved higher against the weakening USD, appreciating to AUD/USD 0.6536 USD/AUD from 0.6430 USD/AUD.

Key market movements over the month

 

In this monthly update, we look at:

• US Fed Chair Powell’s Jackson Hole speech
• The continued rise in global 30-year bond yields
• Inflation expectations are anchored in Australia, but rising in the US and Europe
• The average effective tariff rate in the US has settled at just under 20%
• The US housing market displaying recessionary conditions
• Market sanguine about the underlying trends in the monthly US CPI
• Magnificent 7 US Tech stocks take a slight hit from a report that questions the potential gains from AI
• RBA cuts rates as expected in mid-August, but with a number of economic indicators now improving, how many more cuts can we expect?
• Several economic indicators suggest there is a diminishing case for more rate cuts in Australia
• Australian reporting season themes
• The outlook

Powell’s signal boosts sentiment, but risks build

As was the case at the end of July, market sentiment also ended August optimistically, particularly in the US, with US Fed Chair Powell’s opening of the door to a potential rate cut pivotal in driving market performances. In contrast to recent months, there was little in the way of trade deal announcements to impact market performance during August.
>As the month progressed, investors were faced with having to factor into their thinking President Trump’s increasingly challenging of US monetary policymakers, including his “sacking” of Fed Governor Lisa Cook, with her responding by suing Trump as the month ended.

US data remained generally resilient over the month, with investors most focused on employment market trends (which appear to be weakening) and consumer price trends (which seem to suggest a re-acceleration in inflation momentum. These are opposing trends for monetary policymakers. Market attention will continue to focus on assessing the likely speed and severity of the current US slowdown, as well as the Fed’s policy response. It’s possible that the economic weakness, which is now becoming more clearly apparent in US employment data, becomes a catalyst for a series of Fed rate cuts.

Cautious optimism for Australia

Our view remains that the Australian economy is better positioned than many other economies to withstand any global market, tariff, and macroeconomic turbulence. Fiscal support for the economy and the lagged impact of the three rate cuts to date are likely to continue having a positive influence.
>While we maintain our level of caution regarding the global backdrop and the current stretched equity market valuation, we believe Australia has significant potential to fare better than most other economies and markets during this highly uncertain period.

 

CIO market update: August major developments in review

Fed Chair Powell’s speech at the annual Jackson Hole central bank conference raises hopes for a September Fed rate cut, providing a sharp boost to markets

US Federal Reserve Chair Powell’s speech to the Jackson Hole central bankers’ conference was far more “dovish” than the market had expected and on the day of his speech led to significant gains in equities (especially small caps, +3.3%) and bond prices – especially shorter-dated securities such as 2-year notes which saw their price rise as yields fell by 0.15%.

The impact of Powell’s Jackson Hole speech needs to be considered in the context of the Fed’s policy stance at their July 30 meeting, when they left policy rates on hold, saying “the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge”

But Chair Powell now seems considerably more open to the possibility of a rate cut in September, saying to the Jackson Hole audience on August 22 that, “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance [presumably toward a rate cut]“.

Global 30-year bond yields rose further in August, even as 10-year yields remained within their recent range

Ten-year government bond yields in most advanced economies are within the range in which they’ve been trading since 2023, but 30-year yields have been trending higher.

10-year government bond yields (%)

Source: Bloomberg, RBA

 

Ten-year yields remain below their peaks reached in late 2023 in most advanced economies. However, “term premia” (observed by reference to the slope of the yield curve) have risen, most likely in response to the higher expected growth of public debt in a few large economies and further declines in the size of central bank balance sheets (quantitative tightening).

Reflecting the increase in term premia, 30-year government bond yields have risen more noticeably since the start of the year in many advanced economies, a trend that continued through August. 

The trend toward rising long-term yields has been occurring longest in Japan, but the recent expansionary German fiscal spending package and rising concerns about French political uncertainty have added impetus to the sell-off in long-term bonds more recently. So far, term premia remain modest by historical standards, suggesting that investors do not have material concerns about fiscal sustainability; however, the deterioration of long bond prices (rising yields) bears watching.

Global 30-year government bond yields

Source: Bloomberg

 

Inflation expectations are anchored in Australia, but rising in the US and Europe

Measured via bond market pricing, global longer-term inflation expectations remain stable; however, shorter-term inflation expectations have risen, primarily in the US. The increase in the US appears consistent with evidence that tariffs have had a modest inflationary impact to date in the US, and an expectation that inflation will be somewhat higher over the next year. Euro-area expectations have also risen this year, likely due to the significant fiscal spending package announced in Germany a few months ago.

In contrast, Australian inflation expectations have remained stable despite the volatility in tariffs.

Measures of inflation expectations

Source: Bloomberg, RBA

 

• USA •

The average effective tariff rate in the US has settled at just under 20%

For countries that have reached an agreement with the United States, tariff rates are generally higher than expected pre-Liberation Day, at between 15% and 20%. So far, the flow through to consumer prices has been far less than feared. The overall consumer price impact of tariffs will be driven by a blend of how much of the tariff impact is “swallowed” by importers, manufacturers/distributors and consumers. But the uncertainty around how the price impact is distributed is a key source of uncertainty for the US central bank and its rate-setting decisions.

Average Effective Tariff Rate on US Imports

Source: Yale Budget Lab, RBA

 

The US housing market displaying recessionary conditions

While the level of housing starts rose in July, building permits (leading indicators of the housing cycle) fell by 2.8%, continuing their calendar 2025 slump.

US housing starts and building permits

Source: US Census Bureau, Goldman Sachs

 

Reflecting the poor conditions in the US housing sector, a key survey of home builders (from the National Association of Homebuilders) remains at a very low level.

NAHB Index

Source: NAHB

 

Market sanguine about the underlying trends in the monthly US CPI

US inflation momentum still seems to be upward. Still, the July outcome was better than feared (less tariff pass-through than anticipated), leading to very small rallies in shorter-dated bonds (2-year – 5-year) and stronger equities on the day of release.

The US July core CPI rose 0.3% (m/m), in line with expectations, and the annual change rose to 3.06%. However, monthly momentum is rising – from 0.1% in May to 0.2% in June and then to 0.3% in July.

The headline rate rose 0.2% after rising 0.3% in June, leaving the annual change at 2.7%. But momentum in the headline CPI also appears to be upward, and this has driven the annual change higher in each of the past several months—from a post-pandemic low of 2.31% in April to 2.35% in May, then to 2.67% in June, and finally to 2.70% in July.

However, markets were relieved that there were no more signs of tariff pass-through to the consumer price level.

But unless the last sharp monthly deterioration in payrolls proves to be an accurate reflection of a sharp step down in US activity, it’s hard to see the Fed cutting rates much if inflation momentum is rising.

Annual change in underlying measures – momentum seems upward

Source: Cleveland Federal Reserve

 

Magnificent 7 US Tech stocks take a slight hit from a report that questions the potential gains from AI

Released in mid-August, a report, entitled The GenAI Divide: State of AI in Business 2025, has attracted huge attention because of the dramatic first line of its executive summary:

“Despite $US30 billion [AUD 46.5 billion] to $US40 billion in enterprise investment into generative AI, this report uncovers a surprising result in that 95 per cent of organisations are getting zero return.”

In fact, the report’s findings are somewhat more nuanced than the headline suggests. For example, the report focuses on companies that have deployed AI models customised to their own businesses, rather than general AI models such as ChatGPT or Google’s Gemini. And it is this facet of AI that, so far, seems to have borne little return to date.  Companies that have customised AI models must only be a very small subset of the rising number of companies now using AI in one form or another, so it’s not clear how true this statement would be for all companies.

AI hype faces scrutiny

But, with many AI-related companies having recorded very strong share price performances in the past few years, any hint that AI enthusiasm may be over-hyped has the potential to very severely impact share prices in AI-related stocks (such as those in the NASDAQ). One of the key risks is that the substantial amount of capital currently being invested in AI-related technology does not yield the expected productivity gains and return on investment.

Another related risk is that the pace of capex may slow more than expected. The charts below, from The Bank Credit Analyst, note that while most market focus is on capex spending, investor attention should be on free cash flow (FCF) trends, which tend to lead capex spending and share price performance.

Key clients of companies such as Nvidia – the so-called Hyperscalers – have already experienced a peak in their FCF. This may have implications for the pace of ongoing AI-related capex.

Hyper-scaler Capex and Free Cash Flow

Source: Bank Credit Analyst

 

• AUS •

RBA cuts rates as expected in mid-August, but with a number of economic indicators now improving, how many more cuts can we expect?

As expected, the RBA cut its official cash rate in early August by 0.25% to 3.6% and suggested more cuts could occur if inflation continues downward:

“updated … [RBA] forecasts for the August meeting suggest that underlying inflation will continue to moderate to around the midpoint of the 2–3 per cent range, with the cash rate assumed to follow a gradual easing path“.

But, apart from their comment about expected moderation in inflation, the rest of the RBA’s  accompanying statement gave little indication that further cuts are necessary:

• “more extreme [tariff] outcomes are likely to be avoided”
• “private demand appears to have been recovering gradually; real household incomes have picked up and some measures of financial conditions have eased”.
• “Various indicators suggest that labour market conditions remain a little tight.”

Indeed, if you look only at the last paragraph in the statement, it’s not abundantly clear what direction the next policy move might even be – “The Board will be attentive to the data and the evolving assessment of risks to guide its decisions”  

There seems to be a not insignificant likelihood that the RBA will cut by less than is currently priced, with cuts in November 2025 and February 2026.

The latest monthly CPI will likely keep the RBA on hold for a few more months

The latest monthly CPI (for July) rebounded to 2.8% on an annual basis, from 1.9% over the 12 months to June. Underlying measures were also higher, with the annual trimmed mean measure increasing by 2.7% over the year to July, up from 2.1% in June.

Monthly CPI

Source: ABS

 

Several economic indicators suggest there is a diminishing case for more rate cuts in Australia

The latest measures of consumer and corporate confidence both rose in August.

Consumer confidence is continuing to move higher

The Westpac–Melbourne Institute Consumer Sentiment Index posted a solid gain in August, rising 5.7% to 98.5, from 93.1 in June. The latest improvement follows the easing of interest rates in early August and a more positive tone from the RBA. The improvement in sentiment was broad-based across questions related to family finances, economic conditions, and whether now is a good time to buy a major appliance.

Australian Consumer Confidence

Source: Westpac, Melbourne Institute

 

Corporate confidence is recovering sharply

Growth in Australia’s business activity is accelerating, with faster expansions observed across both the manufacturing and service sectors. This trend is being driven by a solid rise in new orders. Improvements in underlying demand and expansions in customer bases over the last month led to the quickest increase in new manufacturing orders in almost three years.

Confidence in the manufacturing and services sectors

Source: S&P Global

 

Employment and hours worked rose in July

Although the pace of growth in employment and hours worked is slowing, the Australian labour market remains solid, and the unemployment rate remains at around 4.2%.

Employment and hours worked (indexed to June 2022)

Source: ABS

 

Australian reporting season themes

August is one of the two months of the year when most Australian-listed companies report their latest results to shareholders.

Some of the key themes this past month have included:

• Huge post-result volatility in the stock prices of even the largest companies (CSL, James Hardie/Woolworths, etc.)
• An elevated level of change in management ranks in some of the largest listed companies
• Improving consumer spending trends
• Increased discussion of the use of AI by businesses, but few examples of successful implementation
• Increased capital raising activity by gold companies, mainly to fund exploration  (reflecting the high level of confidence in the sector)
• A number of companies announced better-than-expected dividends (including several Special Dividends)
• Improving enquiry levels noted by developers, but little flow-through to actual housing starts so far (building costs are a key limiting factor)
• Weakness in the US economy, especially housing
• Ongoing underperformance of the Victorian economy
• Ongoing improvement in the New Zealand economy

 

• CIO market update: Outlook •

Where to from here?

We remain cautious about the market outlook. This is particularly due to the evolving policy dilemma in the US. Suppose the latest US jobs report is indicative of an acceleration in the pace of economic weakening, and this is being accompanied by an increase in US inflation momentum. In that case, the Fed’s policy flexibility will be constrained. Global equity valuations are elevated, leaving little room for disappointment from either poorer-than-forecast company earnings or fewer-than-expected official policy rate cuts.

We are relatively more sanguine about prospects in Australia, given that the data has generally coalesced around a path allowing the RBA to cut rates in the coming weeks and months to further support the economy. And, while any signs of better-than-anticipated growth could limit the extent of any further RBA rate cuts, this is the best possible reason for the RBA to consider ceasing or limiting its rate cut cycle. But the Australian equity market is also at an extended valuation level, which also makes it vulnerable to disappointment.

 

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