CIO market update for September 2025

In this CIO market update, Rob Hogg reviews September’s key market drivers. Global equity markets recorded positive returns over the month, and Australian data led to a rethink of the forecast path for future rate cuts. US inflation momentum is rising, which is putting rate cut expectations at risk of revision.

Jump to ⏬:  USA  |  AUS  |  Outlook

In September global equity markets recorded positive returns, with most markets rising steadily, with several markets setting new record highs.

Tariff-related developments played a subdued role during the month, having little impact on overall market movements. Core or underlying inflation outcomes in many countries continued to exhibit “stickiness,” while most macroeconomic data continued to point to a reasonable likelihood of a soft landing.

Key events in September included the US central bank’s mid-month rate cut. At 0.25%, the cut was less than some analysts had hoped and was accompanied by a statement that emphasised the two-sided risk to future policy moves. Global bond yields, which had slipped lower early in the month up until the day of the Fed meeting, generally rose from that point. Global curves flattened with longer maturity yields generally falling, while shorter-term yields were either near unchanged or slightly higher over the month.

In Australia, the stickier-than-expected August CPI led to a rethink of the forecast path for future rate cuts, causing market interest rates to rise. Shorter maturity securities (2- and 3-year bonds) witnessed the largest rise in yields over the month (both up around 0.15%) while 10-year yields rose by only 0.02% as the Australian curve “bear-flattened”. This trend was further reinforced as the Reserve Bank left rates on hold at 3.6% at their end-of-month meeting, noting that private demand is recovering while inflation appears to be more persistent than expected in some areas.

As Australian rate cut expectations were wound back in September, it made it difficult for equities to advance, and the Australian equity market ended very slightly lower on the month, one of the few global equity markets to record a loss in September.

The Australian dollar (AUD) rose very slightly against the US dollar (USD) over the month, appreciating to AUD/USD 0.6610 from AUD/USD 0.6445.

Gold prices continued their huge calendar 2025 run, appreciating a further 10% in September (Comex December 2025 Futures), taking gold’s calendar year-to-date appreciation to around 45%

At the time of writing this update, the US government has entered another shutdown. Initial indications from the markets suggest a lack of serious concern, but there is likely a presumption that it may be resolved quickly.

Key market movements over the month were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) slipped by -0.65%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index rose 3.4%.
• The US equity market (S&P 500) rose 3.5%.
• Australian 10-year bond yield rose by just 0.02% to 4.30%.
• Australian 3-year bond yield rose by 0.15%, closing at 3.55%
• The US 10-year bond yield fell by around 0.08%, closing at 4.15%, while 2-year yields fell by just 0.011% to end at 3.61%
• The Australian dollar moved slightly higher against the weaker USD, appreciating to AUD/USD 0.6610 USD/AUD from 0.6445 USD/AUD.

Key market movements over the month

In this monthly update, we look at:

• Risks to the current market consensus
• US central bank cuts rates but remains data dependent
• US inflation momentum rising, putting rate cut expectations at risk of revision
• US growth momentum is slowing, but slowly
• Even as the AI theme again drives share market returns in September, more articles question the expected growth of AI-related investment spending.
• Australian monthly CPI weighs on hopes for a further rate cut in 2025
• The Australian economy continues to move ahead, recovering slowly
• Australian house prices are gaining upward momentum
• Even as the Australian economy is recovering, employment growth is slowing, and rising unemployment seems likely in the coming months
• Australian equity market recap for September
• The outlook

Risks to the current market consensus

Despite the slight hiccup in US rate cut expectations on the day of the mid-month US central bank meeting, market expectations remain fixed on two additional US rate cuts in 2025, with several more expected to be in prospect for 2026. This view has been broadly held, even as growth indicators have remained generally encouraging, pointing to a soft landing, while inflation momentum has continued to rise. This combination of supportive growth dynamics and expected rate cuts has continued to support US equity markets, augmented by solid earnings growth expectations. But there are two clear risks to this equity-supportive consensus view.

• If we continue to see growth resilience and sticky inflation, the likelihood of US rate cuts through the end of 2025 (and into 2026) will likely diminish, which could put earnings growth forecasts at risk.
• Alternatively, if growth prospects were to “crack”, perhaps indicated by a sharp employment slowdown (potentially including falls in employment), there is little currently priced into markets for recession risk. This outcome would also put earnings expectations at risk.

In other words, a near-nirvana of continued growth accompanied by rate cuts is what is currently expected by most market participants. However, there are significant risks associated with this consensus.

For the equity market, the importance of the combination of growth and rate cut dynamics is evident in the chart below from GS, which shows that equities typically rally following the first Fed cut (following a pause) if the economy continues to grow. As noted above, if growth falters or rate cuts don’t materialise, there appears to be a risk to market pricing.

Market outlook critically dependent on how rate cuts and growth interact in coming months

Source: Goldman Sachs

 

In Australia, the month of September provided an example of what the market reaction can be as rate cut expectations are revised lower. Released around mid-month, the stickier-than-expected August monthly CPI led to a repricing of expected rate cuts, with what had been a consensus expected November rate cut pushed out into 2026. This led to a sharp rise in shorter-dated interest rates (those most sensitive to rate cut expectations) and a soggy equity market performance over the month.

Change in the Australian yield curve – end August vs. end September

Source: Bloomberg

 

For the RBA, the rate cut argument is becoming increasingly difficult to make, as underlying price pressures appear to be resilient in the key “market services” sector. With this area of the CPI driven largely by wage-related costs, it tends to be “stickier” than other areas of the CPI. Along with housing-related costs, this area of the CPI is making it increasingly difficult for the RBA to meet the market’s expectations for rate cuts. Additionally, the domestic economy appears to be recovering, which also reduces the need for further cuts. Against this macroeconomic backdrop, and given current market valuations, we maintain our level of caution regarding equity market prospects in Australia and globally.

CIO market update: September major developments in review

• USA •

The US central bank cuts rates but remains data-dependent. Absent a marked weakening in employment, expectations for a rate cut may be overly optimistic.

Around mid-month, the US Federal Open Market Committee (FOMC) voted to lower the target range for the federal funds rate by 0.25 percentage points to a new target range of 4.00% to 4.25%. But, relative to market expectations, the size of the cut and the statement’s contents were less “dovish” than hoped. This caused bond yields and the USD to rise, while equities were slightly weaker.

Fed chair Powell described the rate cut as risk management, saying that labour demand had slowed sharply, Later in the month Powell again emphasised the risks to both sides of the FOMC’s dual mandate saying, “near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation,”…”Two-sided risks mean that there is no risk-free path.”

For the Fed, the challenge is balancing what appears to be a weakening trend in employment while maintaining positive momentum in economic growth and inflation.

In the absence of a marked further deterioration in employment conditions, there appears to be a risk that current market expectations for two additional rate cuts this year may be too optimistic.

US rate cut expectations

Source: Bloomberg, ANZ

US inflation momentum rising, putting rate cut expectations at risk of revision

Measures of underlying inflation continue to point to rising momentum in inflation pressures. The “core” index (for all items less food and energy) rose 0.3% in August, as it did in July, leaving the annual change at 3.1%. Underlying measures produced by the Cleveland Federal Reserve display a similar pattern, with month-to-month pressures continuing.

Sticky inflation has been a developing theme globally, and this is also apparent in the US, as shown in the chart below from the Federal Reserve Bank of Atlanta, which displays the latest three-month and annual changes in “sticky” prices. Sticky prices are defined as those that are slow to change (either up or down) through the economic cycle. Momentum in these types of goods and services has increased in recent months, which at the margin makes the Fed’s rate-cutting plans increasingly difficult to implement.

US “sticky” inflation (3 month % change annualised)

Source: Federal Reserve Bank of Atlanta

US growth momentum slowing, but slowly

The latest survey of Purchasing Managers suggests that growth momentum in services and manufacturing has continued to ease in recent months.

“The monthly profile is one of growth, having slowed from its recent peak back in July, and September saw companies also pull back on their hiring. Softening demand conditions are also being reported more widely. The number of companies able to hike selling prices to pass these [tariff-related] costs on to customers has fallen, hinting at squeezed margins but boding well for inflation to moderate”. 

“In manufacturing, there are also signs that disappointing sales growth has caused inventories to accumulate… The inventory build-up, of course, also hints at some downside risks to future production”.

S&P Global US Composite PMI Output

Source: S&P Global

 

Even as the AI theme again drives share market returns in September, more articles question the expected growth of AI-related investment spending

With the AI thematic returning as a key market driver and contributing to a solid increase in the NASDAQ index over September (+5.6%), it was interesting to see more articles questioning some of the projected upside in AI-related investment spending in September.

In its sixth annual Global Technology Report, released on September 23, global consulting firm Bain questions the industry’s capacity to fund projected power requirements to meet AI compute needs. They claim that, on current expectations, by 2030 global incremental AI compute requirements could reach 200 gigawatts, with the US accounting for half of the power and note that even if companies in the US shifted all of their on-premise IT budgets to cloud and reinvested the savings from applying AI in sales, marketing, customer support, and R&D into capital spending on new data centres, the amount would still fall short of the revenue needed to fund the full investment, as AI’s compute demand grows.

AI-related capital expenditure in the US has become a key driver of economic growth, and the expected AI-related spend is a significant market driver. Over the past year, AI-related capital expenditures (capex) have grown by 15% in nominal terms, and analysts at Zenith Investment Partners estimate that in the first half of this year, such spending contributed around 0.5 % points to GDP. They note that the last time we saw capex growth of this magnitude was in the late 1990s during the dot-com boom. It is the productivity boom forecast to follow this investment spending that appears to be playing a significant role in driving US equity market prospects.

US Private Investment on Information processing, computers (annual change%)

Source: St Louis Fed, Zenith Investment Partners

 

• AUS •

Australia – monthly CPI weighs on hopes for a further rate cut in 2025

The monthly CPI rose 3.0% in the 12 months to August 2025, very slightly more than expected, and up from 2.8% in July, the highest annual inflation rate since July 2024. While the key underlying measure – the “trimmed mean” – recorded a slowing in its annual pace of growth 2.6% (from 2.7%) the underlying composition of the release (ongoing inflation pressures in “market services”) led to market analysts upwardly revising their estimates for underlying inflation in the upcoming September quarter CPI (due to be released at end October).

This release led to an adjustment in money market pricing as analysts revised their expectations for further RBA rate cuts downward. Market expectations are now consistent with a rate cut by March next year, whereas before the inflation data, there were two further full cuts expected – in November 2025 and May 2026.

Monthly CPI

Source: ABS

 

Monthly CPI releases can be highly volatile, whereas quarterly releases provide a more robust guide. However, until October 29 (when the September quarter CPI is released), absent a clearer deterioration in employment data, the likelihood of a 2025 rate cut appears to be much diminished.

The Australian economy continues to recover, albeit slowly

National Australia Bank’s latest (August) survey of business conditions revealed that forward orders (a key leading indicator of business conditions) rose again, continuing the upward trend evident over the past year. The series is now in positive territory for the first time in two years. Encouragingly, cyclically sensitive sectors such as manufacturing and retail both registered improvement in confidence and conditions (in trend terms). And while conditions and confidence are strongest in Queensland, they are also now both positive in Victoria.

Business Forward Orders

Source: NAB

 

House prices gaining upward momentum

According to housing data provider Totality, Australian house prices are accelerating, with September (+0.8%) marking the strongest monthly gain for national dwelling values since October 2023. Capital city prices rose at a slightly faster pace, up +0.9% in the month. Further underlying the strengthen market, price growth is becoming more broad-based, with every capital city and rest-of-state region recording an increase in dwelling values over the month, quarter and most recent 12-month period Painting a similar theme of broadening, the strongest pace of growth has rippled from the lower quartile of the market to the broad middle, likely as a result of the RBA’s series of rate cuts.

Rolling three-month change in dwelling values – combined capitals and regionals

Source: Cotalitity

 

Even as the economy recovers, employment growth is slowing, and rising unemployment appears likely in the coming months.

In August, employment decreased by 5,000 people, and the number of unemployed individuals fell by 1,000. This combination left the unemployment rate steady at 4.2%. The growth in the number of people employed and hours worked now appears to be peaking, suggesting that an increase in the unemployment rate is imminent.

Employment and hours worked 

Source: ABS

 

While it seems strange that employment should be softening just as the economy is recovering, the overall trend may be being impacted by a slowdown in the outsized government (health-related) employment growth over the past year. As public-sector employment growth is slowing, it may be masking a nascent improvement in private-sector employment.

Australian equity market recap for September

The ASX 300 Accumulation Index (total return) retreated by -0.65% in September, while Small Caps provided a positive return of +3.4%. The Small Ordinaries has outperformed the broader market significantly over the past two months, assisted by a P/E rerating of small caps compared with large caps. As we noted earlier, it appears that the downward revision to rate cut expectations weighed on equities at the larger-cap end of the market during the month.

On a sector basis, Materials and Utilities were the only positively returning sectors in September, while Energy and Consumer Staples produced the most negative returns.

• CIO market update: Outlook •

We remain cautious about the market outlook. This is particularly due to the evolving policy dilemma in the US. If the latest US jobs report is indicative of an acceleration in the pace of economic weakening, and this is accompanied by an increase in US inflation momentum, 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 optimistic about prospects in Australia, given that the domestic economy appears to be showing signs of recovery following the RBA rate cuts this year. While domestic rate cut expectations have been scaled back, the RBA still has ample room to adjust policy if required, and an elongated process of rate cuts is no longer being discounted by the market.

 

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