July 2025: No panic, no cuts – just GENIUS

In episode #13 of The Active Investor with SGH – July 2025: No panic, no cuts – just GENIUS, Steve Hiscock and Rob Hogg unpack July’s surprising sense of calm and the key policy shift that could shake things up – the passing of the GENIUS Act, a new US framework for regulating stablecoins. They discuss what it means for digital assets, how markets are handling fewer rate cuts on the horizon, and why investors are staying cautious in a still-volatile market.

 

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July 2025: No panic, no cuts – just GENIUS

Transcript:

Steve Hiscock:

Hello to everyone listening to our podcast, The Active Investor with SGH. I’m Steve Hiscock, the Chair of the company, and it’s my pleasure to be your host for today’s episode. In today’s podcast, we’ll examine what happened in July 2025 and discuss the outlook going forward. This podcast is being recorded on Wednesday, the 8th of August 2025, and joining me again today is our Chief Investment Officer, Rob Hogg. Hi, Rob. Welcome back again.

Rob Hogg:

Hi, Steve. Thanks for having me back again.

Steve Hiscock:

Thanks so much for your time. Can we start with what happened in July? Key market movements?

Rob Hogg:

Yeah, now let’s do that. Although, in some ways, it’s somewhat ancient history, it was ancient history relatively quickly. But look, broadly speaking, equity markets were higher. NASDAQ did best globally. And look, we think a lot of that was because a number of these trade agreements were reached. EU-US was probably the most important. Now, when it comes to trade agreements, there’s not much detail, and there’s not even certainty about the legality of these. But, anyway, in the market’s mind, this was progress. So, that was, along with the fact that US data, up until the 31st of the month anyway, was still reasonably resilient. Slowing, but reasonably resilient.

That changed, or seems to have changed, come August the first. However, back in July, we saw yields rise around the world across the yield curve. A little bit more at the shorter end of the curve. This is what we call a bear flattening. So, bear means that prices are falling, yields are rising, and a flattening to convey the fact that shorter-term yields rose by a little bit more than longer-term yields. And that was consistent, really, with what we saw in equity markets – that growth still seemed reasonably resilient.

And with that, the markets’ implied probability of rate cuts declined very slightly during the course of the month. The US dollar also increased in value during the month. That’s the first time the US dollar’s risen on a trade-weighted basis so far this calendar year. And again, what lies behind that is the continued resilience in the data throughout the month. Additionally, the fact that inflation pressures certainly haven’t gone away. And if anything, they seem to have started to pick up.

Steve Hiscock:

So, we’ve got a situation where I guess the spectre of stagflation has increased. As you mentioned, it is almost ancient history, because on August 1st, we saw some quite interesting US July job numbers.

As a result, the Chief of the bureau that issued them was sacked. Can you go through what they were and what the implications were for the market?

Rob Hogg:

So, these were, and look, these numbers are always revised month-to-month. The US, like every country, does a trade-off between timeliness and accuracy.

And what that means is, the earlier you release this data, the more likely it is to be revised. And the US release data probably earlier than almost any other country in the world. On August 1st, the July jobs report was released. For the month of July, it’s not a huge surprise. The Bureau of Labor Statistics reported a job creation number of 73,000. However, what was shocking was the significant downward revision to the previous two months, April and May, which is the largest two-month revision since 1968. And that has been what has shocked the market, that history has, in a sense, been revised to show a much weaker profile. That, as you said, has led to the sacking of the lady in the Bureau of Labor Statistics, who’s in charge of putting together this report.

And as we speak today, we are waiting to see who might be appointed to that job. But this has implications in that agency, not only for this labour force data, but also for the CPI. Because the CPI is compiled by the same statistical agency in the US, this has significant implications. Anything that leads to a questioning of the veracity of the numbers could have very significant negative implications for US asset prices.

Steve Hiscock:

And look, it’s a bit of an odd thing to sack the messenger or shoot the messenger as such, because he’s arguing for the Federal Reserve, the US Central Bank, to cut rates.

Now, the Central Bank left rates unchanged, and I’ll ask you to talk about that in a sec. But this July jobs report puts pressure on the Fed to cut rates, if anything, and yet he’s questioning, as you say, the veracity of the numbers. So, would you like to discuss the implications for rates and similar matters?

Rob Hogg:

Well, let’s just deal with that issue about how, on the face of it, these numbers suggest that the likelihood of the Fed cutting is greater. That’s absolutely right. He’s been calling for rate cuts, but the catch, of course, is that they also reflect a slowing economy, and that’s not something that Trump really wants to be associated with.

So, we’ve all heard the term ‘cake and eat it too’. This, to me, is Trump wanting his cake and eating it too. He wants to have the rate cuts, but he doesn’t want to have the reason for that, ironically, being the weakening of the economy. Saying that reflects poorly on him. That’s my sense of what’s going on here and his reaction.

What does it mean for rates? Certainly, the probability of a rate cut next month, in September, has increased. We had some numbers last night, as we do most nights, in the US. These were for what’s called the ISM services Purchasing Manager’s Index – a survey of conditions in the services sector. It has continued to soften. It’s still expanding very slightly, but its rate of growth is slowing across the board, whether it’s orders or employment. However, one thing that isn’t slowing is the prices. Prices are continuing to accelerate. Perhaps this is related to tariffs, and we received feedback last night from Caterpillar, discussing some of the costs going into their business that are directly attributable to the tariff increase.

So, this is the dilemma for the Fed: activity seems to be slowing more broadly, but price pressures are showing signs, if anything, of just starting to pick up again, which was also evident in July, as seen in the latest Consumer Price Index. A slight increase in the momentum of month-to-month change, and that’s before we see clearer signs of tariff-based upward price pressures.

Steve Hiscock:

The Fed’s more concerned about price stability, isn’t it, than the economy? Is that a fair comment or not?

Rob Hogg:

Look, they do have a dual mandate. Both employment, which I guess we take as growth. Employment and prices. And, of course, the emphasis they put on either of those sort of depends on the context. So, at the moment, it’s very tricky. The growth side seems to be softening. Whereas the inflation side, if anything, seems to be gaining a little bit of momentum. So, that is like a classic policy dilemma for the US Fed.

Steve Hiscock:

And it makes it hard for markets to power forward in that sort of uncertainty, and it probably brings us on to another point. Which is Chairman Powell’s replacement. So, he’s retiring or being retired, whichever way you look at it. So, have you got a sense of where the replacement is?

Rob Hogg:

Probably the latter. Yeah, so this has all come up and come forward a bit because one of the governors, one of the Fed Governors, Kugler, has resigned, effective immediately, in fact, effectively the 1st of August. So, that leaves a position vacant on the board. Now, just overnight, we’ve had feedback that Secretary of the Treasury Bessent is not interested in the role.

There are a couple of frontrunners for the role. Now, this is an appointment by the Administration. Kevin Hassett is one of the potential candidates. He’s the Director of the National Economic Council, so that is an administration-appointed role.

And the other candidate, also cleverly called Kevin, is Kevin Warsh. He’s a former official with the Fed who hasn’t been with the Fed for some years, but I think he has a very good reputation, a very solid one. Therefore, it’s not necessarily the case that a Trump appointee will be a significant negative from the market’s perspective. I think Warsh would be reasonably supported.

Another potential candidate is Christopher Waller. He’s the current Governor of the Federal Reserve, and he’s one of the voters who have been dissenting in the last several decisions. He’s been dissenting in favour of rate cuts. So, he’s viewed by the market as being more dovish in his approach to rates. By dovish, we mean more likely to cut rates than someone at the more hawkish end of this delightfully named Avery scale.

Steve Hiscock:

Okay, so, difficult times ahead for the Fed in terms of making a decision.

So, you mentioned Caterpillar last night, and clearly, companies are facing pressure, including input price pressures resulting from the effects of tariffs already. How has the earnings season been in the US? Are we seeing widespread effects like that?

Rob Hogg:

Look, we are getting calls regarding tariffs. However, so far, it appears that companies are primarily discussing strategies to mitigate potential tariff-related pressures. So, trying to manage their supply chains more tightly. Some of them are increasing their prices, while others are cutting other costs to try to manage it.

Now, of those companies discussing the impact of tariffs through the reporting season, around a third are saying that they expect the profit headwind from tariffs to be smaller, in fact, than their previous estimate. So, look, so far it’s not been quite as significant as investors may have feared, but I think it’s still possibly quite early.

And as I mentioned, we had only last night, Caterpillar talking about a very significant cost to their business. They estimate a full-year cost of 1.3 to 1.5 billion in full-year impact from tariffs. They’re discussing how sales are being impacted by tariff uncertainty, as well as the increased manufacturing costs resulting from tariffs. And, I imagine we’ll continue to see those types of reports from those types of companies.

Steve Hiscock:

This is the problem some of us have had with the tariff concept: that ultimately, it’s either profits in the US or it’s the consumer who pays the increased prices.

And one of the reasons Trump gave for raising the tariffs, aside from raising money, was to encourage companies to onshore. And I don’t think we’re seeing evidence of that. Are we, that companies are changing their CapEx direction?

Rob Hogg:

Well, we’ve seen a bit of talk, but of course, it takes years and years to bring about these sorts of changes. It’s hard to imagine companies making significant changes, given the nature of policy uncertainty or the substantial degree of policy uncertainty we’ve seen with the current Administration in the US.

Steve Hiscock:

Yes. And I think, in that sense, the market has, you’d have to say, been relatively solid in the light of continued uncertainty. Another thing that happened in the middle of the month was that Congress passed the GENIUS Act, which regulates tokens that they’re calling stablecoins. So, Rob, I have a couple of questions for you regarding this. First, could you please define what stablecoins are and discuss what the GENIUS Act represents?

Rob Hogg:

Yeah, so let’s dive into this, because this is going to be, and already is, incredibly significant. To provide a definition, stablecoins are a type of digital asset designed to maintain a stable value relative to a national currency, and they’re backed at least one-to-one with safe and liquid assets. So, they’re very different from what we understand from what people talk about, such as cryptocurrency, Bitcoin, and so forth. Stablecoins are very different. They are backed one-to-one with safe and liquid assets, so that makes them quite a different beast.

Steve Hiscock:

And these liquid assets are things like US treasuries, US dollars, and that sort of thing. In a sense, they’re fully funded and therefore, it’s easy to determine their value, as opposed to a crypto where the value is really up to the beholder.

Rob Hogg:

That’s exactly right. And what’s so important about the GENIUS Act? The GENIUS Act requires a 100% reserve backing with liquid assets, such as US dollars or short-term treasuries. It requires issuers to make monthly public disclosures of the composition of reserves. This is essentially the regulatory framework for these stablecoins.

And that’s why the act itself was so incredibly important. And look, after the passage of the act, we saw that the heads of the largest banks in the US are now discussing the creation of their own stablecoins.

Steve Hiscock:

Right. Backed by US treasuries and so forth.

Rob Hogg:

And, look, I think about 99% of stablecoins are all backed by US dollar assets; they don’t have to be, but it’s just the case that, so far, they are. Therefore, stablecoins can be traded and are already being traded on exchanges. They’re also a means of accessing and holding US dollars. For example, they could be particularly appealing to people living in countries with higher inflation, or those without easy or affordable access to dollar cash or banking services.

They could also be used for cross-border payments from one country to another, and potentially, more fully, for retail payments. And already, we’re seeing that firms providing point-of-sale technology are acquiring fintechs or developing their capabilities to accept stablecoins for retail purchases. And I think we’re right at the very beginning of that.

Steve Hiscock:

That makes sense. Right? So, if you’re talking about PayPal, Visa, and similar instantaneous payment mechanisms, the use of stablecoins eliminates a layer of costs and speeds up the transaction. So, from the retailer’s perspective, they may receive the money a bit earlier.

I understand the argument why a user might want to use it for a short-term transaction, but given the structure of stablecoins, where the issuer keeps the interest earned on, say, US Treasuries, they’re making a lot of money. And I can imagine that all the investment banks will be scrambling over this as an exciting way to make even more money.

Why would anyone hold a stablecoin as an investment, given that you’re not getting interest on it?

Rob Hogg:

Well, I’m not sure that you necessarily would hold it for investment. For exactly the reasons you say, you don’t get, well, you’re very unlikely to, unless the issuer is about to share the interest earned on the underlying assets backing it.

And of course, that’s the key to the business case for actually creating these things. But it’s more than giving you access to an asset backed by the US dollar, if you were looking for US dollar assets. But you might wonder, well, why wouldn’t you buy a short-term treasury security?

These would be a little easier, I think, for most people to trade on an exchange. So, ease of use might be one of the reasons.

Steve Hiscock:

Because the way I understand it, as long as you’ve got some sort of wallet, an electronic wallet, you can just buy these things on your phone. In comparison, buying a US Treasury is probably a little bit more complex.

And certainly, I would’ve thought that for international people, if they want to buy US dollar assets, say they’re buying something in US dollars, and they want to receive the money already over there, then this is going to be a much more effective and potentially transformational way of doing business.

It will be interesting to see how it goes. But, once again, the genius of the GENIUS is that the investment banks keep all the interest. So, they’ll do very well out of this, one would’ve thought.

Rob Hogg:

Well, there’s that. And look, they’re also likely to generate fees. Charging fees as well. And, potentially, they could even use stablecoin issuance as a loss leader to entice customers to use other products or services offered by the stablecoin issuer.

So, it makes, in some ways, a huge amount of sense from the issuer’s point of view.

Steve Hiscock:

Absolutely.

Rob Hogg:

Whereas its use case will be quite particular, probably quite retail as we’re saying. But just back to the GENIUS Act again. The key with the GENIUS Act is that it has set up the regulatory regime for stablecoins in the United States. And that will be key to really speeding up the development of these.

Steve Hiscock:

Yeah. Many other central banks and countries are also examining this approach. So they’ll be looking at the regime and seeing how successful it is, but one can’t help feeling that it will be widely adopted pretty quickly.

Rob Hogg:

Yeah, you would think so.

Steve Hiscock:

So, it wouldn’t be a month’s end, Rob, without talking about tariffs. Which we’ve done for the last few months. The EU and the US came to an agreement. Can you walk us through what that agreement entailed, whether it was better or worse than expected, and what the implications were?

Rob Hogg:

Well, I guess when we talk about better than expected, if we cast our minds back to, say, September last year, before the presidential election. Through September and October last year, the likelihood of Trump winning the presidency increased in the market’s mind. And that started to become apparent, in fact, with the selling off of the Euro and European equities.That lasted pretty much through to the end of the year. And that was a fear and concern about tariffs.

Then, in 2025, we began to see a reversal, as the market realised it had probably become a little too pessimistic about the outlook for tariffs. And then all these concerns about US policy volatility and uncertainty, and maybe the end of US exceptionalism. All of that then started to evade US markets, and we saw European markets do much, much better. Both absolutely and relative to the US.

That’s now sort of turned around again through July, and we’ve seen the whole AI thematic take off again. And so, in that context, these 15% tariffs were, in the end, probably no better, no worse than we feared. Interestingly, markets sort of sold off after the announcement toward the end of the month, but still ended up in Europe just slightly higher in their equity markets.

However, there has been considerable pushback, particularly from the political sphere. France’s Prime Minister called the deal a dark day, adding that the EU had resigned itself to submission.The German Chancellor has also made similar comments. Very negative.

So, look, I think this is one of the cases where the uncertainty has come and gone. That was the only positive element. However, upon examining the current situation, the effective tariff rate on European exports to the United States is higher than it was at the end of last year. But markets have looked through that for the time being.

Steve Hiscock:

Well, I guess the proof will be in the pudding. What happens to the rate of exports to the US from the EU, and whether the US consumer and the US end businesses choose to absorb part of that tariff?

It might not end up being that bad for the EU. I mean, at the end of the day, if you’re a wine drinker and you like Burgundy, you’re probably still going to buy it because presumably the wine cellar will absorb part of it, and maybe the EU’s exporter will absorb part of it, and the consumer will absorb part of it.

So maybe the net-net?

Rob Hogg:

Yeah. That’s right. That’s why it’s so challenging to model these things, because there’s no one-to-one relationship. In the case of Japanese autos, for example, there’s evidence that exporters have cut their prices, thereby absorbing part of the cost. And you’re quite likely to see, as you’re suggesting in the US, that the importers and distributors may well eat some of the tariff as well.

Like all these things, it’ll depend on the relative strength of demand and pricing power, which will vary from product to product and service to service, I would imagine. And it’ll vary over time, according to how strong or weak US demand may be. So it’ll be distributed. It’s definitely an extra cost of doing business. But it has had a benefit to the US Treasury coffers. They’ve started recording increases in tariff payments, and these are quite significant so far.

Steve Hiscock:

And that was one of the main reasons for doing it.

Okay, Rob, thank you. Let’s move to Australia now. The market, pretty much 100% of the market, expected an RBA cut in July, and yet they didn’t cut, to the surprise of most of us. Can you talk us through that?

Rob Hogg:

Yeah, look, I was surprised as well. So, what’s happened is severalfold. Firstly, the case for a rate cut is, as always, a balance between inflation and growth.

Inflation’s moving in the right direction. The RBA doesn’t think it’s moved sufficiently into its 2% to 3% band. And that’s one of the reasons they said they wouldn’t cut. Additionally, the labour market has been reasonably tight, as measured by the unemployment rate. So, in that context, the RBA again didn’t feel that now was necessarily the time and that they could continue to afford to wait given the uncertainty. So, that’s the backdrop.

However, what has changed is that we now have a monetary policy board. This is different, and the majority of the people on that board are independents. Now that is different. And the Governor, Michelle Bullock, went through this in some detail in her post-non-decision press conference, that she effectively cannot know ahead of time exactly how the committee is going to vote.

And that makes it impossible for the Reserve Bank to do what they used to do, which is what we call jawboning, where they would often provide a view through a well-sourced or a well-respected journalist. That was usually how they did it.And they’d use that journalist and that leak, if you like, that calculated leak, to move market sentiment. They now can’t do that because they don’t know what the vote’s going to be.

So, I think this will lead to a bit more volatility, perhaps a lot more volatility on decision day. When the market’s mind is to move in one direction and the RBA and its monetary policy board, in particular, hold a different view, we’ll get this volatility. So, this is the new regime.

Steve Hiscock:

But what was the rationale? You’re saying that the inflation rate is in the band.

And you’re talking underlying inflation here, I guess. It is in the band, yet they chose not to cut rates because the unemployment rate at that stage was still too low. Is that their reasoning?

Rob Hogg:

We are broadly speaking, so the Governor reiterates several times that it is just a question of timing. It’s not a question of direction. It’s a question of timing. Wanting to get more information before cutting rates, rather than direction. Rates are still expected to fall. That’s really where they’re coming from. And tariffs are one of the key areas of uncertainty.

So, in that sort of context and the fact that the economy, if anything, is showing some very slight signs of perhaps improving off the back of the two rate cuts we’ve already had. Look, in their mind, rushing through these things is a risk they don’t need to take. The lesser of two evils, I think, from their point of view, is to wait and perhaps be a couple of weeks late rather than cutting and finding, uh-oh, in fact, inflation hasn’t quite got where we want it to. And in fact, it’s not decelerating anymore.

So, in that context, the risk of cutting and having an inflation pick up is much, much greater than the risk that might accompany waiting fractionally too long.

Steve Hiscock:

So, the market is now expecting the next meeting to cut rates. Has there been any subsequent data that would support that economic data?

Rob Hogg:

Well, we’ve now had the quarterly Consumer Price Index rather than the monthly one. And that was important too, that the most recent data point for the RBA was one of these monthly numbers, which are not as comprehensive. They now have the full set of data, which we receive quarterly. And that was pointing in the right direction, if you like. They’ve had that, and we’ve had an employment number that was a bit softer as well. And of course, we’ve had what’s happened in the US. And what happens globally does matter. If the likelihood of the US cutting or increasing rates changes, that can impact what the RBA does, as global conditions do affect Australia.

Of almost all central banks, we have traditionally paid more heed to what has happened globally. It’s not the main thing they look at, but it’s always something they do bear in mind. Therefore, the fact that the US probability of a rate cut has increased in certainty would be expected to further enhance the likelihood here as well.

Steve Hiscock:

Well, I mean, from a personal perspective, I just think that while it might be right to be cautious, I think they also risk an economy that slows faster than expected, and they’re not positioned for it. So, from that perspective, I think given that inflation has got back into the band, albeit at the higher end of the band, is that fair to say?

Rob Hogg:

Oh, well, in some measures it’s well through the midpoint of the band. But I mean, they look at these key underlying measures, these trimmed means and medians for good reason. And they’re towards the higher end, but they’re within the band.

Steve Hiscock:

Right. Well, time will tell on that one.

Let’s look at the reporting season, which has just commenced. It’s very, very early days. Has anything been coming out of it, or anything you are expecting to come out of it?

Rob Hogg:

We’ve had a couple of profit warnings, discretionary retail, discretionary related, consumer discretionary related.

So, the sorts of trends we see in that area will continue to be important, as they always have been. A story with banks and margins and net interest margins in particular. That will be a focus, we know how powerfully the banks have performed, particularly CBA. Therefore, the market will be very focused on that.

Outlook statements they’re always a key. So, are companies at the point where they can provide any guidance on whether the rate cuts we’ve had have started to suggest any sort of pickup in demand at all? So, broadly speaking, those are the major sorts of trends. Anything else we might get about the nature of, say, Chinese demand, those types of things and the situation in China, that’ll be important, of course. But it’ll be those industrial companies and those consumer discretionary companies that give us probably the pulse of the consumer.

So, it’ll be interesting to see what sort of reading there is.

Steve Hiscock:

We’ll have a lot more to talk about on that side at the end of this month. So, Rob, wrapping it all up – the outlook. We’ve been relatively cautious over the last few months, given the volatility out there, including the volatility of tariff announcements and similar developments. Have we changed our outlook, or are we still pretty much the same as we have been the last few months?

Rob Hogg:

Look, we are a little bit more cautious, and the reason for that is that the last month suggested, the last 30 days, 31 days, suggests that the US is sailing into slightly more troubled waters. And by that, I mean specifically a slight pickup in inflation and a slight speeding up in the rate of deterioration in the economy.

Now, that is not a great combination because that inflation story at the margin could constrain the Fed’s policy freedom to cut rates, should we see continued falling away in activity in the US. So, that set up, if you like, along with the fact that valuations remain at the very top end of their recent ranges – so expensive – that’s just not a great setup for risk assets in the next little while.

Steve Hiscock:

Yes. I mean, at the end of the day, as you say, there’s more downside risk than upside risk under that scenario.

Rob Hogg:

Yeah. So, some might describe this as stagflation, and perhaps it’s a very tiny wee sniff of that, and that’s a very treacherous, very uncomfortable background from a central banker. And, frankly, for an investor.

Steve Hiscock:

Absolutely, for markets. That’s right. Great. Rob, thank you again so much for your time. That brings us to the end of today’s podcast. We looked at what happened last month in July. We’ve looked at what it means, and again, unpredictability, volatility, and that sort of thing are going to persist for a while. And in that context, we have a market that is evenly poised, but there are certainly slightly increased risks on the downside from our view.

We hope you enjoyed today’s episode.

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Please let us know if you have any questions or comments. Until next time, stay informed and stay active.

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This podcast is produced by SG Hiscock and Company. It does not constitute financial advice and assumes a certain level of knowledge. It’s general information only and does not take into account the investment objectives, financial situation, or needs of any person and should not be considered a recommendation. For more information, visit: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.