July 2026: More Hawks than Doves.

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July 2026: More Hawks than Doves.

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 is my pleasure to be your host again for today’s episode. Today, we’re going to be looking at what happened over June 2026, and we’ll be discussing what we think is going to happen going forward.

This podcast is being recorded on Thursday the 2nd of July 2026, and joining me again today is our Chief Investment Officer, Rob Hogg. Rob, welcome back again.

Rob Hogg:

Thanks, Steve. Thanks. Great to be back as always.

Steve Hiscock:

And Rob, it’s been it’s been an interesting month, hasn’t it? It’s been flattish in terms of what markets did, and this is despite a 20% fall or 20…

Yeah, a significant fall in the oil price anyway and certainly that’s fed through to inflation expectations coming down and bond yields and so forth. But one of the key themes we’re going to talk about today is that it appears the hawks are in charge, and this is not an AFL reference by any means.

For those of you who are AFL supporters, this is to do with the central bank’s positioning. So, Rob, I just want to drill down a little bit into that and what your views are. But could we start by just what happened in terms of the key market movements over June?

Rob Hogg:

Yeah, as you say, there are a lot of things that really didn’t move a lot, certainly on the surface, but there are a lot of things that moved an awful lot under the surface, if you like.

So we look at the broader equity market here. It was a very pedestrian return of just 0.6 including dividends, so that’s the accumulation index here positive 0.6. Small caps did more poorly than that, they were down about 2%. In the US it was quite mixed. Some of their key markets were up, so the Russell 2000, which is a small cap orientated index, that did really the best out of the major indices, and we think that’s got quite a bit to do with the fact that the US economy is proving quite resilient in spite of all the fears, of course, related to the Middle East.

So the Russell was up 3.6, whereas the Nasdaq, for example, was down 2.8, which is a lot to do with the very, very significant rotation in the relative winners and losers within the Nasdaq. Looking across interest rate markets, on the surface, things moved a little bit. Yields here in Australia moved by about 10 basis points, so a pretty quiet month for Aussie bonds and a similar sort of change if we look in the US.

But underneath that apparent- lack of movement was actually a huge change in inflation expectations, and that that is pretty important. One of the things that did actually move and has now moved to the most extended valuation we’ve seen in decades and decades is the yen. So, I just want to come back and talk a little bit about that because that’s ticking away, if you like, in the background.

And

Steve Hiscock:

it- In terms of it being the weakest it’s been-

Rob Hogg:

Yeah, the weakest it’s been- … in 20 or 30 years. And after you allow for inflation and do that kind of relative effective exchange rate calculation, it’s according to some analysts, the weakest it’s been since the 1960s. So that is pretty significant.

Steve Hiscock:

Okay. Let’s focus on some of the key things. So let’s talk about the bond market then. So- I find it interesting that, we had such a significant fall in the oil price. As you say, there was a significant change in inflation expectations. Normally, you’d think that being reflected in interest rates should lead to quite a strong market.

But the markets weren’t that strong, implying, that the markets were building in this outcome that’s happened with the memorandum of understanding in the Middle East. Is that your sense of it or..

Rob Hogg:

Yeah. No that’s certainly part of it. The market has thought really since the war began in March that it would be over relatively quickly.

And after the initial very sharp moves back in March, whether it was the sharp move in the oil price, sharp move in interest rates upwards, sharp move down in equities the market walked that back, if I can use that terminology, really since sort of mid-March. So, to some extent it’s a continuation of that.

But what really moved, certainly in bonds, was this break-even inflation rate. So that’s another way of talking about the bond market’s inflation expectations. So they fell very sharply over the month, expected inflation over the next two or three years in particular. It’s really a very short-term impact of course from oil.

Those rates fell very significantly, but they were met, if you like, by a significant increase in what are described as real interest rates. They rose quite sharply over the course of the month. So, the net effect of that was only a very slight downward move across most global markets. But the added nuance in the US was that the new Fed chair, Kevin Warsh, was his first meeting.

No one was really quite sure what type of attitude he would bring with him what he would say, what he would emphasize. As it turned out, compared with expectations, he proved to be a little more hawkish than had been expected, which is to say that he really played up this, for the US central bank’s role as a key controller of the inflation rate, and was talking about inflation stability that proved to be a little more hawkish than the markets had expected.

And that led to an increase in shorter-term interest rates in the United States over the month. So shorter-term rates are much more impacted by expectations about central bank policy. So that was one of the big changes, and that’s what made the movements in the US a little bit different to most other markets.

Most other markets saw falls in yields right across the curve. US was different. They were up a little in the shorter term. But it’s also had an impact on the US dollar. The US dollar if we cast our minds back, had an incredibly strong run at the end of 2024 in the lead-up to the presidential election and reached, I think, a multi-year high at the end of 2024 into early 2025.

But then as Trump came in and we had all of the executive orders and so on and so forth, there was concern about the volatility of the Trump presidency, and really from that point on for the next year, the US dollar really lost a deal of altitude. But that’s just started to turn around the last couple of months, and we saw that accelerate during the course of June, and really pushed ahead in particular by this new, more hawkish central bank chair.

Steve Hiscock:

And the– and Rob, just on the hawkishness, if you like, that and I guess you’ve defined it, but really, it’s the focus on fighting inflation more than a focus on economic growth. And the implication of that is that someone who is described as a hawk is going to support higher interest rates on average than someone who’s more focused on economic growth.

The reason the market is surprised is because essentially, he is a Trump appointee. Is that fair?

Rob Hogg:

That’s- yeah, that’s absolutely right. He, and because of that, there was, an expectation that he’d prove to be to use this Avery scale, as it’s described, that he’d be a little more dovish.

He’d be leaning toward rate cuts more so than rate hikes. But as soon as the policy statement uttered the words, “Inflation remains elevated relative to the committee’s 2% goal,” everybody was aware then of what the game was, that was the focus. The other thing was important was that they do these dot plots a couple of times a year, which most of the Fed, the voters on the Fed Open Market Committee, plus others, contribute their expectations about where they think rates might be, and that that tilted a little upward as well.

So, there’s now quite a number of voting members and other members that are now tilted towards a rate hike before the end of the year, and the market’s moved increasingly to price that. So bottom line, a month when rate expectations in the US shifted up as a consequence not only of what the new chair said, but also on the back of continued resiliency in the US economy, which of course comes in the face of an expected weakening on the back of the uncertainty from the war and the oil price and so on.

Steve Hiscock:

Okay. That’s certainly something we’re gonna have to keep an eye on. So, Rob, just to, just talking about the yen and its weakness, I guess to put it in context for people, five years ago a bowl of ramen, let’s say that cost a thousand yen, that would cost you, in Australian dollar terms, $14 roughly.

You can buy the same bowl of ramen for a thousand yen, but it only costs you $8.90 now. That’s a huge w- a weakening in the yen or and strengthening of the Australian dollar and other currencies. So, what’s going on there?

Rob Hogg:

No. I, look, I’m not sure I quite know. I haven’t really found anyone that’s absolutely sure what’s going on.

Currencies are affected by myriad of factors, which makes them about the most difficult thing to try and forecast. But what has generally been the case is that there has been a relationship between the currency exchange rate, US to Japan, and relative interest rates. And what we’ve seen here is that interest rates in the United States, as they’ve gone up, they’ve not gone up quite as quickly as interest rates in Japan.

That would generally lead to an appreciation in the yen, but instead we’ve had the absolute opposite. The yen has been weakening, weakening, and as we mentioned earlier, is on various different measures at its lowest level in 30 years or even more.

Steve Hiscock:

Is it specifically against the US dollar or is it against the other currencies, the euro and-

Rob Hogg:

Oh, it’s pretty broadly based ’cause okay, here in Australia as a lot of us would know people that have been to Japan on holidays, and one of the key reasons for that is the currency exchange rate. So, it’s broad-based. Okay. But it’s particularly, I guess because the US yen is such a key currency exchange rate or currency pair it gets a lot of focus.

So why is this important? I think it’s important for a couple of reasons. One is that the Japanese economy is a very big economy, one of the very, very largest in the world. Japanese portfolio flows, so Japanese investments across the globe can have a very significant impact on global financial markets.

A, a number of the listeners may have heard of the yen carry trade, where global investors borrow in yen unhedged, use those borrowings to buy another asset, and that kind of trade works fabulously well whilst the currency is depreciating. Also why interest rates are relatively low, which they are.

But of course that the underlying dynamics and the profitability of that trade can turn very swiftly if the yen were to start to rally. The other part of the impact of the exchange rate is what Japanese investors themselves do. And as their currency is depreciating, so offshore investments for Japanese-based investors tend to perform relatively well.

But again, that can switch around when the currency exchange rate moves. So, I guess what we’re trying to say is the yen has moved to an extreme level against the US dollar, an extremely weak level against the US dollar. If that were to turn around, and it could snap quite sharply given how stretched the elastic band is, that could have quite significant and probably negative market consequences

Steve Hiscock:

And how would that flow through?

Rob Hogg:

We could see a reversal of any elements of this carry trade.

Steve Hiscock:

So people are selling out and-

Rob Hogg:

which is not something that’s- Yeah … that’s obvious or even really seeable. But if that were to switch around, and if Japanese investors themselves were to

Steve Hiscock:

repatriate-

Rob Hogg:

Right. From offshore markets, say bond markets globally. They are, for example, one of the biggest in foreign investors, if not the biggest, in the Aussie bond market have certainly traditionally been. So, it’s all symptomatic of this ongoing significant abundant liquidity sort of conditions that we see globally.

So, anything that turns that around could put global markets at risk of a bit of a setback.

Steve Hiscock:

It won’t

Rob Hogg:

turn around underlying fundamentals.

Steve Hiscock:

Right.

Rob Hogg:

And underlying fundamentals still look pretty good, but it can cause quite a disruption, In in just, in turning around.

Steve Hiscock:

Okay. That’s certainly something to keep an eye on.

Just one thing before we do go to Australia. Obviously the US market’s been an incredible performer in equities. But there’s a couple of danger signals which you’ve put in your report this month that I just want you to talk to. The first is that the global fund flows into US equities this calendar year have been almost as high as they’ve ever been since the start of those records.

So that’s one thing. Really, that explains why the equity market has been so well supported, but of course, that can snap back. And the second thing is that the level of margin debt as a percentage of equities has also risen very strongly in the last few years. That’s a real worry to me, too, because it potentially increases the volatility of any snapback.

Can you talk to those two aspects before we get to Australia?

Rob Hogg:

Yeah. So, they’re both they’re both sort of separate, as it were, but they’re both moving in the same direction. The so this is some research from Goldman Sachs looking at cumulative global fund flows into US equities so far this calendar year and comparing it with the flows relative to the market.

So, it’s not just dollars, it’s relative to the market up o-over the last twenty or so years. And what we see is, on the back of their analysis, that these inflows are greater than they’ve been in almost any year. Indeed, they’re above the seventy-fifth percentile and significantly above what’s going on in an average basis.

And I think what this reflects is the fact severalfold, as you said, US company earnings have been very powerful, particularly AI CapEx generated. Europe, which had been from time to time a beneficiary of global flows particularly in and around when Trump was elected E-Europe, the, our prospects for Europe are looking, compared to the US, relatively poorer for two reasons.

Firstly, they’re more affected and have been more affected by the change in the oil price. But also by the fact that the ECB, the European Central Bank, raised rates during June, really to try and bring about lessening inflationary pressures from what was going on with oil and petrol and so on and so forth.

So those two factors, very strong US earnings and the ECB raise, raising rates, I think has f- further turbocharged these global flows into the US. The other element you’re talking about is the margin debt and margin debt in the US. So this is more of a local US sort of retail investor sort of thing, so a bit different to the global flows we were just talking about.

But margin debt has really accelerated. It’s almost gone straight up, in a vertical line, in actual fact in terms of its total value. So these are the types of things you can get when you get incredible exuberance-

Steve Hiscock:

Yeah …

Rob Hogg:

in a market. So it does seem to be symptomatic of, firstly, this AI trade, which of course does have a good fundamental basis to it.

AI spend we know is continuing. We know US profitability has been incredibly strong, so the basis of all of this is sensible. It’s reflective of activity. But as markets almost always do, they just take it at the margin too far, and this could be what we’re seeing with margin debt.

Steve Hiscock:

Yeah. And the worry with margin debt in particular is that it exacerbates any downturn because the margins get called, they have to sell to fund it.

And it’s certainly something to worry about if the market looks weak. Okay, let’s talk about Australia because Australia seems to be operating to the beat of its own drum. The Reserve Bank, and we’ve talked about hawks before, the Reserve Bank has been hawkish, as in higher interest rate tendencies, for some time.

It’s kept its rates on hold just recently, but the market’s still expecting a rate rise. That — the flow-through to the housing market and obviously the inflation rate here, can you talk to those three aspects? Yeah.

Rob Hogg:

Yeah. So, let’s cut that apart a little bit. Yeah, so the RBA I think, I can’t think of another developed market central bank that’s raised rates three times this year.

The Japanese I think have raised once, the ECB once. But we are, if you like leading the pack with three rate increases this year. That’s initially, anyway, was all about domestically generated inflationary pressures where demand was running ahead of — or growth and demand running ahead of growth and supply.

So, we came into the Middle East war really not exactly how you’d like to do, like to be arranged, if you like with already domestic inflation pressures. So anyway, the RBA’s had their meeting in June and look, it was a bit of a hawkish a bit of a hawkish meeting. They didn’t move rates.

They weren’t expected to, though. But they’re still saying things like inflation is too high, and they’re still saying in their statement that to deliver price stability and full employment, they, the RBA, will do what it considers necessary to achieve that outcome of price stability and full employment.

But here’s the killer, including increasing the cash rate target further if required. So that’s left the market in little doubt, which is probably the RBA’s want, little doubt, that the next move on the balance of probabilities in the RBA’s mind is up, and that is still what’s priced. There’s not a full rate hike priced by the end of the month.

There’s, And not, indeed not even quite a half, but somewhere thereabouts. So, the market here is still priced for the RBA to raise rates perhaps in August, perhaps later this year.

Steve Hiscock:

But surely, Rob given the war’s ended, given in the oil price has come down, surely the Reserve Bank- Would be unlikely to rise rates at the next meeting?

Surely it would want to see the effect of that working its way through the system, or do you think it’s trying to get ahead of it?

Rob Hogg:

Yeah, I think it’s, I think it’s trying to get ahead of it. What it’s all about is chasing out after inflation expectations. So in the RBA’s defence when oil prices go from roughly $60 to $100 in US dollars and petrol prices go up enormously as well as a consequence, that is very much in the face of Australian consumers.

There’s probably no more publicly available, easily observable measure of inflation or change in prices than the petrol price at the bowser. So that’s what really what they’re fighting out against. And as I was saying, in this particular context, the Australian situation was one where we already had an inflation issue. Then you lay upon that a pretty clearly a very clear increase in petrol prices, which does have first-round inflation impacts. I think that’s probably why they had very little choice to raise rates. Interesting to contemplate whether they would have raised rates This is back in May.

If we’d not had the Middle East war, perhaps they wouldn’t have. Anyway, we did have the war, we did have an increase in oil prices, we did have an increase in inflation expectations, and they did raise rates. So looking ahead, what are they likely to do? The stuff they look at, like underlying inflation, the trimmed mean, as it’s often described, that, if anything, is still accelerating in terms of its annual rate of growth, three point six percent in May.

And employment remains pretty solid as well. We had a big bounce back in the number of people employed in May, and we had a fall in the unemployment rate. So that sort of data, which you could argue is backward-looking, it is backward-looking, but that’s the kind of data that central banks have traditionally looked at. That’s still suggestive of tight domestic conditions and ongoing inflationary pressure but what has really changed in the last couple of months, or accelerated in the last couple of months, is the impact on the housing sector.

Steve Hiscock:

Yeah. And I have a bone to pick with the statisticians on the housing market because my sense is that the housing market is in free fall.

And we’re showing evidence that the market is down one, 2%, which just doesn’t ring true to me at all. I think the market’s probably down 10%, but because the, because of the way they price it, because clearance rates matter so much, it’s not being reflected. But I think we’re actually seeing a much bigger correction than the government is letting on, and that has got serious consequences potentially for people

Rob Hogg:

Housing’s a very tricky thing- Yeah, it is to measure. Yeah. So, these house price indices that you’re referring to that purport… A- and look, they are the best measures we have – Yeah … to be fair. They’re talking, as you suggest, of changes in prices of, say, half a percent or 1% or 2%, perhaps, on a monthly basis. But the problem is that of course every house is not valued every single month, so you’re having to make all kinds of wild assumptions.

The other thing, of course, is not only are each of the capital city markets quite different, housing markets quite different, within each of the capital city housing markets, there’s myriad different sub-markets, if you like. What seems to be occurring is that higher priced homes are being most negatively affected by the rise in rates, and lower priced homes are being relatively less impacted, and I think that’s got to do with borrowing capacity.

And the and in fact, that trend’s been going on for a little while now, certainly more than this year that we’ve seen declining prices at the high end. So, it’s an incredibly difficult thing to measure, but things we do know that the auction clearance rate is falling very sharply. Now, we’re based in Melbourne, of course, which I think is the auction capital of the world.

Not every capital city in Australia, indeed I don’t know that any other capital city in Australia is anywhere near those, as a higher proportion- … of auctions that as we do, but you get the sense that sentiment is weakening any which way you measure it. So this is important because housing is a huge multiplier, not just the construction of new stock.

More important than that is housing turnover. Housing turnover is falling ’cause auction clearance rates are falling. People are withdrawing properties, and we know that finance for investors has collapsed. All of this tells us that turnover in housing is slowing very sharply, and that means that purchasing decisions for furniture, carpets, all the other kind of stuff that you might change on buying a house and moving in, all of that stuff is grinding lower as well, and that’s really where this multiplier effect comes from.

So we can see in surveys that that time to buy a dwelling, that’s fallen off a cliff. Time to buy a major household item, that’s fallen off a cliff as well, and this is all completely consistent with this scenario that the housing market has really weakened sharply.

Steve Hiscock:

So, Rob, just to put that in context- The survey you’re mentioning, the Westpac Melbourne Institute Time to Buy a Dwelling survey is as bad as it was in 2008, and at the bottom of the 2022 housing market.

They’re the only two times it’s actually been worse-

Rob Hogg:

Yeah …

Steve Hiscock:

this in terms of sentiment.

Rob Hogg:

It’s… Yeah, it’s pretty extreme. I do wonder though whether sentiment bounces around a little bit more than it used to, but what you say is absolutely right. If you just look at the index itself, it’s as low as it’s been on only a couple of other occasions historically.

But it’s the same with consumer sentiment. Consumer sentiment’s been weakening. So what we have in Australia is a situation where with when interest rate expectations started to swing in October, November last year from expecting rate cuts to expecting perhaps no more rate cuts to then expecting rate hikes, we’ve seen progressively consumer sentiment slow.

We’ve seen housing price growth slow and then perhaps move negative. But what we haven’t seen is really much of a slowing in employment. We haven’t seen much of a slowing in overall consumption spending either. Surveys that we see from not only the ABS, but also data that we see from, say, Commonwealth Bank that measure what all of their cardholders do, these are still suggestive of reasonably buoyant conditions, albeit slowing a little bit at the margin.

It’s these surveys of intentions that have fallen away much more sharply. They’re not always a great guide but they do, give us a direction. Perhaps the magnitude that they’re talking about is a little overblown, but the direction seems to be down

Steve Hiscock:

It does. And honestly, I think the Reserve Bank is playing with fire if it does another rate rise.

I, think the potential is for this, and you said it before the impact on a weak housing market flows through to most parts of the economy, and obviously affects banks as well. So, we’ve got to be careful what we wish for or what the Reserve Bank wish for in that sense. But it’s certainly, Rob, it’s certainly been one of the key factors why the Australian equity market has underperformed, isn’t it?

Other than- Yeah … not particularly exciting earnings growth compared to the rest of the world.

Rob Hogg:

That’s the reason. It’s not all it’s not all domestically driven, of course. But yeah, the Aussie economy has slowed, interest rates have gone up and expectations, earnings expectations have been affected.

The market, as we’ve said a couple of times if you exclude dividends, so just looking at the price index, the Aussie equity market hasn’t moved any higher since October of last year, and that’s when these rate expectations started to change. And I don’t think that is that, that should be a surprise.

And as we were saying, what’s happened here with interest rates has been more significant than almost anywhere else in the world. So perhaps not a surprise that’s been a huge negative. But as we’ve also spoken about, it’s the underlying profitability. There is no question about the fact that US company earnings have been far stronger than expected, far stronger than anywhere else in the world.

And as a consequence, their markets have done better than most any other market in the world, and this is this whole AI trade. In Australia, we see this AI trade in a sense negatively because we see some of the software companies that might be negatively impacted by the growth of AI. We haven’t really benefited from significantly from the AI CapEx, as it were.

And one of the reasons for that is that it’s a completely different scale of spending, but also that all of this stuff is imported or largely imported. So from a growth perspective, if you’re importing all of the capital equipment, that’s not making an a positive contribution or only making a small positive contribution on net to the Aussie economy.

So our sector composition is always very important. We don’t have the same weighting in the IT sector as the US does, or plenty of other markets for that matter, and that’s also been a very important constraint on our performance over the last several years really, but particularly over the last 12 months.

Steve Hiscock:

And so for the last probably 12 months, we’ve been speaking about the fact that we’re slightly underweight Australian equities And that’s been the correct position really given its relative performance com- to other markets I guess one way of looking at it, though, is if we look at interest rate expectations, if they change, if the Reserve Bank comes out after its next meeting and implies that might be the end of the raisings or gives some light at the end of the tunnel, would you see Australian equities as likely to outperform in that environment?

Rob Hogg:

It’s yes most likely yes is the answer. Now the market, of course, and I’m thinking here the bond market, but equity market too, they will front run-

Steve Hiscock:

Yeah …

Rob Hogg:

the RBA. Yeah. They won’t be hanging around waiting for the RBA to say, “Oh, by the way, we’ve left rates on hold, and by the way, we think inflation pressure has eased.”

They will be front running, so we’re watching that extremely closely. So, whilst it is still the case that the market is priced for a partial rate hike, I think only about 10 basis points, so 10 basis points of 25 basis points, which is generally what the RBA moves in increments of. That’s, what, a little more than a third of a rate hike.

So it’s still priced that way, but that pricing has become less extreme. So a month ago, there was almost a full rate hike priced by the end of the year. So there’s a lot of nuance in this. The expectation from here is, yes, rates up on balance, but with less certainty than a month ago. I think we’ll continue to see that certainty ebb away and that pricing adjust until we get to the point where the market starts contemplating no increase, and then from there, the market starts contemplating rate cuts.

Steve Hiscock:

Right.

Rob Hogg:

And given that we’ve been most recently increasing rates, that should be a positive impact on sentiment. And it’s a change in sentiment that will drive the market before we get any turnaround in actual underlying activity and actual dollar profits. It’s the change in expectations, the second derivative, that is what will move market.

Steve Hiscock:

And that will likely also be a positive for small companies as well.

Rob Hogg:

Yeah, probably more so than the broader market – because the smaller companies are usually much more focused on the domestic economy in terms of their earnings. They’re more cyclical as a consequence on balance. So, they’re the ones, just as we’ve seen in the US, that the best performing segment of the market is the smaller cap area, that’s the Russell 2000.

That- that’s really all about the fact that the economy’s surprising on the upside.

We- we’ll probably see the same thing here if we get this change or rather when we get this change in expectations about rates

Steve Hiscock:

Excellent. Great summary. Thank you so much for your time.

Rob Hogg:

No, pleasure as always, mate.

Steve Hiscock:

That brings us to the end of today’s podcast. We looked at what happened in June, and we looked at what is likely to happen going forward. Interest rates and inflation expectations are going to play a key part in what the markets do from here. We hope you enjoyed today’s episode. Please subscribe so that you don’t miss out on future podcasts.