Interest Rate & Market Commentary for Week Ending 29th August 2025
Weekly Overview
Narrow Foundations
Global markets extended gains in August, powered by easing trade tensions, limited tariff fallout, and a dovish shift from Fed Chair Powell. US indices rose between 3.9%–4.6%, led by technology, while Asia also advanced, with China up 6.8% and Vietnam surging nearly 12%. Bonds rallied alongside equities, reinforcing liquidity-driven momentum.
However, the rally rests on narrow foundations. Earnings growth is decelerating globally, especially in Europe, where less than half of industries report rising EPS. Despite this, over 90% of markets trade above their 200-day moving averages, reflecting support from rate-cut expectations and explosive AI sector growth.
A September Fed cut now looks almost certain. US payroll growth slowed sharply to 73,000, with weak consumer spending and stagnant income. Powell signalled rate cuts do not require inflation below 2%, reframing policy to prioritize labour market stability. Next year’s FOMC is expected to lean more dovish, ensuring ongoing support.
AI remains the key growth engine, with Taiwan tech exports surging and inventories at major chipmakers lean, suggesting strong demand through mid-2026. Yet outside AI, fundamentals weaken—China’s industrial growth slowed, with gains confined to semiconductors, EVs, aerospace, and drones, while most sectors contracted.
Looking ahead, we expect choppy consolidation at high levels, with stock-specific drivers dominating. Focus remains on three long-term themes: AI and nuclear power (productivity race), defense and aerospace (hegemony race), and gold/stablecoins (currency race). Monitoring labor market softness and AI inventory trends will be crucial for assessing sustainability.
September Cut Now All But Certain
The Fed looks poised to cut rates in September, supported by cooling US economic data. Nonfarm payrolls slowed sharply in August, with revisions highlighting weaker labour momentum. Hiring outside education and healthcare is flat, while real disposable income and consumption have stagnated. Powell emphasised labour softness at the July FOMC and at Jackson Hole flagged employment risks, signalling a dovish pivot. Importantly, Powell reframed the policy framework: cuts no longer require inflation below 2% as “compensation.” Instead, steady disinflation is sufficient, broadening flexibility.
Tariff-related inflation impacts appear temporary, reinforcing the case for easing. The timing also allows the Fed to cut without political interference, especially as 2026 FOMC voters skew dovish. Taken together, the groundwork is set for a September cut, with further easing possible if growth decelerates. This shift underscores the Fed’s focus on labor market resilience and its willingness to act pre-emptively rather than reactively.
Liquidity Is Assured—But What About Fundamentals?
While liquidity from expected Fed cuts underpins valuations, fundamentals remain uneven. The AI sector dominates growth, while most industries show softening momentum. Taiwan’s tech exports surged to $24 billion in July, confirming robust AI demand that could sustain double-digit revenue growth through mid-2026. Inventory trends at firms like TSMC and Broadcom remain lean, though NVIDIA saw a small uptick linked to delayed shipments. Outside AI, the picture weakens.
US consumer spending has cooled, while China’s industrial growth slowed to 5.8%, with gains concentrated in semiconductors, EVs, aerospace, and drones—sectors tied to “new productive forces.” Most traditional industries are contracting. This divergence highlights fragility in the global recovery: a strong AI-driven boom coexists with broad industrial stagnation. For investors, the challenge is separating sustainable growth from liquidity-driven rallies. AI remains a core driver, but overreliance raises risks if momentum slows or inventories normalize. Broader industrial participation is still lacking.
Market Outlook & Positioning
The market backdrop suggests consolidation at high levels, with Fed liquidity supporting valuations but fundamentals dependent on narrow sectoral strength. Investors should expect stock-specific performance rather than broad rallies. The recommended approach emphasises long-term quality themes: the productivity race (AI, nuclear power), the hegemony race (defence, aerospace), and the currency race (gold, stablecoins). Monitoring US labour data remains crucial; modest payroll growth (0–100k) would enable the Fed to ease without destabilising inflation, supporting a soft landing. AI inventory conditions are also a key gauge—sustained lean levels would confirm resilient demand. While risks of volatility persist, policy support and AI strength keep upside alive. Strategic positioning should balance near-term liquidity tailwinds with the fragility of fundamentals
Figure 1: World – Major Stock Indices 1 Month Return
Chart of the week: Buffett Indicator – Stock Market Valuations
Market Summary Table
| Name | Week Close | Week Change | Week High | Week Low |
|---|---|---|---|---|
| Cash Rate% | 3.60% | |||
| 3m BBSW % | 3.5716 | -0.0404 | 3.59 | 3.5716 |
| Aust 3y Bond %* | 3.386 | 0.0609 | 3.398 | 3.325 |
| Aust 10y Bond %* | 4.32 | 0.089 | 4.328 | 4.23 |
| Aust 30y Bond %* | 5.068 | 0.0979 | 5.074 | 4.97 |
| US 2y Bond % | 3.794 | 0.0707 | 3.794 | 3.744 |
| US 10y Bond % | 4.339 | 0.058 | 4.339 | 4.296 |
| US 30y Bond % | 4.9326 | 0.0601 | 4.942 | 4.902 |
| iTraxx | 67 | 0 | 71 | 67 |
| $1AUD/US¢ | 64.3 | -0.8 | 65.2 | 64.18 |
Overview of the US Equities Market
Global equities extended gains to record highs in August, buoyed by easing trade frictions, limited impact from semiconductor tariffs, and dovish signals from Fed Chair Powell at Jackson Hole. US indices rose strongly, led by the Nasdaq (+4.6%) and Philadelphia Semiconductor Index (+5.4%). Asia also advanced, with China’s Shanghai Composite (+6.8%) and Vietnam’s market (+11.9%) notable standouts. However, the rally rests on narrow foundations.
Earnings momentum has slowed, with fewer industries reporting rising EPS, particularly in Europe. Yet liquidity expectations and AI’s explosive growth continue to fuel valuations, leaving most markets above their 200-day averages. This creates a divergence between fundamentals and prices, raising questions about sustainability. Going forward, market direction hinges on two drivers: whether the Fed follows through with September rate cuts, and whether AI’s growth broadens into other industries. Momentum remains strong, but sectoral concentration and stretched valuations increase risks of volatility.
A federal appeals court delivered a major ruling late Friday, striking down former President Trump’s signature tariffs, declaring that he exceeded his emergency powers in reshaping U.S. trade policy. However, the judges permitted the tariffs to remain in place until mid-October to allow the administration time to appeal to the Supreme Court. The decision represents the most significant legal setback yet to one of Trump’s hallmark economic initiatives of his second term.
The ruling coincided with a weak end to August for U.S. markets. Technology stocks tied to artificial intelligence led declines, as disappointing results weighed on sentiment. Dell’s softer AI-related guidance sent its shares down 9–10%, while Nvidia, Broadcom, and Oracle each fell over 3%. The Nasdaq fell 1.2%, the S&P 500 dropped 0.6%, and the Dow shed 0.3%. Despite Friday’s pullback, the S&P 500 still posted a fourth consecutive monthly gain, supported by expectations of monetary easing.
Inflation data offered little surprise. The personal-consumption expenditures (PCE) index, the Federal Reserve’s preferred measure, showed prices rose 2.6% in the 12 months through July, unchanged from June. Core PCE, excluding food and energy, rose 2.9%. While inflation remains above the Fed’s 2% target, markets are increasingly confident that a September rate cut is likely. Futures data show traders now pricing an 87% chance of a cut, up from 63% a month earlier.
At the same time, political tensions added uncertainty. Fed Governor Lisa Cook’s lawsuit against Trump, seeking to block her dismissal, was heard in federal court on Friday. Judge Jia Cobb pressed both sides but issued no ruling. The case could set an important precedent for presidential authority over the central bank.
Other developments highlighted shifting trade and consumption dynamics. On Friday, the U.S. formally ended the long-standing “de minimis” rule that exempted packages under $800 from tariffs, closing a loophole widely used by Chinese exporters. This followed the administration’s broader tariff rollouts earlier this year.
Markets elsewhere showed mixed signals. Gold surged to a record $3,473.70 per ounce, reflecting investor demand for safe havens. Oil fell 0.9% to $64.01 a barrel, while the 10-year Treasury yield rose slightly to 4.227% after three days of declines. Bitcoin slid 3% to $108,221. Consumer sentiment also weakened in August, with the University of Michigan index falling to 58.2 from 61.7, while inflation expectations ticked higher.
Overall, the week ended with a sharp intersection of politics, markets, and monetary policy: a legal blow to Trump’s tariffs, elevated inflation pressures, expectations of Fed easing, and volatility across equities, commodities, and currencies.
Last week saw broad divergence across S&P 500 sectors amid shifting investor sentiment:
- Technology and Communication Services led the pack, buoyed by strength in media, telecom, and software names, even as specific tech subsectors faltered
- Energy and Financials also gained, reflecting robust investor interest in oil and banking names
- Conversely, semiconductor and AI-related tech—notably Nvidia, AMD, Broadcom, and especially Marvell—faced sharp declines, pressured by concerns over AI infrastructure growth and weaker China exposure. The semiconductor index logged its weakest weekly performance since April
- Healthcare trailed behind most other sectors, consistent with broader market softness in defensive names.
Despite these disparities, the S&P 500 managed only a slight weekly dip (~–0.1%), as gains in communication services, energy, and financials helped balance out semiconductor-heavy losses. The index even hit all-time highs mid-week, supported by upbeat economic signals and optimism for upcoming Fed policy easing.
In summary, last week’s sector rotation highlighted investor caution toward AI-related tech, favouring cyclicals like energy and financials, and reinforcing the S&P 500’s resilience amid volatility
Overview of the US Treasuries Market and Other Fixed Income Markets
Short-maturity US Treasuries slipped on Thursday after stronger-than-expected economic data raised doubts about the extent of Federal Reserve rate cuts. Yields on two- to five-year notes climbed at least two basis points, with the two-year rising to 3.64% after GDP growth was revised up to 3.3% for Q2 and weekly jobless claims fell more than anticipated, signalling continued labour market strength. Analysts said the figures underscored consumer resilience despite tariff pressures, complicating the Fed’s dovish tilt.
Despite the move, shorter-dated yields remain near their lowest levels since early May, following a rally on growing expectations for policy easing. Swap contracts still price in a quarter-point Fed cut by October and a second by year-end, with about an 80% chance of a September reduction. Citigroup economists cautioned, however, that underlying demand outside a few sectors is weakening and that growth should slow further as tariffs weigh and labour conditions soften.
Political developments are also influencing expectations. President Donald Trump’s push to accelerate Fed appointments has bolstered market bets on cuts, with his nominee Miran expected to be confirmed before the September meeting.
Longer-dated Treasuries, in contrast, rallied after a seven-year note auction, sending yields to session lows and narrowing the yield curve. The two-to-10-year spread shrank to 57 basis points from 62, while the five-to-30-year gap fell to about 118 from 122. Recent steep curve levels prompted traders to unwind positions.
Auctions earlier this week also reflected strong demand: two- and five-year sales cleared at the lowest yields since September 2024, before rallying further in secondary markets. End-of-month bond index rebalancing, particularly large in August, also supported demand for new issues.
Overall, markets remain split between strong near-term data supporting higher yields and expectations that tariff-driven inflation and labour softness will push the Fed toward easing.
The US economy grew more strongly than initially estimated in the second quarter of 2025, with revised figures showing a 3.3% annualised expansion compared with the 3% originally reported. The upward revision was driven by robust business investment and a historic boost from trade. Business spending rose 5.7%, well above the prior estimate of 1.9%, with notable gains in transportation equipment and the strongest growth in intellectual property products in four years.
The trade sector provided an extraordinary lift, with net exports contributing nearly five percentage points to GDP, the largest on record after weighing on growth in the first quarter. This reflected both a rebound from earlier import surges tied to tariff anticipation and stronger overseas demand for US goods. Consumer spending, the backbone of the economy, grew at a modest 1.6%, slightly above initial estimates but still sluggish compared with past expansions. Retailers like Walmart and Home Depot remain optimistic about consumer resilience, though tariff-driven price increases are beginning to filter into stores.
Corporate profits improved in Q2, rising 1.7% after suffering their sharpest decline since 2020 earlier in the year. Margins, measured as after-tax profits for nonfinancial firms relative to gross value added, held steady at 15.7% although elevated by historical standards. Economists caution, however, that whether firms pass tariff costs to consumers or absorb them will shape profit trajectories and inflation pressures going forward.
Gross domestic income (GDI), an alternative gauge of economic activity, surged 4.8% in Q2 after barely growing in Q1, reinforcing the picture of stronger momentum. Still, analysts warn that underlying demand outside specific sectors remains subdued, with labour market weakness and higher tariff costs likely to restrain activity in the months ahead. Final sales to private domestic purchasers, a cleaner measure of household and business demand, rose just 1.9%, suggesting slowing core momentum beneath the headline GDP figure.
Inflation dynamics remain central to the outlook. The Fed’s preferred core PCE index rose at 2.5% in Q2, unchanged from the earlier estimate. Policymakers are closely monitoring whether tariffs will further pressure prices. Chair Jerome Powell, speaking at Jackson Hole, acknowledged tariff-driven inflation but highlighted labour market risks as a potential justification for a September rate cut. Markets are still pricing in easing, with traders betting on at least one cut before year-end.
In addition to the GDP revision, the Commerce Department announced it will begin distributing GDP data via public blockchains, aligning with the Trump administration’s push for greater adoption of digital technologies. Meanwhile, labour market signals remain mixed, with jobless claims falling in mid-August even as concerns mount about broader hiring trends.
Figure 2: US Cash Rate Expectations
Overview of the Australian Equities Market
The August corporate reporting season highlighted how Australian businesses are navigating productivity pressures against a backdrop of subdued long-term growth. With Treasurer Jim Chalmers’ productivity summit running in parallel, results underscored a clear theme: companies are prioritising disciplined capital allocation, internal efficiencies, and leadership stability.
Success stories reinforced this trend. SGH’s turnaround at Boral illustrated how sharper pricing and capital discipline can lift profitability. Many corporates, including CBA, Telstra, BHP, AGL, and Origin, are investing in targeted, low-risk projects such as AI, digital infrastructure, and energy transition assets, thereby balancing growth with dividend commitments. Retailers also delivered strong results, buoyed by improved household spending power from tax cuts, easing inflation, and rate reductions. Consumer resilience benefited names like Nick Scali and Super Retail, while CBA data showed a rare simultaneous increase in spending across all age groups.
Leadership proved a differentiator: REA’s smooth CEO transition reassured investors, while JB Hi-Fi briefly wobbled on succession news. Proven leaders such as Breville’s Jim Clayton gained investor confidence, while strategic missteps were harshly punished—CSL’s Seqirus demerger plan and James Hardie’s $14bn Azek acquisition triggered steep sell-offs. Even strong performers like CBA and Guzman y Gomez were marked down for meeting but not exceeding lofty expectations.
At the market level, Australian equities have delivered solid returns but lag global benchmarks, reflecting sectoral imbalances—heavily weighted to banks and miners with limited tech exposure. CBA alone has accounted for 40% of ASX 200 gains this year, though its valuation premium raises sustainability questions. Many companies continue to list offshore, attracted by higher multiples and growth-oriented investors.
Overall, the season revealed a “two-speed” market: firms with pricing power, disciplined execution, and credible leadership were rewarded, while missteps, overreach, and unmet expectations were swiftly penalised.
Figure 3 shows the P/E ratio of key equity markets around the world. It’s worth noting that the Australian share market is trading well above its historical PE Ratio average and is one of the most expensive markets in the world. The latest reporting season will provide further clarity on the future direction of earnings growth and any further rally that can be sustained without the support from offshore market sentiment.
Figure 3 – World – MSCI PE Ratio By Country
Overview of the Australian Government Bond Market
Australian government bonds were mixed on August 29, 2025, with yields edging slightly higher at the short end amid U.S. inflation alignment and global equity jitters, as earnings season wrapped and monthly gains solidified. The 10-year yield dipped 1 basis point to 4.27%, the 2-year rose 1 bp to 3.33%, the 5-year held at 3.64%, and the 15-year eased 2 bps to 4.64%. Month-to-date, yields declined 5-7 bps, reflecting dovish sentiment post-softer Q2 capex (0.2% vs. 0.7% expected) and July CPI surprise, though August’s equity rally tempers aggressive RBA cut bets. U.S. PCE meeting forecasts—core YY at 2.9%, supporting Fed’s easing path—bolstered resilience views but fueled a tech-led selloff, amplifying tariff truce talks (U.S.-China extension eyed) and European duty reductions, potentially stabilizing flows yet heightening September correction risks from valuations and U.S. debt. Trump’s Fed independence challenge risks higher global borrowing costs, indirectly pressuring Aussie yields via commodity ties, as lithium and uranium surges highlight supply constraints. Bond traders eye next week’s jobless claims (230k expected) and Australia’s leading index for further RBA clues, with swaps implying ~60% September Fed cut chance influencing cross-currency dynamics.
Looking Ahead: Major Economic Releases for the Week Ending 5th September
For the week ending September 5, 2025, Australian economic data will be in the spotlight, with the S&P Global Manufacturing PMI Final expected to confirm ongoing expansion in the sector, reflecting resilient activity despite global headwinds. Building approvals are anticipated to show a notable decline both month-on-month and year-over-year, signalling potential cooling in the housing market amid high interest rates. The current account balance may widen its deficit slightly, while net exports are projected to contribute positively to growth, offsetting some domestic weaknesses. S&P Global Services and Composite PMI Finals could indicate steady service sector momentum, and real GDP figures (quarterly and annual) are expected to reflect a modest pickup in overall economic growth from prior softness. Trade data, including goods balance, imports, and exports, may highlight a robust surplus driven by stronger exports. These releases could reinforce the Reserve Bank of Australia’s cautious stance, potentially supporting further rate cuts to bolster recovery in construction and consumer sectors, though persistent trade uncertainties pose downside risks.
In the United States, the S&P Global Manufacturing PMI Final and ISM Manufacturing PMI are anticipated to show continued contraction but with marginal improvement, suggesting tentative stabilization in the sector. Factory orders may contract less sharply than before, indicating easing manufacturing pressures. International trade is expected to post a wider deficit, reflecting import growth amid tariff concerns. S&P Global Composite and Services PMI Finals, along with ISM Non-Manufacturing PMI, could confirm expansion in services, underscoring economic resilience. Initial jobless claims are likely to remain stable at low levels, while nonfarm payrolls may edge up modestly, with the unemployment rate ticking higher and average earnings softening slightly, pointing to a cooling but solid labor market. These indicators might prompt the Federal Reserve to consider further rate cuts to sustain growth, though global trade uncertainties, including U.S. tariff policies, may continue to pose risks to both economies.
Major Economic Releases for the Week ending 5 Sep, 2025
| Date | Country | Release | Consensus | Prior |
|---|---|---|---|---|
| Monday, 01/09 | Australia | S&P Global Mfg PMI Final | n/a | 52.9 |
| Monday, 01/09 | Australia | Building Approvals | -4 | 11.9 |
| Monday, 01/09 | Australia | Building Approval Total YY | n/a | 5.4 |
| Tuesday, 02/09 | Australia | Current Account Balance SA | -15.1 | -14.7 |
| Tuesday, 02/09 | Australia | Net Exports Contribution | 0.3 | -0.1 |
| Tuesday, 02/09 | United States | S&P Global Mfg PMI Final | n/a | 53.3 |
| Tuesday, 02/09 | United States | ISM Manufacturing PMI | 49 | 48 |
| Tuesday, 02/09 | Australia | S&P Global Svs PMI Final | n/a | 55.1 |
| Tuesday, 02/09 | Australia | S&P Global Comp PMI Final | n/a | 54.9 |
| Wednesday, 03/09 | Australia | Real GDP QQ SA | 0.5 | 0.2 |
| Wednesday, 03/09 | Australia | Real GDP YY SA | 1.6 | 1.3 |
| Wednesday, 03/09 | United States | Factory Orders MM | -1.4 | -4.8 |
| Thursday, 04/09 | Australia | Balance on Goods | n/a | 5365 |
| Thursday, 04/09 | Australia | Goods/Services Imports | n/a | -3.1 |
| Thursday, 04/09 | Australia | Goods/Services Exports | n/a | 6 |
| Thursday, 04/09 | United States | International Trade $ | -74.5 | -60.2 |
| Thursday, 04/09 | United States | S&P Global Comp PMI Final | n/a | 55.4 |
| Thursday, 04/09 | United States | S&P Global Svcs PMI Final | n/a | 55.4 |
| Thursday, 04/09 | United States | ISM N-Mfg PMI | 51 | 50.1 |
| Thursday, 04/09 | United States | Initial Jobless Clm | 230 | 229 |
| Friday, 05/09 | United States | Non-Farm Payrolls | 75 | 73 |
| Friday, 05/09 | United States | Unemployment Rate | 4.3 | 4.2 |
| Friday, 05/09 | United States | Average Earnings YY | 3.7 | 3.9 |
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