Market Update - 20 August 2025

Markets Send Mixed Signals

Key Market Movements

Equities: The Dow Jones gained 1% midweek while the S&P 500 and Nasdaq posted modest gains. European markets outperformed, with the Euro Stoxx 50 rising 1%. The ASX 200 finished up 0.7%.

Bonds: Treasury yields initially fell 5-6 basis points but reversed after stronger-than-expected producer price data, finishing at 4.32%. UK gilt yields stood out, with 30-year yields reaching 5.57%, raising fiscal concerns. Australian 10-year yields rose from 4.22% to 4.27%.

Currencies: The US dollar traded mixed, initially weakening to 97.6 on the DXY before recovering to 97.85. The Australian dollar held near 65 U.S. cents.

Commodities: Oil remained subdued with Brent around $65-67 per barrel. Gold declined 0.7% as risk appetite improved.

Central Bank Dynamics

Treasury Secretary Scott Bessent's comments that rates should be "150 to 175 basis points lower" initially boosted rate cut expectations, with markets briefly pricing a 50 basis point September cut. However, Friday's producer price data showing a 0.9% monthly increase—the largest since July 2022—tempered this optimism, raising concerns about tariff-induced inflation.

Fed officials remained divided. Mary Daly shifted toward supporting a 25 basis point cut while Raphael Bostic emphasised caution. The debate centres on whether tariff pressures represent a one-time adjustment or persistent inflation. Markets fully price a September cut but remain uncertain about the magnitude.

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Economic Divergence

United States: Retail sales remained resilient with upward revisions, though Michigan sentiment dropped to 58.6 and one-year inflation expectations jumped to 4.9%.

China: Data disappointed with retail sales declining for a second month, property prices falling 2.8% year-over-year, and 60 of 70 major cities seeing price declines.

Europe: Industrial production fell 1.3% in June after rising 1.3% in May, showing tariff front-loading effects. The UK surprised with 0.3% Q2 GDP growth versus 0.1% expected.

Geopolitical Developments

President Trump's separate meetings with Putin and Zelensky in Alaska produced no immediate breakthrough on Ukraine, though efforts to arrange a three-way meeting maintained some optimism. Markets showed minimal reaction.

Australian Reporting Season 

By August 19, 2025, around 82% of ASX200 companies have reported. Major banks are facing margin pressure and profit-taking while miners struggle with weak Chinese demand. Retailers experience subdued growth due to promotional pressures; tech stocks outperform through cost discipline and sustained earnings growth. Low unemployment underpins consumer resilience, but risks persist as interest rate impacts filter through. The ‘event of the season’ so far though was CSL's 17% plunge—its worst ever—despite reporting 14% profit growth and unveiling major restructuring (3,000 job cuts, Seqirus spin-off). To some (mainly active managers who have chosen supposedly cheap CSL over the ever more expensive CBA) this epitomise the market's structural crisis where fundamentals no longer seem to matter. We still have some of the so-called 'expensive defensives’ still to report next week including Wesfarmers and Qantas, and the market reaction to those results might also be interesting. Next week we will look to dissect and make sense of these conflicting signals in our reporting season wrap-up.

Week Ahead

Focus shifts to Jackson Hole, where Fed Chair Powell's Friday speech will be scrutinised for September FOMC signals. The symposium's "Labor Markets in Transition" theme suggests structural rather than immediate policy focus.

Key risks include further tariff pass-through evidence, labour market deterioration, and UK fiscal concerns—with inflation-linked bond yields at 1998 highs. Investment-grade credit spreads at 73 basis points over Treasuries (narrowest since 1998) suggest potential risk underpricing.

Markets face continued volatility as they digest mixed growth and inflation signals against evolving geopolitical and trade dynamics.