Global equity markets continued to climb in August, while bond prices rose, with the US 10-year interest rate falling by -0.15% over the month.
US markets
Optimism around the technology sector continued to propel the momentum, with deal-making between several super-cap names bolstering sentiment. In the US, and the Nasdaq Composite surged 5.6% during the month while the S&P500 gained 3.5%. In what is typically a poorly performing month, both indices had their best September since 2010.
September was also notable for the US Federal Reserve’s first rate cut of the year. While reaffirming its data-dependent stance, the central bank signalled a greater willingness to address risks from a softening labour market. The monthly non-farm payrolls data was much weaker than expected, and another release showed that 911,000 fewer jobs were created in the year to March than previously reported.
Other economic data late in the month highlighted the resilience of the US economy, which grew at 3.8% in the second quarter, the fastest pace in nearly two years. Driving the revision was an upgrade to consumer spending which grew at a 2.5% annualised pace. Corporate profits rose just 0.2%, which suggests companies are shielding US consumers from price hikes due to tariffs.
US businesses continue to invest at a robust pace. Business investment surged 7.3% during the quarter, with the sharpest increase in spending on intellectual property products since 1999. The influence of the AI thematic is increasingly evident, with investment in data centres reaching a new record of over US$40 billion on an annualised basis. Durable goods orders also rebounded strongly, rising 2.9% in August following sharp declines of 2.7% in July and 9.4% in June. Meanwhile, activity in the US housing market is beginning to pick up, as lower interest rates start to have a positive impact.
The strong economic data placed additional focus on inflation readings released toward the end of the month. The Personal Consumption Expenditures (PCE) Price Index showed annual inflation at 2.7% in August, up slightly from 2.6% in July. Excluding food and energy, the more closely watched core PCE measure, rose 0.2% for the month and 2.9% year-on-year. The inflation figures reinforced expectations for two additional rate cuts before year-end.
Market volatility, as measured by the VIX Index, remained subdued throughout the month. Toward the end of September, attention briefly turned to the potential for a US government shutdown following a funding standoff between President Donald Trump and Congressional Democrats. Investors, however, largely looked through the development. Historically, government shutdowns have been relatively common (20 since 1976) and in recent decades they have often coincided with rising equity markets. Notably, the shutdown during President Trump’s first term was the longest on record, yet the S&P 500 gained more than 10% over that period.
Australian economy
Across the Tasman, the ASX 200 pulled back from record highs, softening 1.3% in September. The resilience of the Australian economy continued to show in official data, which expanded 0.6% over the June quarter. A stronger-than-expected monthly inflation print compelled the Reserve Bank of Australia to keep rates on hold.
Monthly inflation reached 3% in August. Price strength in August was felt across all categories, from housing to food. The RBA has however downplayed the importance of the monthly CPI data in the past, saying the series remained too volatile. Adding to the picture was the fact that trimmed mean inflation, the RBA’s preferred measure, ran at an annual 2.6%, down from 2.7% in July. Rent growth of 3.7% in August was the lowest annual growth since late 2022. The market odds of a rate cut by the RBA on Melbourne Cup Day have now lengthened slightly.
NZ economy
The NZX 50 rose 2.8% in September, taking quarterly gains to 5.5% and bringing the benchmark within reach of its January 2021 record high. While June quarter GDP data painted a downbeat picture of the New Zealand economy, it strengthened the case for further RBNZ rate cuts. Meanwhile, Dr Anna Breman was appointed as the new Governor of the central bank -the first female and first non-New Zealander to hold the position since the 1930s.
Post the month-end, the electricity sector was in focus as the Government announced it was willing to provide capital support for major new generation projects to strengthen energy security and address high wholesale power prices. The Crown is looking to accelerate renewable consents and explore importing liquefied natural gas. The Government also confirmed it would participate in equity raises to maintain 51% stakes in Meridian, Mercury NZ and Genesis Energy, while strengthening the Electricity Authority’s powers.
The diverging rate outlooks of Australia’s and New Zealand’s central banks were also reflected in the currency markets, with the New Zealand dollar falling to multi-year lows around 88 cents against the Australian dollar. This provides a potential earnings tailwind for New Zealand companies that export to Australia or that have meaningful operations across the Tasman.
Looking ahead
There is plenty to occupy markets in the weeks ahead. The US earnings season will soon get underway, offering investors fresh insights into how a broad range of companies are assessing the economic environment, and whether tariffs are having any noticeable impact on corporate performance.
The Federal Reserve will also remain in focus, with markets currently pricing in two further rate cuts this year. That outlook could shift, however, as upcoming economic data continue to shape expectations. The US dollar will likewise be closely watched, alongside the evolving story around political attempts to influence the Fed’s independence.
On the trade front, investors will be monitoring any progress toward a new US-China trade agreement as the clock runs down on the current tariff pause. China, of course, remains a key customer for both Australia and New Zealand.
Finally, it will be important to observe how the economies of Australia and New Zealand perform in the coming months, with their respective central banks now moving at noticeably different speeds in the monetary policy cycle.