September Market Update

September market view: softer growth meets sticky inflation

Looking back at August’s dataflow and what it may mean for portfolio positioning.

Introduction

August brought a run of welcome inflation news. US CPI eased to 3.4% with core at 2.5%, producer prices were flat, Australian wage growth stayed contained and the RBA held rates. The US Treasury also stepped in to support the long end of the bond market, pulling the 30-year yield back from its highs.

The growth data was less comfortable. US payrolls fell, retail sales dropped and consumer sentiment slid, Australian unemployment rose to 4.5%, and China’s activity data missed across the board. Then Fed Chair Kevin Warsh used Jackson Hole to signal that better summer inflation readings did not mark a genuine improvement in the trend, and markets moved to price a September hike.

A cooling economy with inflation still above target is a harder mix than either problem on its own.

What moved the dial

Supportive signals

• The RBA held the cash rate at 35% on 11 August, extending the pause that began in June, after June-quarter trimmed mean inflation printed 3.6%, below the 3.8% the RBA had forecast. Westpac, the last major bank calling for a hike, moved to a hold, removing the immediate tightening risk from domestic rate-sensitive assets.
• Australian wage growth stayed contained at 2% in the June quarter, in line with expectations and down from 3.3%, with no evidence of second-round effects from the energy shock. This is the indicator the RBA has identified as its key upside-risk test, and it is not flashing.
• US July CPI eased to 4% from 3.5%, with core down to 2.5% and headline prices up just 0.1% for the month as the pass-through from higher crude faded. Producer prices were unchanged against a 0.2% rise expected, and with wholesale costs leading consumer prices, the absence of pipeline pressure undercut the argument that the oil shock is broadening.
• The US Treasury announced on 19 August that it would at least double its long-dated debt buybacks from 9 September, targeting the 10 to 30-year sector that had seen a buyers’ strike since late June. The 30-year yield fell from above 5.33% toward 5.20%, the dollar weakened and risk assets rallied.
• Euro-area second-quarter GDP grew 4% on the quarter, two-tenths above consensus, following an upwardly revised flat first quarter, suggesting Europe is absorbing higher energy costs better than the ECB’s scenario analysis had assumed.
• UK services inflation fell to 4% from 3.6% and food inflation to 1.3%, the lowest since September 2021, in the July data. The measures the Bank of England watches most closely for domestic inflation are still cooling, even as the headline rate rose on utility bills.

Watch-outs

• Australian unemployment rose to 5% in July, matching April’s post-COVID high, with employment down 15,800, participation down two-tenths to 66.9% and hours worked down 0.6%. The fall in participation flatters the headline rate, so the underlying loosening is running faster than the number suggests.
• Australian underlying inflation stayed stubborn. While headline eased, July’s trimmed mean held at 6%, above the 2 to 3% target and above expectations, and the monthly CPI rose 1.0%, keeping the door open to the RBA staying restrictive for longer.
• Jackson Hole tilted the Fed toward a September hike. After Chair Warsh said better summer inflation readings did not signal a genuine improvement in the trend, markets repriced the odds of a September hike to roughly 57%, from about one in three beforehand.
• US July payrolls fell 23,000 against a consensus 80,000 gain, with May and June revised down a combined 103,000. The unemployment rate ticked down to 4.1%, but that reflected a shrinking labour force rather than genuine strength.
• US July retail sales fell 6%, the largest monthly drop since May 2025, while University of Michigan consumer sentiment slid to 51.0 with year-ahead inflation expectations at 4.9%, an unwelcome mix for discretionary earnings.
• Euro-area July inflation ticked up to 9% from 2.8%, with energy inflation accelerating to 10.0%, keeping the ECB at a 2.25% deposit rate despite a 2026 growth baseline it has already downgraded to 0.8%. It is managing a supply shock it cannot offset with rate policy.
• China’s July activity data missed across the board. Retail sales rose just 6% against 1.5% expected, industrial production slowed to 4.5%, fixed-asset investment fell 6.7% year to date, urban unemployment rose to 5.2% and new yuan lending recorded a record contraction. Chinese large-cap equities were down 2.3% for the month at the time of writing, the only major market to decline.
• Japan’s second-quarter GDP grew just 1% annualised against 2.0% expected. Private consumption contracted and the entire expansion came from net exports flattered by a weak currency.

Macro overview

August’s inflation data was mostly encouraging. US headline and core CPI both eased, producer prices were flat and the pass-through from higher crude continued to fade. Australia’s June-quarter trimmed mean undershot the RBA’s forecast, wage growth showed no second-round effects and UK services inflation kept cooling. On inflation alone, the case for further tightening weakened.

The problem is what happened alongside it. The US economy shed jobs at the margin, retail sales fell and year-ahead inflation expectations sat at 4.9%. Australian unemployment rose and July’s trimmed mean stopped falling. China missed across the board and Japan’s growth relied entirely on net exports. This is the combination we are increasingly alert to: a global economy showing early signs of cooling while inflation stays elevated. The usual remedy for one worsens the other, and Jackson Hole tilted the Fed toward a hike.

Asset class outlooks

Equities: Risk assets rallied on the Treasury buyback, but a weakening US consumer and rising inflation expectations are an unwelcome mix for discretionary earnings. With September and October historically the most volatile months for shares, sharper still in a US mid-term election year, we would not be surprised by choppier markets. The rising cost of building AI stays on watch.

Fixed income: The Treasury’s buyback expansion was the first real circuit-breaker for the long end after a buyers’ strike since late June, pulling the 30-year yield back from above 5.33%. In Australia, the RBA hold removed the immediate tightening risk, though a stubborn trimmed mean keeps the door open to policy staying restrictive for longer. We remain cautious on the outlook for interest rates.

Alternatives and real assets: Energy is still feeding into European prices, with euro-area energy inflation accelerating to 10.0%, even as the pass-through from crude into US consumer prices fades.

FX: The US dollar weakened after the Treasury’s buyback announcement. In Japan, second-quarter growth relied on net exports flattered by a weak currency.

Implications for asset allocation and portfolio positioning

We remain constructive on risk assets but continue to hold slightly higher cash. The tension between softening growth and sticky inflation is unresolved, and it is the risk we are watching most closely.

Practical implications:

• Keep the tilt toward structural growth companies that are less exposed to renewed supply disruption.
• Hold slightly higher cash through a historically volatile September and October, ready to act if volatility creates opportunities.
• Stay cautious on interest rates while the Fed, ECB and RBA remain focused on controlling inflation.
• Keep liquidity on watch. With government and corporate debt so elevated, an excessive slowing in liquidity growth could trigger credit-market dysfunction.
• Expect higher dispersion in returns.

Scenarios and probabilities

Scenario probabilities reflect our current assessment and are reviewed as new data emerges.

Base case: 75% probability

The conflict around Iran pushed energy prices sharply higher and continues to disrupt the supply of essential goods such as fertiliser and sulphuric acid. The picture remains volatile, with on-again, off-again ceasefires, the deal not yet final, parts of the strait still hazardous and governing arrangements unresolved. We have tilted portfolios toward companies with strong structural growth that are less exposed to renewed supply disruption. The global economy, credit markets and corporate profits remain on a solid footing. We expect a seasonally choppier September and October, sharper in a US mid-term election year, but do not read short-term swings as a change in the underlying picture.

Inflation had been slowing before the conflict, but energy prices have pushed expectations higher. The recent downward surprises in Australia and the US are encouraging, but we are increasingly alert to the harder combination of a global economy showing early signs of cooling while inflation stays elevated. That mix is tougher for policymakers than either problem alone, because the usual remedy for one worsens the other. Some central banks have shifted back toward raising rates, and Chair Warsh has signalled a greater willingness to keep rates higher and to reduce the Fed’s balance sheet. Our base case is that policy stays tighter for longer than markets had hoped without derailing the recovery, and we remain cautious on rates. Liquidity conditions remain benign, though a recent slowing in liquidity growth concerns us and is on watch.

Structural growth themes remain intact, with investment in AI, manufacturing and energy infrastructure expected to broaden profit growth. Our base case is that the rising cost of building AI lifts the bill without breaking it, as the leading companies have the cash flows to fund it, albeit with more debt. This matters because so much equity and credit capital has been committed to the buildout that it has become systemically important. With a seasonally weaker patch ahead, we remain constructive on risk assets but continue to hold slightly higher cash for now, ready to act should volatility create opportunities.

Bear case: 13% probability

The key risk is a meaningful pullback in consumer and business spending, particularly in the United States. With valuations already elevated, weaker revenues coinciding with a pullback in AI investment, persistent inflation and elevated rates could see profit margins and market prices fall together. Large and sustained oil price rises would make this more likely, as central banks may be unable to cut and high government debt limits fiscal support, and a breakdown of the ceasefire or collapse of the 60-day deal would sharpen the risk. Rising AI costs add risk from the other side: if spending keeps climbing while the payoff is delayed, a sharp repricing of the expensive technology leaders could drag the broader market down, made worse by a Fed unwilling to step in.

China adds a further layer of risk. If its property sector weakens further and stimulus fails to restore confidence, Chinese growth could slow materially, directly affecting Australian national income and corporate earnings. In this scenario a more defensive approach would be warranted, with higher cash holdings, reduced share market exposure and a tilt toward healthcare, consumer staples and utilities.

Bull case: 12% probability

In the bull case, de-escalation with Iran gathers pace: a ceasefire holds and the Strait of Hormuz reopens fully. Falling energy prices and easing supply pressures would support stronger growth while keeping inflation in check, and resolved trade disputes and continued AI adoption would lift profits across industries without the widespread job losses many fear. A Warsh Fed seen as genuinely committed to low inflation could help: if markets trust inflation will stay contained, longer-term borrowing costs can fall even as the Fed holds firm. Cheaper energy and rapid technological improvement could also bring AI costs down faster than expected, broadening its benefits beyond the companies building it.

Government spending would add support, and strong household and business balance sheets leave both well placed to respond. For Australia, government spending and the end of the current hiking cycle would support stronger domestic growth. If interest rates stay below inflation, a growth-oriented portfolio with low cash and more exposure to industrials, materials and financials would be well positioned.

Closing perspective

August showed inflation continuing to cool while growth began to soften, and a Fed chair who, at Jackson Hole, was not yet ready to take comfort from the better readings. That leaves markets heading into a seasonally volatile stretch with the tension between slowing growth and sticky inflation unresolved. We remain constructive on risk assets, keep the tilt toward structural growth, and continue to hold slightly higher cash so we can act if volatility creates opportunities.

This publication is prepared by Akambo Pty Ltd (ABN 16 123 078 900) AFSL 322056.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo’s Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

Past performance is not a reliable guide to future returns.