August Market Update

August market view: inflation cools, then oil bites back

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

Introduction

July started with encouraging inflation news. US CPI recorded its biggest monthly fall since 2020, Australian headline inflation eased to 3.8%, and the ECB paused after June’s hike. China’s first-half growth landed inside Beijing’s target and the IMF lifted its forecast.

The month then turned. Iran-aligned Houthi attacks on two Saudi tankers and a declared Red Sea blockade pushed Brent back above US$100, reintroducing the biggest inflation headwind just as central banks had begun to price it out. The Fed held, but three officials voted to hike, and the Bank of England’s hawkish minority grew. The ceasefire picture is again on-again, off-again.

Just as the inflation data began to cooperate, the energy shock found a new route back into the story.

What moved the dial

Supportive signals

• Australian headline inflation eased to 8% in the year to June, with the June-quarter CPI up just 0.6% and automotive fuel down 10.9% in the month on lower world oil prices and extended fuel-excise relief. Transport inflation moderated to 0.1% year on year, a constructive signal for the front end of the Australian curve.
• The Fed held at 50-3.75% on 29 July, a fifth consecutive hold, resisting pressure to tighten even as three officials dissented in favour of a 25 basis point hike in a 9-3 vote. Chair Warsh kept the statement short and stripped out forward guidance.
• US June CPI fell to 5%, with headline prices down 0.4% for the month, the biggest monthly drop since 2020, and core at 2.6% against 2.8% expected. The dollar fell, yields declined, and rate-sensitive technology and gold rallied as markets read the shock as fading rather than entrenched.
• The ECB paused at a 25% deposit rate on 23 July after June’s hike. The Governing Council voted unanimously to hold and declined to pre-commit to September, giving European risk assets a brief reprieve.
• China’s first-half GDP grew 7%, inside Beijing’s 4.5-5.0% target, and the IMF lifted its 2026 growth forecast from 4.4% to 4.6% on the strength of high-tech manufacturing and exports.
• China’s late-July Politburo reaffirmed support for “new productive forces” such as AI, electric vehicles and high-end manufacturing. High-tech manufacturing value-added rose 3% in the first half and now drives over 40% of growth, even as broad stimulus stayed calibrated.

Watch-outs

• The RBA kept Australia in a rare tightening bias. Headline inflation slowed to 4.0% in May, but underlying inflation accelerated to 6% while unemployment held at 4.4%, above the RBA’s forecast, a difficult inflation-versus-jobs bind.
• Australian housing and growth showed strain, with consumer spending slowing and house prices falling in some capital cities alongside a contractionary federal budget.
• Oil surged back above US$100 a barrel (Brent), its highest since late May and up around 35-40% on the month, after Iran-aligned Houthi attacks on two Saudi tankers and a declared Red Sea blockade widened the conflict beyond Hormuz. The situation remains a live risk to both inflation and equity markets.
• The Bank of England turned more hawkish, holding at 3.75% on 30 July but with the minority voting for a hike to 4% growing from two to three Its chief economist has said publicly that rates will need to rise.
• China’s investment slump deepened. Fixed-asset investment fell 7% in the first half against an expected 4.9% decline, and real-estate investment fell 18%, underlining the unresolved property drag.
• The Bank of Japan sharply lifted its core inflation outlook to 8% and cut growth to 0.5%, warning of a light stagflation risk from higher oil. Goldman Sachs now forecasts USD/JPY at 165 in 12 months, pointing to further yen pressure.

Macro overview

For most of July, the data suggested the energy shock was working its way out of the system. US headline CPI fell 0.4% in June with core at 2.6%, Australian fuel prices fell sharply and headline inflation eased to 3.8%, and markets responded with lower yields, a weaker dollar and rallies in technology and gold. China’s growth held inside its target, supported by high-tech manufacturing that now drives more than 40% of growth, even as investment and property continued to slide.

The late-month escalation changed the balance. Houthi attacks on Saudi tankers took Brent back above US$100 and widened the conflict beyond Hormuz, just as central banks had begun to price the energy shock out. Policymakers were already uneasy: underlying inflation in Australia had risen to 3.6%, three Fed officials voted to hike, the Bank of England’s hawks grew in number and the Bank of Japan raised its inflation outlook. The downward surprises in Australian and US inflation are encouraging, but the energy risk is live again.

Asset class outlooks

Equities: Rate-sensitive technology rallied on the soft US CPI print, but the renewed oil spike is a live risk to equity markets. We remain tilted toward companies with strong structural growth that are less exposed to renewed supply disruption. The rising cost of building AI stays on our watch list, with the highly valued technology names that have led the market the most exposed if investors start to question the return.

Fixed income: Yields fell on June’s soft inflation data, and the Australian disinflation signal is constructive for the front end of the curve. Against that, the Fed’s hawkish dissents, the Bank of England’s growing hike minority and Chair Warsh’s stated willingness to keep rates higher and shrink the balance sheet all point to policy staying tighter for longer. We remain cautious on the outlook for interest rates.

Alternatives and real assets: Gold rallied as markets read the inflation shock as fading, and oil’s move back above US$100 shows how quickly the energy picture can reverse. With parts of the strait still hazardous and the conflict now reaching the Red Sea, energy remains the key swing factor for inflation.

FX: The US dollar fell after the June CPI print. The yen remains under pressure, with the Bank of Japan warning of stagflation risk and Goldman Sachs forecasting USD/JPY at 165 in 12 months.

Implications for asset allocation and portfolio positioning

We remain constructive on risk assets but are holding slightly higher cash for the time being. The foundations are solid, with resilient earnings, supportive government spending and relatively easy borrowing conditions, but the oil shock is live again and liquidity growth has slowed.

Practical implications:

• Maintain the tilt toward structural growth companies that are less exposed to renewed supply disruption.
• Hold slightly higher cash while the energy risk and on-again, off-again ceasefires play out.
• Stay cautious on interest rates while the Fed, ECB and RBA remain focused on controlling inflation over supporting growth.
• Watch liquidity closely. Conditions remain benign, but with government and corporate debt so elevated, an excessive slowing 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: 73% 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 the governing arrangements unresolved. We have tilted portfolios toward companies with strong structural growth that are less exposed to renewed supply disruption. While risks abound, the global economy, credit markets and corporate profits remain on a solid footing, with resilient earnings, supportive government spending and relatively easy borrowing conditions.

Inflation had been slowing before the conflict, but energy prices have pushed expectations higher. If it proves persistent, the greater risk is a slowdown in consumer spending and demand destruction, though the recent downward surprises in Australia and the US are encouraging. Some central banks have shifted back toward raising rates, and Fed Chair Kevin Warsh has signalled a greater willingness to keep rates higher and to reduce the Fed’s roughly $6.7 trillion 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 the outlook for interest rates. Liquidity conditions remain benign, but a recent slowing in liquidity growth is causing us some concern. With debt so elevated, an excessive slowing could trigger credit-market dysfunction, though this is on watch rather than a live concern.

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. This matters because so much equity and credit capital has been committed to the buildout that it has become systemically important. In summary, we remain constructive on risk assets but with slightly higher cash levels for the time being, in a more volatile environment with higher dispersion in returns.

Bear case: 14% 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: 13% 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

July showed both sides of the current environment. The inflation data finally began to cooperate, with US and Australian headline rates easing and markets pricing a fading shock. Then Red Sea attacks sent Brent back above US$100 and reminded markets that the energy risk has not been resolved. Central banks are leaning hawkish into that uncertainty. Our response is to stay constructive, keep the tilt toward structural growth, and hold slightly higher cash until the energy and liquidity picture becomes clearer.

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.