August 2025: Powell’s pivot & US housing under pressure

In episode #14 of The Active Investor with SGH – August 2025: Powell’s pivot & US housing under pressure – Steve Hiscock and Rob Hogg unpack Jerome Powell’s unexpectedly dovish turn at Jackson Hole and what it means for interest rates. They explore the steepening shift in the bond market, the strain evident in the US housing sector, and the latest corporate reporting season in Australia. From AI hype meeting hard returns to valuations running hot, they discuss where caution – and opportunity – might lie for investors heading into spring.

August 2025: Powell’s pivot & US housing under pressure

Transcript:

Steve Hiscock:

Hello to everyone listening to our podcast, the Active Investor with SGH. I’m Steve Hiscock, the Chair of the company, and it’s my pleasure to be your host for today’s episode. In today’s podcast, we’ll be looking at what happened in August 2025, and we’ll be discussing the outlook going forward. This podcast is being recorded on Monday, the 1st of September 2025, and joining me again today is our Investment Officer, Rob Hogg.

Rob Hogg:

Steve, how are you?

Steve Hiscock:

Very good, Rob. Thank you. Welcome back again. So, let’s have a look at what happened over the month of August. The S&P ASX 300 Accumulation Index rose 3.2%. The S&P Small Ordinaries Accumulation Index rose 8.4% and continued on the outperformance that we’ve seen in recent months of small companies versus large companies.

The US equity market, the S&P 500, rose 2.1%. Australian 10-year bond yields were basically flat at 4.27%. The Australian 3-year bond fell slightly, to close at 3.37%. The US 10-year bond fell by about 0.16% and closed at 4.23%, while the 2-year bond yield fell by 34 basis points to end at 3.62%.

The Australian dollar moved higher against the US dollar, which continues to weaken and appreciated up to 0.6536 US cents. So, Rob, let’s start by having a look at some of the highlights which we’ll touch on. And so let’s start with one of the most important speeches, I guess you could say, in August. And that was the Fed Chair Powell speech at the annual Jackson Hole Central Bank Conference. Can you walk us through what he said and what implications it has for interest rates?

Rob Hogg:

Thanks, Steve. As is pretty much always the case, anytime the Chair of the biggest and most important Central Bank says anything, the market really hangs on his every single word, including what he says and what he doesn’t say, and the order in which he says what he says.

But the key issue I think about this particular speech was that following on from their prior July meeting, where the Fed Committee said they’d be prepared to adjust the stance of policy as appropriate if risks emerge. He’s then moved from that, several weeks later, and been considerably more dovish than the market expected.

Indeed, he said words to the effect with policy and restrictive territory. So, by that, he means that rates are probably higher than they will ultimately end up being. So with policy and restrictive territory, the baseline outlook and shifting balance of risks may warrant adjusting our policy stance, presumably towards a rate cut. My words at the end there. So that was obviously very significant. That was toward the end of August, and it had a significant impact on equities, assisting equity markets throughout the month, as well as bond markets.

Steve Hiscock:

So, talking about bond markets, what happened in bond markets around the world over the month? Did they rise? Did they fall? Are they about the same?

Rob Hogg:

Well, they did a little bit of everything, but broadly speaking, they all steepened. So, what that means is that in a bull steepening scenario, what we’re talking about there is shorter-term rates falling by more than longer-term rates.

And that’s what happened in the US. Or in a bear steepening, which is pretty much what happened in Australia. You get, in fact, a slightly higher level of yields at the very long end and a slightly lower level of yields at the short end, and that’s what we mean by steepening. It can be bullish or bearish according to whether interest rates are going up or down.

But the clearest example of this during the month was the US, where short-term interest rates fell quite significantly, and a lot of that was because of Chair Powell.

Steve Hiscock:

Right. And then the longer-term, say the 30-year government bond yield, that actually rose.

Rob Hogg:

Well, it’s mixed around the world. And this is a very interesting thing.

We’ve seen this now for several months, beginning in Japan about a year ago, more so in Germany this year, and to a lesser extent in the US and the UK. We’ve seen 30-year bond yields start to rise, whilst 10-year bond yields, I mean, we talk about them every month. They’re up, they’re down, they’re up, they’re down, they’re up.

However, they haven’t really moved out of the long-term trend they’ve been in for a couple of years. Nevertheless, we’re starting to see 30-year yields move a little bit above that area where they have been. And investors are really starting to worry and wonder what that exactly means. Perhaps it’s investors reassessing factors such as fiscal sustainability and concerns about budget deficits being run at a significantly higher level, certainly higher than they were before the COVID-19 pandemic. So, perhaps that’s what we’re starting to see at that very long end of the curve.

Steve Hiscock:

Yes, because in isolation, say, looking at the 30-year French bond yield is almost 4.5% and the 30-year US bond yield is almost 5%. You know, if you take away inflation, they’re both net real positive yields, aren’t they?

Rob Hogg:

They are. And what’s important in Europe and what’s important in the US with these very long-term yields, is that more borrowing tends to occur certainly than in Australia with those sorts of tenants. For example, in the US housing market, mortgage rates, and almost every mortgage in the US have a fixed 30-year term. So, what the 30-year bond does has a very immediate impact on mortgage rates in the US, and we’ll come back to it in a sec. However, perhaps that’s one of the reasons why the US housing market is looking quite sick.

Steve Hiscock:

Well, before we get onto the US housing market, I know that’s an area of interest for you at the moment, but can we go back a little bit to inflation? So what’s happening in Australia? What’s happening in the US and Europe?

Rob Hogg:

Yeah, so they’re really contrasting stories in Australia, inflation expectations.

And we measure these by looking at just the conventional government bond, and we subtract from those conventional or nominal bonds. We subtract from that what are called real yields. And the difference between the two is the implied inflation expectation. So, the difference between the nominal yield and the real or inflation-protected yield.

In Australia, that’s relatively stable, but inflation expectations have started rising in the US and Europe. Therefore, the US may again be a source of investor concerns regarding fiscal sustainability. You recall that Trump had passed through the Congress, his Big Beautiful Bill, and that’s all about fiscal easing, so higher deficits.

And, of course, in Europe, the key has been the very significant spending package announced by the German government, focusing on infrastructure and defence spending. So, perhaps that’s what we’re seeing there. In Japan, it appears to be merely a reassessment of market expectations regarding inflation and growth as well.

But it’s quite significant and it bears watching. It’s not in any dangerous territory now. But the bond market is about the only guardrail that President Trump respects and notices.

Steve Hiscock:

Right. Look, one of the key things that goes into long-term bond rates is the expectation of inflation. And, obviously, the tariff hikes that we’ve seen in the US are going to feed into that if they haven’t already. So, where are we with the tariff rate at the moment?

Rob Hogg:

Well, there wasn’t a lot of news on tariffs over the last month, and that’s enabled us to make a bit more of a judgment about where they’ve settled. And the answer is between 15 and 20%. So, that’s significantly higher than tariffs were before Liberation Day, the 2nd of April. But the market has just looked through that. Key here will be the inflationary impact, with almost everybody expecting some inflationary impulse from tariffs, but so far, it has been less than expected.

We hear anecdotally about the fact that exporters to the US are taking cuts on their landed prices into the US, and there’s other margin compression that happens through the distribution cycle and so on. Manufacturers as well are taking a hit on their margins, and what all of this means is that at the consumer price level, which is what the Fed’s all about, there are really scant signs so far. There are some, but there’s nowhere near the amount of inflation impact from tariffs as was feared.

Steve Hiscock:

Robert, it’s interesting, isn’t it, because I think, you know, we’re seeing countries have got to adjust to the new order. If we look at China, then you’ve got a situation where exports are still growing. And I think it was roughly 7 to 10% for the year-on-year. So, clearly, China is looking for other countries to sell its goods to. Is that a fair comment?

Rob Hogg:

Yeah, no, I think that’s how it’s going to pan out. European, it’ll be the same with every other trading partner of the US, including ourselves. We will be increasingly seeking out other trading partners around the world. So a lot of the impact globally will be mitigated by just the simple redirection of exports, which is why they continue to look at the US, because that’s where you would expect to see the nub of the impact.

Steve Hiscock:

So, just back on, you mentioned the US housing market. It’s a big part of the US economy. Not as big as Australia, but it’s still a significant part. It doesn’t look that good, does it? And the 30-year bond increase is putting more pressure on it.

Rob Hogg:

Yeah, that’s absolutely right. One of the interesting sorts of impacts of this is that, as you can imagine, if you have a 30-year mortgage that maybe you got several years ago, and that mortgage rate is lower than the current prevailing rate, if you’ve got a new mortgage. It’s a significant constraint on actually selling your property and moving to a new property. And what we’re seeing is that housing starts and building permits, which are the two key indicators of housing activity, they’re just continuing to slip away. We can see that confidence from builders is also ebbing away, towards some of the weakest levels we’ve seen for several years.

So, look, I think a lot of this is about the 30-year mortgage and the level.

Steve Hiscock:

And it doesn’t, I mean, at the moment, the trend is down. So, you know, we’re not predicting a recession in the US, but certainly parts of it are, as you say in your monthly report, displaying recessionary-type conditions.

Rob Hogg:

Yeah, housing, definitely.

Steve Hiscock:

Yeah. So, just back on the US inflation outlook with tariffs feeding through and so on, how’s the equity market looking at it? Is it worried yet?

Rob Hogg:

No, seemingly not. During the month, the market pretty much looked through the CPI, which was sort of as expected. Some of the underlying measures, however, were a little bit higher. So, some of the ways we look at the CPI are things like what’s called the trimmed mean, which strips off the two outer extremes of price increase and price decline, and the median, which is the midpoint. Those sorts of measures are starting to rise a little bit. The one inflation number that did actually have a bit of a market impact was what’s called the Producer Price Index, and that’s sort of like an upstream manufacturing price.

And that came in quite a lot higher than expected, and that did have a negative impact on the night. But together over the course of the month, neither of these numbers was enough, really, to cause equities to have a significant rethink.

Steve Hiscock:

No, and look, it’s a non-sequitur, but it does feel like almost nothing can derail the market at the moment.

Rob Hogg:

At the moment.

Steve Hiscock:

Whether it’s good or bad news, but things change as we know. So, looking at the tech stocks, they’ve obviously been fantastic performers over the years. How are they going? And there’s obviously reporting season in the US. There were some negative announcements.

Rob Hogg:

Look, by and large, they’ve tracked okay. Although one of the features of the month was really that small caps did so well in the US, and I think a lot of that’s to do with the monetary policy outlook shifting. And, of course, lower rates are usually most positive for the domestic economy, and small caps are most affected by the domestic economy.

However, we had another interesting development in the AI tech area during the month. A report titled “The Gen AI Divide: State of AI in Business 2025” was released. Now, this is a survey carried out by some researchers at the Massachusetts Institute of Technology. So, a very reputable source. And they claimed that despite all the investment in generative AI, amounting to $ 30 to $ 40 billion, the report, which was a survey, uncovers a surprising result: 95% of organisations are getting zero return.

Now, this is important for a couple of reasons, mainly because the market has been buying companies that benefit from Gen AI-related capital expenditures. And if anything were to upset the idea that spending on AI CapEx may not give the return expected, it could be a very real risk to AI and other tech-related spending. And of course, that’s particularly important because these stocks have run over the last several years incredibly hard, and particularly in the last couple of months. So, if anything were to sort of upset that investor psychology in AI CapEx-related growth, that could have quite significant impacts on that sector.

And we know how important that sector is in terms of its size. We know how important that sector is in terms of driving earnings as well across the broader US market. And of course, we had DeepSeek earlier in the year, and I don’t know, perhaps we’ll look back and say, well, these were a couple of canaries in the coal mine.

Steve Hiscock:

And it’s interesting because a lot of these organisations don’t yet make profits. It’s really the very long-term cash flows that investors are buying at the moment. Consequently, the share price is highly sensitive to the long-term growth rate. And, I guess what you are saying is, a small change in long-term growth rate can have a huge impact on the present value of the share price.

Rob Hogg:

Yeah. When that second derivative, so that rate of change, changes, particularly for expensive stocks, high P/Es, high-growth, if that second derivative changes, so the rate of growth slows, that can have a very outsized impact.

Steve Hiscock:

Okay, well, let’s move to Australia. So the Reserve Bank cut rates as expected in mid-August. We expected it last time as well, and they didn’t cut rates. So, I guess at least we got one out of two. As did the market. However, there has been a slight change since they cut the rates, as a couple of economic indicators have come in that may push the rate cuts further down the road. Is that right?

Rob Hogg:

Yeah, no, I think that is the best way to think about it. And in fact, even the statement, when the RBA cut rates in early August. It was a fascinating thing to read. As much as these things are fascinating, this was one of the more fascinating ones. What the RBA said as they cut rates was that the cash rates are expected to follow a gradual easing path, and that’s really because the RBA expects the inflation rate to continue to ease through time.

But apart from that statement, right up the very front of the statement, pretty much all the rest of the statement was quite balanced and didn’t really give any indication of what the next rate move might, in fact, be. For example, they said more extreme tariff outcomes are likely to be avoided. Well, that’s a positive, but I think they’re talking about the impact on growth there. But also inflation, to be fair. They said that private demand appears to be recovering gradually.

Real household incomes have picked up, and some measures of financial conditions have eased. Financial conditions refer to the combination of interest rates and asset prices. And then they went on to say various indicators suggest that labour market conditions remain a little tight. And then they concluded by stating that the Board will be attentive to the data and the evolving assessment of risks to guide its decisions.

So, there’s nothing in that to indicate direction. So, it was really only the statement at the very top where they spoke about expected further raising in inflation, which will be met by rate cuts, but as you were alluding to, I think the risk is that the rate cuts are less than expected or will take longer to occur.

And we can look at things like the CPI, the most recent monthly CPI for July. Now these do bounce around. They’re not as good as the quarterly numbers we know. But for July, the annual rate of change was bound to 2.8 from 1.9 over 12 months to June, and underlying measures were higher as well.

And there are a number of these confidence and forward-looking numbers as well that we’ve been talking about that are pointing to a pickup. Consumer confidence is continuing to move higher. And the Westpac-Melbourne Institute Group that put this together talk about improving its sentiment, being broad-based, and also that the improvement really follows the August easing. So now we’ve had three rate cuts. Consumer sentiment is rising. Corporate confidence is rising. We had a big bounce in the latest S&P Global Australian PMI, and that was really driven by orders picking up. PMI, as in Purchasing Manager’s Index, I beg your pardon.

And employment remains pretty stoic as well. Employment and Hours worked both rose in July. So, if you put all that together: rising household confidence, rising corporate confidence driven by new orders. Inflation that’s bouncing around, it’s within the band, but it did bounce higher. And employment that remains relatively robust.

It’s not, you know, if you just landed in Australia and you looked at all these numbers, I don’t know that you would be banging the table and saying, you know, rate cuts, rate cut, rate cuts. However, to be fair, market pricing is not expected until a rate cut in June, November, or sometime next year.

However, it’s possible that those will be moved out even further. Now, that’s in the absence of the US just subtly careering into a hole, because that will have global implications. But as far as Australia’s concerned, really, activity in the outlook looks pretty good.

Steve Hiscock:

Well, that’s good to hear. Although it’s not necessarily translating through to the earnings of companies, and we’re pretty much at the end of the reporting season. August is the time of year when most companies report their full-year returns. Can you just talk through some of the themes you’re seeing out there?

Rob Hogg:

It’s been an extremely interesting reporting season. And there’ve been several features that have really been quite incredible. One of these is the significant post-result volatility in the stock prices of some of the largest companies listed on the stock exchange.

For example, CSL and James Hardie experienced incredibly large, negative price falls following the release of their results. Now, these are amongst the very biggest companies on the ASX. So, it’s not generally, and it’s not historically where you see this much volatility, but we saw that with both of those companies. We’ve seen and continue to see an elevated level of change in management ranks. And that may have something to do with the whole CSL story, but that is, I mean, obviously, there’s a cycle. There’s a corporate cycle. Management does come and go, but there seems to be a higher-than-usual level of change in management ranks at the moment.

But look, some of the positive stuff. There are clearly improving consumer spending trends, and we’ve seen that across household-related goods, but also other areas of consumer discretionary spending. And that’s been one of the very best performing sectors during the month. We’ve seen increased discussion of the use of AI by businesses. However, there have been a few examples so far. Look, talk is cheap, but at the moment, it’s very fashionable to discuss AI.

The gold sector’s been quite amazing, a significant increase in capital raising activity there, mainly to fund exploration, but that just reflects the very high level of confidence in the sector. And also reflecting confidence, a number of companies announced better-than-expected dividends, including several special dividends. On the property side, we’ve seen hints of improving inquiry levels; the developers have, but so far, there hasn’t been a lot of flow-through to actual housing starts. Building costs remain a significant factor.

Weakness in the US economy was evident, particularly in the housing sector. So a lot of that was what we saw with James Hardie. However, other Australian companies also discussed similar issues. We continue to see underperformance of the Victorian economy compared to the rest of Australia.

And, just finally, there seems to be ongoing improvement in New Zealand, which you sort of hope to see after they’ve cut rates quite a number of times.

Steve Hiscock:

Well, there’s a little bit more to come in the reporting season, but we’ve pretty much covered it.

So, wrapping all that up. Rob, how do you see things going forward? We have been a little bit cautious over the last few months, and that’s really because the fundamental outlook is not that positive necessarily, and earnings growth is not huge. But the share market has gone up, and part of that’s obviously the rate-cutting cycle, but how do you see it going forward from here?

Rob Hogg:

Well, look, we said a month ago that we’d become more cautious and look, if we absolutely remain with that same level of greater-than-usual cautiousness about the market outlook. There are several issues, the most important of which is probably valuation. So, valuations globally are towards the very high end of their range.

So, what that means is that for the market to continue to rise, you need to continue to be surprised on the upside with earnings.

Steve Hiscock:

Or perhaps interest rates or, yes. Yeah.

Rob Hogg:

Or indeed interest rates. So, you need inflation to be extremely well-behaved. And you need central banks to be cutting rates because inflation is extremely well-behaved, rather than because our growth is very weak. So basically, high valuations mean things have to go well. Because a lot is priced in. In the US, the jobs market, the employment market broadly continues to soften. It’s still been a modest rate of slowing, but that continues. You don’t want that to suddenly morph into something faster or more serious because that will not be good for expectations about earnings. Ideally, for the Fed’s sake, it’d be a lot better if inflation momentum in the US was actually easing, not accelerating, which is what it seems to be doing. And just finally, for investors, really, the stature, the standing, the independence of the key Central Bank, that is absolutely paramount.

Really, the last months and particularly August, have been marked by, if anything, an increase in really the very, very belligerent language by the president regarding not only the institution of the Fed, but also some of the Fed members as well. And not just the chairman now. So, those kinds of things run the risk of being debased in investors’ minds. The independence of the US Central Bank, and were we to see that reflected in market pricing, would be evident in a higher risk premium. So, what does that mean? That means lower P/Es and higher interest rates are how you would sort of expect that to be through.

Here in Australia, we’re much more optimistic about the prospects. Absent the July bump, inflation does seem to be moving down. The economy does seem to be improving. We’ve only just really started on our rate cut cycle. The RBA can quite legitimately cut rates again, with that inflation momentum easing. And of course, we’ve got very significant potential fiscal firepower because I mean, much as we might see on the front page of the paper that the budget’s not behaving as well as we’d all like, it is truly a relative thing and relative to most of the rest of the world. The Australian budgetary situation is in a very good spot.

So, we essentially have more firepower and greater flexibility to respond, should things globally or domestically turn sour.

Steve Hiscock:

Great. Rob, thank you so much for your time. That brings us to the end of today’s podcast. We examined what happened in August 2025 and then looked forward to its implications for investors going forward.

We hope you enjoyed today’s episode.

Follow us on LinkedIn, YouTube, Spotify, Apple, or wherever you get your podcasts from.

Please let us know if you have any questions or comments. Until next time, stay informed and stay active.

___

Disclaimer:

This podcast is produced by SG Hiscock and Company. It does not constitute financial advice and assumes a certain level of knowledge. It’s general information only and does not take into account the investment objectives, financial situation, or needs of any person and should not be considered a recommendation. For more information, visit: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.