Monthly Newsletter Australian Interest Rates Fall Again.

Published on 22 August 2025

It was another strong month for financial markets in July. The Australian share market increased 2.40% whilst global shares increased +3.10% in Australian dollar terms. This was the fourth consecutive month of gains. The rally was driven by stronger US company profit reports, easing trade tensions, stronger US economic data and in Australia, a better inflation reading. Within the global share market, the Magnificent Seven were the most prominent contributors, outperforming by approximately 4%, supported by stronger-than-expected AI capital expenditure forecasts. The lower inflation reading saw markets factor in a reduction in the RBA cash rate which was subsequently delivered at the Bank’s meeting in August.

In Australia the cash rate now stands at 3.60%. The RBA cited improved inflation data, to justify the reduced cash rate. Financial markets continue to aggressively price in interest rate reductions by the RRBA. However, it is unlikely that an aggressive rate cutting cycle is forthcoming. Australia’s growth backdrop remains resilient and housing activity and housing inflation suggests that there is a limit in the scope for further aggressive easing. The NAB Business Survey showed moderating current conditions but expectations were much improved. Capacity utilisation remains elevated, and forward orders have shown momentum. Retail sales and the labour market point to underlying economic resilience and rising activity. It all looks rosy however, if there was an economic indicator that may concern financial markets, it is the underlying trend in the labour market. The labour market data suggest a gradual softening trend is re-emerging. July’s employment gain of 24.5 thousand was barely able to offset two months of close to zero net job creation. The unemployment rate has also started to increase, reaching 4.3% at the latest reading. The rise has been driven by an increase in youth unemployment – a labour market cohort more sensitive to changes in the business cycle. It signals a broader lift in total unemployment is likely.

In the US, retail sales and consumer sentiment data point to slowing underlying momentum despite headline resilience. Retail sales increased by a weaker than expected 0.5% in July, from 0.9% in June. June data was revised higher, however much of July’s strength appears to be a one-off, with large retailer discounting and unusually strong vehicle sales ahead of the September 30 expiry of federal EV subsidies. Spending on food services, fell 0.4%. Retail sales are skewed toward goods and are not inflation-adjusted, implying some nominal gains likely reflect tariff-related price effects rather than stronger demand. Inflation adjusted goods spending growth remains positive but is slowing.

The University of Michigan Consumer Sentiment index fell to 58.6 from 61.7, with weaker current conditions suggesting July’s retail sales strength will be hard to sustain. Inflation expectations increased to 4.9% from 4.5% (1-year) and 3.9% from 3.4% (5–10 year), a shift unlikely to be welcomed by the Federal Reserve Bank members hesitant over a September rate cut. While inflation is set to rise modestly, downward revisions to jobs data are a clearer signal of the slower growth trajectory.

In Europe, tighter financial conditions from a stronger EUR and higher German 10-year bond yields are weighing on growth. These headwinds were evident in weak German factory orders. The ZEW index, a reliable gauge of European growth momentum has levelled out recently and suggests trend like economic growth. Europe’s core inflation held steady at 2.3% in July – for a third consecutive month. Goods inflation was higher, coming from a low base however, services inflation trended down again and now stands at 3.1%. Wage growth continues to show signs of moderation which is a good sign that core inflation should remain close to the ECB’s target for the foreseeable future. ECB President Christine Lagarde emphasised that inflation is under control, the economy is growing, and the labour market is strong.

Lastly, in China, economic activity slowed across the board with. After a strong start, several months of cooling momentum suggest that the economy may need further policy support. New home prices fell 0.31% over the month, retail sales slowed to 3.7% over the year from 4.8% and industrial production eased. Flooding disrupted infrastructure spending beyond seasonal norms, while household consumption lost support after local governments exhausted subsidy funds in June. Despite faster fiscal disbursements earlier in the year, proceeds were used mainly for debt repayment, not investment. The accelerating downturn in property prices in the past few months signals that further policy support is needed. Given the high exposure of Chinese households to real estate, establishing a trough on prices is an important factor to restoring confidence and generating a sustained consumption recovery. This is particularly important as domestic demand is targeted to become an increasingly important economic driver. It’s difficult to expect that consumers will spend with greater confidence if their biggest asset continues to decline in value. Fiscal and monetary policy remain aimed at containing downside risks rather than driving a recovery. This is likely to persist to the end of 2025.

The rally in the Australian share market was driven predominantly by the improvement in tariff‑related sentiment and rising commodity prices following the start of construction on the world’s largest hydroelectric project in China. The Medog Hydropower Station will be three times the size of the gigantic Three Gorges Dam and produce up to 60GW of power, similar to the total capacity of Australia’s National Electricity Market. The scale of the project contributed to positive sentiment towards commodity demand. Sector rotation was evident, with financials underperforming resources. HealthCare (+8.7%) was the best-performing sector last month, led by CSL (+13.1%). In August however, on the day of its profit report, the CSL share price fell 17% as the company’s management warned of a weak revenue outlook. Analysts also balked due to the uncertainty surrounding the demerger plan of CSL’s vaccine unit.

Other companies that performed well over the month included Pro Medicus (+12.9%) while Financials ex REITs (-0.9%), dragged down by Macquarie Group (-4.9%) and Commonwealth Bank (-3.7%), underperformed the broader market. The best performing stocks included Mineral Resources (+32.6%), AMP (+26.9%) and Life360 (+24.7%) while Northern Star (-16.0%), Telix Pharmaceutical (-3.8%) and Evolution Mining (-8.7%) were amongst the biggest laggards.

The resilience that the global economy has shown in the first half of this year in the face of significant uncertainty related to tariffs as well as geopolitics has been surprising. From a “support for markets” perspective, 60% of the world's central banks cut their policy rate in the 3-months to July. The extra liquidity helps to explain why markets remain so positive despite tariff fears, weak US and Australian job growth and poor data out of China. The key risk for investors is not a pause in global monetary easing (that risk grows when they tighten) but a decline in employment as mentioned above. In Australia, the recent weak labour force data has analysts forecasting a terminal cash rate of 3.1% by the end of 2025.

Over the past month, the AI thematic has reasserted itself, with the global tech sector sharply outperforming the rest of the market. This has been driven by profit resilience among US mega companies like Microsoft, Meta and Google which has helped investors grow more comfortable with large-scale capital expenditure plans.

The price to earnings valuation (P/E) for Australian share market has continued to rise (more risky) with the increase in liquidity. At a value of 20, the ASX 200 P/E is only 2% below the peak from the post-COVID boom. Bond yields were closer to 1% when the P/E was 20.1x in November 2021. The 10-year yield is 4.25% today. It suggests that the price to earnings multiple should be lower today. The multiple will fall if earnings (E) is higher, however the results by CBA and CSL have not fulfilled analyst expectations. What is similar to 2021, is that global central banks were easing and the economy was improving. Like 1998/99, we are also in a Technology boom. In Australia, Pro Medicus leads the way with a very expensive P/E multiple of circa. 200x, as the share price increased another 13% in the month. The simple interpretation of these P/E multiples is that an investor might expect to double their money in 200 years if they bought Pro Medicus at its current price and forecast profit growth. That’s a long time. We see some pockets of froth on display in the U.S., where a recent surge in low-quality stocks has been described as a “dash for trash.” Stocks linked to crypto, quantum computing, and meme stocks have surged 50-80% since April amid rising retail participation in the market. I urge investors to be cautious and exercise patience and not to stray from their investment discipline.

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