The Overnight Report: Dovish? Not So Fast

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US markets took a breather with profit taking moving in after Friday's Powell inspired exuberance. Commentators and market pricing are paring back US interest rate cut expecations.

After a flat performance on Monday with a mixed set of company results, the ASX pushes further into reporting season with futures pointing to a slightly negative start ahead of today's RBA minutes.

Good Morning,

Following on from all the excitement on Wall Street on Friday, the enthusiasm and gains failed to translate onto the ASX market on Monday.

After hitting a record intraday high early in yesterday’s session, sellers moved in.

By 4pm the ASX200 closed up 5pts to 8.972. Six out of eleven sectors retreated. Miners and energy stocks led the gains, ofsetting weaker financials.

What happened overnight: NAB Markets Today Research extract

Markets traded with a cautious tone overnight, digesting a mix of soft US data, political headlines, and exuberant moves in Chinese equities. 

US equities ended the session lower, with the S&P500 down -0.4%, the Dow shedding -0.8%, and the Nasdaq slipping -0.3%. The Russell 2000 underperformed, falling -1% (after gaining close to 4% on Friday), while the Magnificent 7 managed a modest gain of 0.4%. 

Market breadth was weak, with 399 of 503 S&P constituents declining, led by healthcare and consumer staples. Keurig Dr Pepper was the standout laggard, plunging -11.5% after announcing a EUR15.7bn acquisition of JDE Peet’s. Microsoft also weighed on the index, down -0.6%.

Nvidia bucked the trend, rising 1% ahead of its earnings, supported by optimism around its data centre chips and Blackwell AI platform. The Euro Stoxx 600 index closed down -0.4%, while the UK market was closed for a public holiday.

Sticking with AI news, Elon Musk’s xAI and X filed a lawsuit against Apple and OpenAI, alleging anti-competitive practices that favour ChatGPT on iPhones. The suit seeks billions in damages and an injunction against the partnership. The case echoes broader antitrust concerns and adds another layer to Musk’s feud with Sam Altman.

US Treasuries closed modestly weaker, with front-end yields leading the move higher as the curve flattened ahead of this week’s auction cycle and PCE release on Friday..The 2-year yield rose 3bps to 3.73%, while the 10-year added 3bps to 4.28% and the 30-year gained 2bps to 4.89%.

The market showed limited reaction to the day’s economic releases, instead the move up in yields was fuelled by some pairing of Fed easing expectation, unwinding some of the “enthusiasm” priced after Fed Chair Powell’s speech on Friday. Pricing expectations for a Fed September ease was little changed at -21bps, but the January 2027 Fed pricing lifted 10bps to 1.289%, suggesting expectations for a more gradual pace of easing over 2026 relative to Friday’s closing levels.

The USD was broadly stronger, with the Bloomberg Dollar Spot Index up 0.5%. EUR fell -0.9% to 1.1610, effectively reversing all its Friday’s gains post Fed Chair Powel’s speech.

In addition to the French political news, weighing on the euro, Reuters ran a story noting sources saying President Donald Trump’s administration “is considering imposing sanctions on EU or member state officials responsible for implementing the bloc’s landmark Digital Services Act over US complaints that the law censors Americans and imposes costs on US tech companies”.

Chinese stocks extended their rally, with the CSI300 Index up 2.1%, building on its best week since November. Turnover hit a staggering CNY3.1tn (US$433bn), the second-highest on record. Tech and property stocks led gains, buoyed by Shanghai’s easing of home-buying rules and expectations of further support ahead of the September 3 military parade. Analysts warn of overheating, with RSI indicators flashing red and ETF premiums surging.

Bloomberg noted eligible residents, including those from outside Shanghai, can now buy an unlimited number of homes in the outer suburbs, according to a statement Monday. Non-residents who have paid pensions for three years can now purchase new homes in urban areas, instead of only being allowed to buy existing residences there.

The above should be welcome news, but it does little to address China’s housing slump which has been in place since 2022. Indeed, Shanghai housing activity has been quite resilient, instead the challenge is in other cities, particularly second tier cities. That said, expectations are for additional measures to be announced over coming weeks, with authorities preparing to speed up urban renovation projects to bolster the property market, the Securities Daily reported, citing an industry expert.

US new home sales fell -0.6% in July to 652K, missing expectations and reinforcing the narrative of a cooling housing market. Inventories remain elevated, and builders face headwinds from high mortgage rates and a softening labour market. The Dallas Fed manufacturing index also disappointed, slipping to -1.8 from plus 0.9.

President Trump met South Korean President Lee Jae Myung, expressing optimism on North Korea and shipbuilding cooperation. However, he downplayed chances of renegotiating Seoul’s tariff deal. Separately, Trump revealed recent conversations with Vladimir Putin, citing the Russian leader’s dislike of Zelenskiy as a barrier to peace talks. Trump hinted at stepping in if progress stalls, raising the stakes on the Ukraine front.

French PM François Bayrou will face a confidence vote on September 8, risking his government’s survival over a contentious budget plan. The announcement triggered a selloff in French assets, with domestic stocks down -2.9% and the 10yr OAT-Bund spread widening to 75bps, the highest since April.

Yesterday, NZ retail sales surprised to the topside, rising 0.5% q/q in Q2, much stronger than market expectations for a 0.3% contraction. Our BNZ colleagues admit the data release was a bit of a head-scratcher, particularly as it followed strong 0.8-1.0% gains over the previous two quarters, challenging the narrative that consumer spending was very weak. The data suggest upside risk to prevailing views that the economy contracted about -0.2-0.3% in the June quarter.

Finally on commodities, WTI crude rose 1.8% to US$64.78, supported by technical momentum and geopolitical tensions (Ukraine struck a Russian Baltic port over the weekend as part of a continued effort to undermine Moscow’s energy infrastructure).

Gold slipped -0.2% to US$3,365.38. Iron ore and copper posted modest gains, while aluminium and zinc were flat.

Franklin Templeton extract, Stephen Dover and Lawrence Hatheway

Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Conference has been greeted by stock, bond and currency markets as a dovish pivot by the typically cautionary head of the US central bank. Stock and bond prices jumped, and the dollar edged lower, as futures markets bid up the odds of rate cuts over the remainder of 2025.

While we don’t advocate fighting either the market or the Fed, we can’t share fully the markets’ embrace of Powell and his colleagues as birds rapidly morphing from hawks to doves. If you read Powell’s speech closely, it surely reflects the majority view of the Federal Open Market Committee (the Fed’s rate-setting forum), but it’s nuanced. It’s replete with caveats and even sprinkled with a few hawkish remarks. Indeed, if there is a takeaway, it is that the Fed is manifestly data-dependent and not embarking on a predetermined glide-path to lower rates.

Notably, Powell emphasized a point that ought to give investors pause, namely that inflation risks are “tilted to the upside” while risks to employment are (tilted) “to the downside.” To use Powell’s own language, that poses a “challenging situation,” to which we would add, not just for the Fed in setting rates, but for markets sorting out the prospects for growth, profits and the rate at which they are to be discounted.

The road ahead seems rather bumpy.

Moreover, Powell also observed the experiment the Fed had conducted since 2020 to permit a temporary overshooting of inflation had not worked as intended, hinting the Fed was likely to return to a firm 2% inflation target.

While the impact of tariffs on inflation may prove temporary (funny, transitory is “so yesterday”), a 2% target as ceiling and floor potentially would slow any forthcoming Fed easing until either tariff price increases subside or the Fed is convinced they will not unleash second-round impacts on prices and wages. Either could take time.

In sum, the markets’ near-term reaction has been positive, with equity and bond bulls pouncing on a perceived pivot by the FOMC toward a dovish bias. But in our view, Powell’s language suggests not much has changed at the Fed.

The road ahead for the Fed and hence for the markets remains murky, with direction to be provided by the incoming data. And those data, whether about growth, inflation, or unemployment, are not likely to be quite as friendly nor as certain as the consensus now appears to believe. 

Corporate news in Australia

-Southern Cross Media ((SXL)) rallied 26% on reports the company has been approached by executives at Nine Entertainment ((NEC)) over a possible deal.

-Reece ((REH)) CEO described the past year as one of the most challenging in the group’s history.

-Aurizon Holdings ((AZJ)) continues to explore selling a minority stake in its rail business, though private equity is reported as backing off.

-Bain and Axight consider a joint bid for the $2.5bn La Trobe sale.

-Aussie Broadband ((ABB)) is selling its Buddy Telco brand to Tangerine.

On the calendar today:

-AU Aug RBA mins

-JP July services PPI

-US July durable goods

-US Phil Fed

-ACUSENSUS LIMITED ((ACE)) earnings report

-AUSTRALIAN CLINICAL LABS LIMITED ((ACL)) earnings report

-AGL ENERGY LIMITED ((AGL)) ex-div 25.00c (100%)

-AMOTIV LIMITED ((AOV)) ex-div 22c (100%)

-AUB GROUP LIMITED ((AUB)) earnings report

-BEFOREPAY GROUP LIMITED ((B4P)) earnings report

-CHALLENGER LIMITED ((CGF)) ex-div 15.00c (100%)

-CLOSE THE LOOP LIMITED ((CLG)) earnings report

-COLES GROUP LIMITED ((COL)) earnings report

-CEDAR WOODS PROPERTIES LIMITED ((CWP)) earnings report

-CALIX LIMITED ((CXL)) earnings report

-DICKER DATA LIMITED ((DDR)) ex-div 13.00c (100%)

-DATA#3 LIMITED. ((DTL)) earnings report

-EVT LIMITED ((EVT)) earnings report

-FORTESCUE LIMITED ((FMG)) earnings report

-G8 EDUCATION LIMITED ((GEM)) earnings report

-HELLOWORLD TRAVEL LIMITED ((HLO)) earnings report

-HMC CAPITAL LIMITED ((HMC)) ex-div 6.00c

-HMC CAPITAL LIMITED ((HMC)) ex-div 6.00c

-INTEGRAL DIAGNOSTICS LIMITED ((IDX)) earnings report

-INTELLIGENT MONITORING GROUP LIMITED ((IMB)) earnings report

-INGENIA COMMUNITIES GROUP ((INA)) earnings report

-JUMBO INTERACTIVE LIMITED ((JIN)) earnings report

-KELSIAN GROUP LIMITED ((KLS)) earnings report

-NANOSONICS LIMITED ((NAN)) earnings report

-NEXTDC LIMITED ((NXT)) earnings report

-PROPEL FUNERAL PARTNERS LIMITED ((PFP)) earnings report

-PILBARA MINERALS LIMITED ((PLS)) earnings report

-PIONEER CREDIT LIMITED ((PNC)) earnings report

-READYTECH HOLDINGS LIMITED ((RDY)) earnings report

-SCENTRE GROUP ((SCG)) earnings report

-SCIDEV LIMITED ((SDV)) earnings report

-SUPPLY NETWORK LIMITED ((SNL)) earnings report

-SRG GLOBAL LIMITED ((SRG)) earnings report

-TYRO PAYMENTS LIMITED ((TYR)) earnings report

-VIVA ENERGY GROUP LIMITED ((VEA)) earnings report

-VULCAN STEEL LIMITED ((VSL)) earnings report

-WEB TRAVEL GROUP LIMITED ((WEB)) AGM

-WAGNERS HOLDING CO. LIMITED ((WGN)) earnings report

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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