The Overnight Report: Stagflation Chatter Lifts

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US markets cooled on more tariff threats and weak ISM data, while earnings reports diverged as tariffs showed signs of impacting corporate America.

Post a new record high yesterday, ASX200 futures are bucking the soft overnight lead and pointing to a positive start.

Good Morning,

The Australian market rallied strongly on Tuesday post Wall Street’s Monday recovery.

The ASX200 reached a new record close, up 107pts or 1.2% to 8,770 with financials up 1.5% and leading the market higher, followed by consumer discretionary stocks.

What happened overnight: NAB Markets Today Research extract

A soft US ISM Services (50.1 vs. 51.5 expected) and Trump’s extensive interview on CNBC (from 10.00pm Sydney time) saw a small softening in risk sentiment.

US President Trump in his CNBC interview noted “we’re going to be announcing [tariffs] on semiconductors and chips … because we want them made in the United States” as soon as next week, along with pharmaceuticals tariffs that start small and could end up to as high as 250%.

Along with the above flagged semiconductor/chips and pharmaceuticals, he said he’ll be raising India’s tariff over the next 24 hours, “very substantially” higher than the 25% tariff previously flagged as it continues to purchase Russian oil. The tariff on the EU will lift to 35% if it fails to meet its agreed US$600bn worth of investment obligations. On a more positive note, he said he was “getting very close to a deal”. China to extend the trade truce due to expire on 12 August.

President Trump also commented on possible candidates for the next Fed Chair. He noted there were four candidates, including the two Kevins (Kevin Warsh and Kevin Hasset) who were said to be “very good”, while Bessent was ruled out. Polymarket has Warsh at 27.7%, Hasset at 21.1% and Waller at 16.4% – note this is for an announcement by end December with no-announcement at 27.0%. It is also unclear whether Governor Kugler’s replacement will go on to be Fed Chair, noting it could be a short term replacement.

Yields saw a small tick down on the ISM data, but largely reversed out following poor demand metrics at the 3yr US$58bn note auction. The 3yr was awarded at 3.669% versus the 3.662% when-issued yield; bid-to-cover was 2.53 compared to an average of 2.59 for the prior six auctions. In the next two days the market will need to absorb US$42bn of 10-year notes and US$25bn of 30-year notes as well as a record-setting US$100bn of 4-week bills. Overall, this impacted the front end more and the 2yr yield is up 4.9bps to 3.72%; the 10yr is up 1.8bps.

Fed funds pricing was pared a little with -58.2bps of cuts priced by the end of the year from -62.6bps on Monday. .

As for the data, the US ISM Services had a clear stagflationary vibe. The headline index was softer than expected. The details showed a 2.4ppt rise in prices paid to 69.9, a 30-month high, while new orders fell back -1.0 to 50.3.

Anecdotes in the survey noted tariff uncertainty was delaying purchases as well as seeing clients to re-evaluate projects (“Trade uncertainty causing client reevaluation of feasibility for projects in certain sectors, resulting in some delays or cancellation”; and “Extra purchasing to head off tariffs has leveled off. Expecting decreases in activity in the second half of 2025”).

The US also had its full trade balance for the month of June as well as the alternative S&P Global PMI for the US. Following the data, the Atlanta Fed’s GDP Now for Q3 was revised up to 2.5% annualised from 2.1%. The trade balance also enabled an update to average effective tariff rates which in June was 8% versus the average rate of 1.9% in 2024. More US companies also noted the impact of tariffs, Caterpillar the latest flagging a -US$1.3-1.5bn impact.

Finally, yesterday China’s S&P Global PMI Services Index rose to 52.6 vs. 50.4 expected. While positive, the details noted a pickup in tourism as one factor, so it is unclear how much the rise will be sustained and there was little market reaction to the news. 

In Australia a Monthly Household Spending Indicator showed very solid quarterly volumes at 0.7% q/q. That reinforces our view that activity in H2 will pick up on H1 2025, and that the RBA does not need back-to-back rate cuts.

NAB continues to see the RBA cutting rates in August, November and February, bringing the cash rate down to 3.10%, which we see as broadly neutral.

Stephen Innes, SPI Asset Management extract

Tuesday’s session wasn’t exactly a train wreck, but it did have the rhythm of a band stumbling out of sync. The S&P500 slipped into the red as a cacophony of tariff threats, sour economic data, and rising stagflation chatter drowned out the recent rate-cut chorus. Traders now face a market that looks increasingly like it’s dancing on uneven ground, caught between softening growth signals and lingering inflation tremors.

Let’s start with the ISM services print, which didn’t just disappoint—it flatlined. The index barely held expansion at 50.1, while the employment component contracted for the fourth time in five months. Add in a prices-paid surge to 67.5, and the ghost of stagflation has crept back into the room. Services represent roughly 70% of U.S. economic activity, and when the backbone buckles, it’s hard to maintain bullish posture.

This isn’t just another macro blip. It’s a potential inflection. With both manufacturing and services ISMs now weaker than the most bearish forecasts, the market is coming to terms with something darker: job growth could be rolling over hard. If you weigh these surveys together by their economic footprint, the implications are staggering; potential NFP prints dropping by over -100,000. Not just soft, but recessionary-soft.

Yet the kicker? Inflation’s still sticky where it counts. The ISM prices index has now clocked eight consecutive months above 60, with July’s jump hinting that tariffs may be doing more than just posturing—they’re actually starting to bite.

And that’s before the tariff barrage from President Trump. On Tuesday, he lit another match under the geopolitical risk stack. Tariffs on semiconductors and pharmaceuticals are reportedly just days away. The numbers floated are staggering: 250% import duties on drugs.

Meanwhile, Trump doubled down on India, threatening “very substantial” hikes on Indian goods within 24 hours. Switzerland’s president flew to Washington with a sweetened deal in a last-minute scramble to avoid a 39% rate. The EU, for its part, is desperately trying to shield its wine and spirits from the crossfire.

In trader speak, this isn’t a “headline risk” story—it’s a potential macro regime shift.

Market structure is now part of the drag. Systematic melt-up chasers, the kind that fuel vertical ramps, are drying up in the August heat. CTAs have flipped from buyers to sellers. (Wall Street desks report that momentum chasers are flipping to sell, approx -US$20bn this week on a global basis.) Liquidity is thinning, and without big systematic buyers, upside follow-through could prove elusive over the near term unless a fresh bullish catalyst appears.

Palantir stood out as one of the few bright spots, surging nearly 8% after topping US$1bn in revenue—a milestone that fueled some defence-sector optimism. But elsewhere, industrial bellwethers like Caterpillar and Eaton either disappointed or barely moved the needle. Not precisely the earnings follow-through you want to see after a massive AI-led rally.

And here’s the double-bind: even as macro data deteriorates, price inputs are rising, not because of strong demand, but because of political intervention. Tariff-induced inflation is distorting the picture. We’re not looking at a reflationary boom; we’re staring at manufactured inflation amid cooling demand.

Bond markets aren’t blind to the shift. The U.S. 3-year auction saw a modest tail, suggesting some buyer fatigue despite attractive front-end yields. The 10-year is up next, and with disinflation hopes hanging in the balance, it could be a make-or-break moment. In Europe, spreads are tightening as summer supply dries up and the ECB nears the end of its easing cycle. Italian spreads over Bunds just dipped below 80bp, their tightest level since before the sovereign debt crisis. But that tightening leg may be running on fumes.

Make no mistake: this tape isn’t in freefall, but it’s certainly lost its lead. Earnings may be trending higher, and yes, rate cuts are likely on the horizon. But when ISM prints dive, inflation edges higher, and tariffs come knocking, traders don’t see a clean pivot; they see friction.

The path forward is murky. If macro deteriorates faster than inflation softens, the Fed is backed into a corner. And as more global partners brace for tariff shocks, risk appetite could prove more fragile than the S&P’s calm surface implies.

This is no longer a one-variable story. It’s a market where bad news is bad again, and policy risks are no longer just noise—they’re moving the tempo. The bull isn’t dead, but the beat has changed. And right now, the dance floor feels less like a party—and more like a minefield.

Corporate news in Australia

-A $96m stake in Qoria ((QOR)) has been sold by McCusker Holdings.

-TPG Telecom ((TPG)) is returning $3bn to shareholders and will maintain 2025 dividends.

-CommBank ((CBA)) expects -$130m in Bankwest charges and customer remediation.

-Austal ((ASB)) has been appointed as the Australian Government’s strategic shipbuilder.

-Stockland ((SGP)) has entered a deal with Bob Ell for a major site near Kingscliff, NSW, valued at $620m.

On the calendar today:

-NZ 2Q Unemployment

-JP June earnings

-EZ June retail sales

-BWP TRUST ((BWP)) earnings report

-CENTURIA INDUSTRIAL REIT ((CIP)) earnings report

-CHARTER HALL LONG WALE REIT ((CLW)) earnings report

-LIGHT & WONDER INC ((LNW)) earnings report

-NEWS CORPORATION ((NWS)) earnings report

-REA GROUP LIMITED ((REA)) earnings report

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

The Australian share market over the past thirty days…

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