The Overnight Report: Rotating To New Highs

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US Treasuer Bessent calling for rate cuts was enough to boost animal spirits overnight in US markets, with investors rotating into small caps, materials and health care stocks.

The ASX200 futures are pointing to a positive start after yesterday's CommBank induced retreat.

Good Morning,

Shares in Australia’s largest listed company, CommBank ((CBA)), fell -5.4% yesterday, dragging the ASX200 index down -54pts or -0.6% to 8,827.

While the result itself set a new all-time record for the bank, in light of the lofty valuation it simply wasn’t good enough. Other banks sold off in sympathy.

Financials as a group declined -2.6% offset by a rally in Materials, up 1%, and with healthcare too buffering negative sentiment.

What happened overnight: NAB Markets Today Research extract

First up Westpac reports Australia’s July Unemployment/Employment data and NAB expects the unemployment rate to tick back down one-tenth to 4.2% from 4.3% (consensus 4.2%). Last month’s two-tenths rise was driven by sample volatility (the rise almost entirely came from sample rotation).

Cross checking the data suggests little deterioration in June with the Job Seeker rate broadly steady in contrast to the unemployment rate. For employment we see 23k jobs (consensus 25k) which is broadly where trend growth is. We also expect the participation rate to tick down by one-tenth to 67.0% from 67.1%. It also worth noting for risks that the participation rate has started to fall in several countries – the ageing of the population being one factor.

Overseas on the Street, an absence of top-tier data has seen markets instead follow news headlines. The most significant was US Treasury Secretary Bessen calling for a -50bps cut in September and suggesting rates should be -150 to -175bps lower than current.

Bessent said in a Bloomberg interview “there’s a very good chance of a 50bp rate cut [in September]”…“If you look at any model that the…we should probably be 150, 175 basis points lower”. President Trump also stated rates “should be three or four points lower” and that he is down to “three or four names” for the next Fed chair.

Market pricing for the Fed now has a very small chance of a greater than -25bps move at -26.7bps for September (from 24.1bps on Tuesday). And there is a cumulative -63.6bps of cuts priced by end 2025 (from -60.1bps on Tuesday). US 2yr yields are lower, down -5.4bps to 3.68%. The 10yr yield also fell by -5.0bps to 4.24%. 

With heightened rate cut expectations equities rallied, led by small caps – the Russell 2000 rose 2.0% and the S&P500 up 0.3%. Tech stocks underperformed with IT down -0.2%; Communications Services fell -0.5%, with perhaps some rotation out to other names.

Official Fed speak was not market moving but reinforced that September is live. The Fed’s Goolsbee (2025 voter) said: “As we go into the fall, these are going to be some live meetings and we’re going to have to figure it out”. However, Goolsbee didn’t appear dovish, noting: “That was the most concerning thing in the inflation report — if that persisted, we would have a hard time getting back to 2%” and “For me, I want some more surety that that’s not going to be a persistent inflation shock”.

The Fed’s Bostic (2027 voter) also repeated he only saw one cut in 2025, “For the rest of this year, I still have one cut on my outlook” …“That also is predicated on the notion that labor markets stay solid. If they weaken considerably, that balance of risks starts to look differently and the appropriate path will look different as well”.

Across the Atlantic, European yields fell with the German 10yr yield down -6.4bps to 2.68%. There has been a notable compression of European sovereign spreads with the Italian-German 10yr spread sitting now at just 77.1bps, it’s lowest in several years. 

FX moves were largely confined. The USD (DXY) fell -0.3% with most of that fall coming just after 4pm Sydney time. The AUD rose 0.2% to 0.6544.

In other news, the International Energy Agency said global oil markets are expected to have a record surplus next year as supply increases and demand growth slows. The report showed oil inventory buildup surpassing that of 2020 during the pandemic. The market is also looking ahead to the meeting between Presidents Trump and Putin and any implications it might have for global oil supply. Brent crude prices have traded to a fresh two-month low near US$65 per barrel.

Finally in China, Aggregate Financing figures for July disappointed expectations. There was a notable miss on new yuan loans with a measure of new yuan loans shrinking by 50-billion-yuan last month. It marked the first such decline in about 20 years.

Alfonso Peccatiello, Palinuro Capital @The Macro Compass

I believe the US economy might be entering a temporary slowdown (‘Run It Cold’ now), which will allow the Fed to cut a few times right before the 2026 ‘Run It Hot’ Trump plan.

If I’ll end up being proven right, investors should drastically increase the share of Inflation Risk Premia (IRP) and Policymaker Protest Assets (PPA) in their portfolios.

Here are some data on the temporary US slowdown (‘Run It Cold’).

The US labor market has only added 35k jobs/month over the last 3 months – this number has basically never been this weak outside recessions. Yet the supply side of the labor market is so weak that the unemployment rate only gently moves up, giving a false impression of stability.

If the supply of labor didn’t dry up so quickly due to the new immigration policies and the labor force participation rate (LFPR) held steady at April levels, the US unemployment rate would have jumped to 4.9%.

The supply of labor is extremely weak, and it’s behind the impression of ‘’stability’’ one has when looking at the US labor market – but the demand for labor is very weak under the hood.

The 6-month annualized pace of job creation in US cyclical industries (e.g. housing, manufacturing, transportation etc) stands at 0.3%. The cyclical private sector went on a hiring freeze:

Our US primary deficit tracker stands at 1.54% of GDP as per last week, already lagging behind the 2024 pace and way behind the 2023 staggering pace.

Tariffs came in at almost US$30bn in July, and were this pace to continue we’d effectively face an additional US$150bn of fiscal drag until the end of the year.

That alone means the US primary deficit might shrink by -15% from US$1 trillion in 2024 to US$850 billion in 2025: So the math turns out relatively ugly over the next 3 months:

1)     The private sector hiring pace is pretty much at stalling speed;

2)     Real income growth and consumer spending are weak;

3)     We face a around an US$150bn tax hike (read: tariff passthrough) over the remainder of the year;

4)     There is no major offsetting tax stimulus as the One Big Beautiful Bill kicks in mostly in 2026;

5)     Ex-top 100 companies (read: the real employers) are already witnessing a margin hit;

6)     Tariff passthrough will make this worse, and if companies try to aggressively pass to consumers…

7)     …the ability to absorb the passthrough will be limited by low real income growth

In short, it’s possible the US economy will face a soft patch over the next 3-4 months.

But what happens after that?

If the Fed cuts with core PCE around 3%, it effectively brings down front-end real interest rates to almost 0% while inflation is running above their target.

Trump has already talked about using tariff income to cut taxes for low-income consumers: basically another fiscal injection ahead of the 2026 mid-terms.

Front-end zero or negative real rates with inflation above target and another fiscal injection coming is the recipe for a warp-speed ‘Run It Hot’ policy in 2026.

The ‘’Run It Hot’’ policy is nothing new: the US applied it in 2003-2006 and in 2013-2019 to make sure the economy could recover from the 2001 and GFC crisis.

But the two prior experiments were run with inflation at or below target, no tariffs, no attacks on the Fed independence, and no hostile policymaking against the rest of the world. In that environment, buying assets denominated in USD that produce nominal income (e.g. equities and real estate) works wonders.

Today, I believe a mix of such investments and PPAs (Policymaking Protest Assets) would work better.

PPAs are assets denominated in USD that represent a release valve against unorthodox policy mix such as forcing real rates too low vis-à-vis the level of nominal GDP, manipulating long-end yields via reducing issuance or encouraging banks to buy (SLR reform), or incentivizing foreign countries to diversify away from USD investments.

Gold and metals in general are the longest-standing PPAs, and needless to say Bitcoin is also a valid contender for PPA properties.

Corporate news in Australia

-CommBank ((CBA)) has teamed up with OpenAi to counter financial scams and improve its service offering.

-AGL Energy ((AGL)) is considering the sale of its wind projects to help fund the -$3bn capex for transition.

-Humm Group ((HUM)) founder finds backer for $286m takeover bid.

-WiseTech Global ((WTC)) is facing ACCC scrutiny over its takeover of e2open with concerns from customers registering concerns the company will be too dominant.

-Avita Medical ((AVH)) raised $32m from domestic institutional shareholders at $1.32 per share, a discount to last close of -11.1%.

On the calendar today:

-AU July unemployment

-UK 2Q GDP

-UK June IP

-UK June trade bal

-US July PPI

-ABACUS STORAGE KING ((ASK)) earnings report

-ASX LIMITED ((ASX)) earnings report

-DICKER DATA LIMITED ((DDR)) ex-div 11.00c (100%)

-GROWTHPOINT PROPERTIES AUSTRALIA ((GOZ)) earnings report

-HOMECO DAILY NEEDS REIT ((HDN)) earnings report

-NIDO EDUCATION LIMITED ((NDO)) earnings report

-NRW HOLDINGS LIMITED ((NWH)) earnings report

-ORORA LIMITED ((ORA)) earnings report

-ORIGIN ENERGY LIMITED ((ORG)) earnings report

-PRO MEDICUS LIMITED ((PME)) earnings report

-RIO TINTO LIMITED ((RIO)) ex-div 226.80c (100%)

-RECKON LIMITED ((RKN)) ex-div 2.50c (100%)

-SCENTRE GROUP ((SCG)) earnings report

-SCENTRE GROUP ((SCG)) ex-div 8.82c

-SUNCORP GROUP LIMITED ((SUN)) earnings report

-TELSTRA GROUP LIMITED ((TLS)) earnings report

-TEMPLE & WEBSTER GROUP LIMITED ((TPW)) earnings report

-VISTA GROUP INTERNATIONAL LIMITED ((VGL)) earnings report

-VENTIA SERVICES GROUP LIMITED ((VNT)) earnings report

-WESTPAC BANKING CORPORATION ((WBC)) Qtr update

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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