Markets faced a week of contrasts as weakening U.S. employment data reinforced expectations for Federal Reserve rate cuts, while the Australian economy continued to demonstrate surprising resilience. The UK, Japanese and French fiscal and political situations were also dominating the headlines for all the wrong reasons. If these were canaries in the coal mine in full voice markets weren’t listening as most overseas markets were up while the local market (mostly banks) went the other way. It is fair to say though that the economic data in all economies is pretty noisy at the moment, to say the least.   

U.S. Labor Market Deteriorates

The data highlight of the week was Friday's very weak U.S. employment report, with just 22,000 jobs added in August versus expectations of 75,000. The unemployment rate rose to 4.3%, its highest level since October 2021. Adding to concerns, historical revisions revealed that job growth has been significantly overstated, with 911,000 fewer positions created in the year to March than initially reported. 

For now this bad news was good news for the market as employment weakness virtually guarantees the Federal Reserve will begin cutting rates at its September meeting, with markets now pricing 60-70 basis points of reductions by year-end. While softer economic data might typically worry investors, the prospect of lower rates provided some support to equity markets, with U.S. indices ending the week mixed.

Markets React to Shifting Landscape

This no doubt helped interest rate sensitive technology stocks more than most but an unexpectedly positive antitrust outcome for Alphabet arguably provided a greater boost. The Nikkei hit record highs amid Japanese political developments which ironically weakened the Yen and thus supported the exporters that dominate the Nikkei. The Chinese market also continued to respond well to government initiatives to boost the local economy.  

Bond markets saw yields fall globally as rate cut expectations intensified, with Australian 10-year yields dropping to 4.27%. This provided capital gains for bond holders and highlighted strong institutional demand despite ongoing fiscal concerns in major economies.

In commodities, oil prices fell below $67 per barrel despite Middle East tensions, pressured by OPEC's surprising decision to increase production. Conversely, gold hit new record highs at $3,674 per ounce, benefiting from lower yields and serving its traditional role as a safe-haven asset. The Australian dollar briefly touched 66.2 U.S. cents before settling around 65.9 cents.

Australian Economy Defies Global Slowdown

In stark contrast to international weakness, Australian economic data surprised on the upside. Second-quarter GDP growth came in at 0.6%, double market expectations, driven primarily by resilient consumer spending. The NAB Business Survey showed conditions returning to long-run averages with improving profitability, while house price forecasts were upgraded significantly, with NAB now expecting 6% growth across capital cities in 2025.

This domestic strength is keeping the Reserve Bank on hold for now, though markets increasingly expect rate cuts in November and February as global monetary easing takes hold. The combination of solid economic fundamentals and potential rate relief is supporting Australian asset prices.

However, the local stock market still bucked the global trend, weighed down mainly by the large banks as by number most stocks were actually up for the week. The banking sector faces significant headwinds beyond rate margins. ANZ's announcement of 3,500 job cuts by September 2026 highlights the structural challenges facing the industry. Despite these pressures, Commonwealth Bank's market capitalisation approached $285 billion, maintaining its position as Australia's most valuable company. 

Implications for Australian Investors

In this week's what we are working on video we discuss the near and medium term prospects for global economies and markets with Andrew Hunt of Hunt Economics. Similarly, he is starting to see a muddle through scenario where we might see a setback in the coming weeks as many of these fiscal and political chickens come home to roost, especially in Europe and the U.S., but that probably leads to further easing into the year end. The key message for clients can be somewhat reassuring for now: while global uncertainty persists, Australia's economic position remains relatively strong. A diversified portfolio with some defensive positioning makes sense, but dramatic changes aren't warranted. As central banks globally pivot toward easing, patient investors should be rewarded, particularly given Australia's stronger economic foundations compared to other developed markets. Looking ahead into 2026 and 2027 we may have to be more or on our toes if a combination of challenging fiscal positions and populist politics means the Piper finally gets paid.