Fed Turns Hawkish: September Rate Hike Back in Play

At the Jackson Hole Economic Policy Symposium, Federal Reserve Chair Kevin Warsh sent an unmistakably hawkish signal, stating that "price stability is not self-executing, nor is inflation necessarily mean-reverting," and reaffirming that the Fed's 2% inflation target remains "a firm, fixed" objective. While July CPI eased to 3.4% from 4.2% in May, and PCE inflation slowed to 3.7% from 4.1% over the same period, inflation remains sticky and well above the Fed's target.

Market expectations for a September rate hike rose sharply in response. The 2-year/30-year Treasury spread narrowed by 10 basis points as the yield curve flattened, while the US Dollar Index gained 0.5% on the day and gold fell 3%, unwinding the dollar-weakness trade that had built up on expectations the Trump administration would use a Treasury bond buyback programme to suppress long-end yields. The timing and magnitude of any further tightening will ultimately depend on incoming economic data.

Strait of Hormuz Remains the Key Swing Factor for Oil Prices

Although headlines were dominated by the Trump administration's deal to take control of more than 65 billion barrels of Venezuelan oil reserves, market attention remained firmly fixed on the Gulf, through which roughly one-fifth of global oil trade transits via the Strait of Hormuz. On 31 August, after the US struck an Iranian island within the Strait, prompting retaliation from Tehran, and with the conflict now in its sixth month, both Brent and WTI crude rose more than 2%, touching US$90 and US$86 per barrel respectively. At the same time, under the recently launched "Operation Economic Outcast" framework, the US has taken action against the UAE branches of an Egyptian bank, Banque Misr, and signalled further moves to cut off Iran-linked financing and revenue channels — raising the risk that Tehran retaliates against Gulf energy infrastructure and shipping activity. Persistently elevated oil prices could reignite global inflationary pressure, complicating the disinflation process and reinforcing central banks' "higher for longer" policy stance.

RBA Holds Hawkish Line Despite Cooling Labour Market

Australia's July CPI rose 3.5% year-on-year, easing from June but still above the 3.3% consensus forecast. Trimmed mean inflation held at 3.6%, up 0.5% month-on-month — the largest monthly increase in nearly a year. Despite three rate hikes this year, household spending has now strengthened for three consecutive months, rising 1.1% month-on-month in July, led by discretionary categories such as recreation, dining and apparel, adding to the risk that inflation stays elevated for longer.

That said, the labour market is showing signs of softening. The unemployment rate rose to 4.5% in July, while underemployment — a measure of labour market slack — held near a two-year high of 6.4%, and private-sector wage growth slowed to 3.1% in the second quarter. While these trends should gradually ease inflationary pressure, they have yet to translate into a meaningful improvement in the inflation data. Markets expect the RBA to raise rates by at least a further 25 basis points before end-2026 to bring inflation back to target.

Australian Housing Downturn Remains Manageable; ABS Performance Stays Resilient

According to Cotality data, national home values fell 0.9% in August, weighed down by elevated borrowing costs, constrained affordability and softer demand. Outside Sydney and Melbourne, where annual declines have run at roughly 4–5%, home values in most markets remain above year-ago levels, with higher-priced properties broadly underperforming owner-occupier-driven segments. Borrower buffers remain solid: the average loan-to-value ratio sits at around 80%, and fewer than 1% of borrowers hold negative equity, keeping systemic risk broadly contained. Per S&P Global Ratings' SPIN index, as of June, arrears on Australian prime residential mortgage-backed securities (Prime RMBS) held steady at 0.80%, having stayed below 1% over the past 12 months; arrears on auto asset-backed securities (Auto ABS) were flat at 1.31%, with a modest further increase expected.