The Australian sharemarket edged down last week, falling 1.0%. The main drivers last week were stock specific weakness, disappointing jobs data and overall fragile investor sentiment. The Health Care sector struggled throughout the week, again attributed to sector and index heavyweight, CSL. The company announced they will be taking a stake in Dutch biotech company, VarmX, costing an upfront $175 million. Elsewhere, interest rate sensitive sectors sold off in the middle of the week ahead of the US Federal Reserve’s interest rate decision. Additionally, local jobs data was released, which saw jobs fall by 5,400, worse than the expected 21,000 rise.
US sharemarkets extended their rally, with the S&P 500 and the NASDAQ touching fresh record highs, up 1.3% and 1.8% respectively. Big tech was the main theme throughout the week, as earnings optimism and AI enthusiasm drove sentiment. NVIDIA agreed to invest US$5 billion in its rival, Intel. The two companies said they would co-develop chips for PCs and data centres. Tesla (7.6%) and Alphabet (5.7%) were also key movers. The US Federal Reserve announced their latest interest rate decision, delivering a 0.25% cut. Chair Jerome Powell emphasised the smaller rate cut was a risk management move. Sector performance was mixed with Information Technology (2.1%) and Communication Services (3.4%) both outperforming, while Consumer Staples (-1.2%) and Materials (-0.9%) dragged.
European sharemarkets closed slightly lower last week. Seven from eleven industry sectors finished in the red, as investors moved from cyclical to defensive sectors, while continued uncertainty around tariffs, central bank policy decisions and overall weak sentiment also factored into performance. The Information Technology sector was the only real bright spot, hitting its best weekly performance in a year, thanks to stock specific performance and the NVIDIA and Intel collaboration. European technology company SAP advanced 3.3%, after broker upgrades and a stronger cloud outlook. In economic news, Bank of England held rates steady at 4%, in a divided vote and Norway cut by 0.25%.
A measured cut, mixed debate and sticky mortgages
Last week the US Federal Reserve finally gave in and trimmed interest rates by 0.25% to 4.00%-4.25%. It looks like policymakers aren’t charging into an easing cycle, they’re edging in. We wouldn’t expect any less from the cautious Chair Jerome Powell.
From the meeting we learnt the dot plot was split, with a narrow majority signalling two more cuts this year, while 7 of 19 participants pencilled in no further reductions. That dispersion tells us the officials are somewhat mixed, weighing softer labour data against moderate inflation. The one caveat being Trump’s newly appointed inside man Governor Stephen Miran, who dissented from the rest and confidently voted for a larger 0.50% cut this meeting.
On the labour market, Powell highlighted slower growth in both people looking for work and those finding jobs. Notably, in the Fed’s statement, it dropped the word “solid” to describe employment conditions. Recent revisions also cut reported payroll gains to just 29,000 per month over the three months to August, while unemployment ticked up to 4.3%. That’s what has triggered markets to price-in more interest rate cuts over the past few months and why we saw last week’s decision as a measured risk management cut.
Mortgages: lower, but still sticky
Average US 30-year mortgage rates have eased to ~6.35%, the lowest in nearly a year, and many real estate agents say sub-6% is the psychological line that gets buyers moving. The lock-in effect is real, with recent figures from the National Mortgage Database show 82% of mortgage holders have rates below 6%.
This means most owners would have to trade up from much cheaper loans to move or remortgage. In our view, this will be a tough sell to most unless the average US 30-year mortgage has a “5” handle on it.
That being said, the above figures are naturally drifting higher, as life events force moves and new buyers enter and accept the pandemic era of less than 3% mortgage rates aren’t coming back. It’s a slow thaw. Evidenced by recent housing activity data, which improved year-on-year, but missed expectations, with housing starts falling to +1.31 million in August, 63,000 less than expected.
Implications
We see the Fed continuing with a measured easing bias, subject to incoming labour data and persistent services inflation. The dot-plot dispersion argues against a straight-line pivot. That being said, lower rates are welcomed and will support asset prices in the near-term. They should also help support the US debt situation from deteriorating any further, particularly as new tariff revenue comes in.
Regarding housing, we emphasise mortgage rates are sticky. They follow long-dated US Treasury bond yields, which are primarily driven by long-term market expectations for inflation and growth. For this reason, even when Trump gets his wish and Powell leaves his post in May 2026, we think mortgage rates are unlikely to fall significantly. Meanwhile, until home loan rates are sustainably around 5.75%-6.00%, we expect only a small and gradual pickup in housing activity, with new-builds relying on incentives to fill the gap.
Locally, we will hear from RBA governor Michele Bullock when she speaks at the house of representatives, while also getting a look at the latest monthly CPI data.
Overseas, in the US there is a raft of economic data set to be released. Fed Chair Jerome Powell will provide some guidance on the outlook of the US economy earlier in the week, before US GDP is released on Thursday. Other economic indicators are new and existing home sales and personal income and spending. In China, no change is expected to their short-term rates.