In August, global central banks stepped forward as potential white knights for markets, offering relief just as economic storm clouds gathered. Hints of easier policy from Washington to Wellington sparked rallies. Throughout this, investors remained cautious: would rate cuts be enough to counter slowing growth and the looming impact of tariffs? By month-end, it felt less like a smooth recovery and more like a hurdle race, with each policy signal, earnings release, and data print representing another obstacle for markets to clear.
Central banks to the rescue?
The defining theme of August was the prospect of a policy shift after a long pause. The Fed has kept rates on hold since December last year, maintaining a restrictive stance even as inflation eased. This was on the basis that the labour market remained strong, but cracks in that narrative appeared on August 1, when a sizeable downward revision to prior payroll data cast doubt on the perceived resilience of US employment. The downgrade reinforced the sense that the Fed’s reluctance to cut was built on shakier foundations than previously thought.
This set the stage for Chair Jerome Powell’s much anticipated speech at the Jackson Hole symposium - the annual gathering of central bankers that often sets the tone for global monetary policy. Powell acknowledged that “conditions may warrant adjusting our policy stance,” pointing to softer labour data and moderating inflation as justification for a shift. The message was clear - after months on hold, the Fed was opening the door to interest rate cuts as soon as September.
A dovish tone also emerged elsewhere. The European Central Bank highlighted similar concerns around growth and inflation, while the RBNZ went further, cutting the OCR by 25 basis points (bp) to 3.0%. Two committee members even pushed for a larger 50bp move, and the Bank revised its forward guidance lower, citing both global trade uncertainty and domestic weakness.
A late-month hurdle race
August felt like a sprint through hurdles, with each event risk posing a challenge to the markets. The final week concentrated several of the most significant tests.
The first hurdle was Powell’s Jackson Hole speech. His dovish comments sparked a broad relief rally, reversing a five-day losing streak for the S&P 500 and lifting global equities after a mid-month wobble.
The second hurdle was Nvidia’s earnings. AI has been the driving force behind this year’s equity rally, and no company is more central than Nvidia. With a $4.4 trillion market cap, an 8% weighting in the S&P 500, and chips powering the AI ambitions of giants like Meta, Microsoft, Alphabet, and Amazon, it has become the market’s bellwether. After nearly doubling in the past five months, investors hoped its results would confirm that the AI boom still has room to run. Instead, softer guidance disappointed, raising questions about whether the sector’s growth can keep pace with soaring expectations.
The final hurdle was the release of the Fed’s preferred inflation gauge - the PCE index. The July report showed core inflation ticked up to the highest level seen since February. However, that was largely in line with expectations and gave markets more confidence that a September cut remains on track.
Still, the uptick in core prices was a reminder that inflation has not fully cooled, and with tariffs expected to filter through in coming months, the Fed’s balancing act between growth risks and inflation vigilance is far from over.
Taken together, the hurdles underscored a broader tension. Policy optimism injected bursts of life into risk assets, but lingering growth and valuation concerns kept investors cautious.
The next race: rate cuts vs tariff risks
Markets may have cleared August’s hurdles, but the path forward remains uncertain. The debate is shifting from if the Fed will cut, to how fast and how far.
A notable payroll revision at the start of the month highlighted cracks in the labour market, reinforcing the case for support. At the same time, inflation is proving stickier beneath the surface. US wholesale inflation accelerated in July, with producer prices rising by the sharpest increase in three years, suggesting that tariffs are already feeding through to costs. Consumer prices so far show a milder pass-through, but the full impact of tariffs is expected in coming months.
This leaves policymakers in a bind. A softening labour market argues for urgency in cutting, while inflation that remains above target, and the risk of tariffs reigniting it, argues for caution. A September cut looks all but certain, but the following meetings before year end remain live and data dependent.
For investors, the lesson is clear. Central banks are pivoting toward support, but growth jitters and tariff uncertainty will keep volatility in play. The coming months will be about gauging not just the fact of cuts, but their cadence, and how effectively they offset the economic drag still working its way through the system.
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