Global share markets were mixed over the last week with US and Eurozone shares down as bond yields rose further, whereas Japanese shares surged helped by expectations that the BoJ won’t speed up the pace of rate hikes. Chinese shares also fell. Australian shares had a volatile ride with a 2% plunge on Thursday but were little changed for the week with no real surprises from the RBA, but with falls in resources and bank stocks offsetting gains in IT, retail and telco shares.

Gold fell on the back of rising bond yields and a rise in the $US, but Bitcoin managed to rise slightly. Metal and iron ore prices fell. The $A fell below $US0.70 as the $US rose.

Oil prices bounced around above $US100 with Saudi Arabia restoring half the flow through its East West pipeline and ongoing signs of tankers getting through the Strait of Hormuz keeping a lid on prices, but the lack of any deal to decisively reopen the Strait along with reports that the US is considering sending another aircraft carrier and more troops to the Middle East keeping them elevated. The risks on the upside remain high as Iran may be motivated to push oil prices up going in to the midterms to punish Trump and we can’t keep running down global oil reserves indefinitely. Disrupted Russian oil product exports have added to upwards pressure on diesel prices.

The bond vigilantes are back. The past week saw another rise in bond yields. Bonds have been oversold for several weeks now but their continued sell off is a sign of the strength in the bear market that is now engulfing them. As with the Australian housing market they are getting hit by a perfect storm with: high energy prices adding to inflation worries; rising expectations for central bank rate hikes; stronger economic data adding to concerns that maybe the neutral short term rate has moved up; worries about big budget deficits in the US, UK, France and elsewhere; increased corporate borrowing to fund data centre investment; erratic US policy marking; and a rising trend in Japanese bond yields leading to a reversal of the so-called carry trade. And in Europe we are seeing a renewed widening in the bond yield spread between French, Italian, Spanish and Greek bonds on the one hand and German bonds on the other reminiscent of the Eurozone crisis. Put simply bond investors are starting to demand a higher risk premium in order to buy government bonds globally and also in Australia. The US 10-year bond yield briefly rose to its highest since 2002 and Australia’s 10 year bond yield is around its highest since 2011.

From TINA to TARA. The ongoing back up in bond yields has significant consequences for other asset classes. The multi decade super cycle downswing in bond yields from the 1980s drove a “search for yield” that pushed investors out along the risk frontier into corporate debt, equities, commercial property, infrastructure, housing, private credit etc. It culminated in TINA or “There Is No Alternative” where investors put money into shares because bonds and cash paid such low returns. Its reversal this decade after 10-year bond yields bottomed out around 0.5% or sub zero in some cases in 2020 threatens to reverse this – with talk of TARA or “There Are Reasonable Alternatives” – putting downwards pressure on the valuations of other assets as investors demand higher yields from them too.

In the near term this leaves shares vulnerable to a further correction. US shares have held up well and moved through the seasonally weak months of August and September without a major problem. But Eurozone shares are down 5.7% from their August high and Australian shares which are down 6.7% from their August high. The risk of a deeper correction in shares remains high. Along with the back up in bond yields at a time when equity risk premiums are low (see the next chart) the worry list for shares remains high and includes: the likelihood of more central bank rate hikes; the ongoing oil supply shock; worries about an AI bubble; and political uncertainty ahead of the US midterms with a Democrat win potentially flagging the risk of US tax hikes and Trump possibly ramping up tariffs and the Iran War once the midterms are over as he becomes a lame duck president.

In Australia, the RBA provided no surprises with a hawkish hike taking the cash rate to a 15 year high of 4.6%. Put simply upside risks to its inflation forecasts – flowing from excess demand but made worse by higher energy prices and booming AI data centre investment – materialised so it hiked rates again as it indicated it would. Failure to have done so would have risked a further loss of confidence in its commitment to the 2-3% inflation target. As expected, and as necessary with underlying inflation well above target and having been so for five of the last six years, it remains hawkish warning that it will raise rates again if needed.

Our base case is that rates have probably peaked as the RBA has likely done enough to weaken demand sufficiently to push inflation back to target by the end of next year – but expect the RBA to remain hawkish for a while yet with no rate cut until late next year. Mortgage interest payments as a share of household income are now pushing back to around the highs reached in 2024 which when combined with higher petrol bills will act as a big constraint on consumer spending, falling home prices will drive an increasing negative wealth effect on consumer spending, household spending in August showed signs of starting to slow, unemployment is continuing to drift higher, the NAB survey shows business conditions at their weakest since the pandemic and home building approvals are now starting to trend down pointing to less home building. And while underlying or trimmed mean inflation remained at 3.6%yoy it was fractionally less bad than feared and didn’t add any further to the upside risks on inflation that the RBA responded to with its September hike. So, while another hike is a very high risk for November, by the time we get to the next RBA meeting there is likely to be enough evidence of cooling demand in the economy to enable the RBA to leave rates on hold and return to “wait and assess” mode, albeit with an ongoing tightening bias and this to remain the case going into next year. But while our base case is that rates have peaked, we don’t see the RBA being able to start cutting until late next year. So, expect a long hold at current high rates with constant concern that rates may still go higher. At present the money market sees a 28% chance of a November high (which is probably a bit too low), but still sees one or two more hikes ahead (which is probably a bit too pessimistic).

Australian inflation rose to 4%yoy in August with a 15% rise in auto fuel prices with trimmed mean inflation holding at 3.6%yoy – both were fractionally better than expected but don’t really change the outlook. September quarter trimmed mean inflation looks on track to come in around 1%qoq or 3.6%yoy, which is above the RBA’s August forecast for a 3.5%yoy rise but the RBA looks to have already adjusted to that with its September rate hike.

As can be seen in the next chart the breadth of above target inflation rises as quite high with more CPI items still seeing inflation above 3% than below 2%. This tells us that its not just the Iran War and surge in fuel prices that’s driving inflation but more broadly reflects excess demand in the economy. The impact of the AI data centre boom was evident too in higher prices for computing equipment and games (X Box) via higher processing & memory chip prices.

The RBA’s latest Financial Stability Review characterised the Australian financial system as remaining resilient with most household and business borrowers likely to be able to manage through slower growth and falling home prices. In particular, the FSR notes that housing and business loan arrears are low, the proportion of home borrowers with a cash flow shortfall is likely to remain low based on RBA assumptions from August and even with a 20% fall in home prices only around 5% of mortgages would fall into negative equity, and it suggests banks should be able to absorb a 20% fall in home prices because of strong capital reserves. So, in short, the RBA does not see a major threat to financial stability from domestic risks. Rather it sees more risks from external factors like high levels of public debt in some countries and low risk premia associated with optimism about AI. Of course, saying that financial stability risks are low from domestic sources does not mean that the economy is not vulnerable to rate hikes and falling home prices and while “most” households and businesses are in good shape the problems could still be significant for “some” and this can often have a significant impact on the wider economy. So, the RBA still needs to be cautious not to raise rates too far.

Following on with Alberts Productions…one of the first hits Vanda and Young had in Australia with one of their songs after The Easybeats was with Ted Mulry and the ballad Falling in Love Again. Of course, Ted quickly changed style to rock a few years later. One of the biggest Vanda and Young success stories though was John Paul Young starting in particular with their song Yesterday’s Hero which was in part based on their Easybeats experience. The Alberts’ sound was clearly evident on that song.

Major global economic events and implications

US economic data was a mostly solid. June quarter GDP growth was revised up to 2.2% annualised from 1.5% with strong 4.6% growth in domestic demand, the level of personal income was revised up and real consumer spending rose solidly in August. The September manufacturing conditions ISM fell but remains strong. Against this consumer confidence fell again in September.

Job openings and quits data suggests an okay but not booming US jobs market, while still low jobless claims and a fall in layoffs suggest it’s strong. The Atlanta Fed GDP tracker for the September quarter has slowed from 5% annualised growth but to a still strong 3.7%.

Meanwhile, downwards revisions to private final consumption expenditure (PCE) inflation give the Fed a bit of breathing space. Core PCE inflation for July was revised down to 3%yoy from 3.3% thanks to methodological changes that revised down inflation for portfolio management fees, software and legal services and August inflation held at 3%yoy. This should give the Fed a bit of breathing space to hold rates at its October meeting consistent with Fed Vice Chair Jefferson NY Fed President Williams assessments that the Fed can be patient. That said, inflation is still too high at 3%yoy, the monthly rise was a “high” 0.247%mom, the ISM showed a rise in price pressures and with mostly strong growth data the Fed is still likely to hike again at its December meeting. The US money market is still pricing in 3.3 more 0.25% Fed hikes – which looks a bit excessive.

Japanese economic data was mixed with falls in industrial production and retail sales, albeit annual growth in both is good, and strong readings for the September quarter Tankan business survey.

Chinese business conditions PMIs rose but remain in the same subdued range they have been in for the last few years. There also appears to be more targeted monetary and fiscal stimulus measures on the way following Premier Li’s call for more measures to help reach the growth target.

Australian economic events and implications

Household spending stalled in August and actually fell after excluding the impact of surging fuel prices. Annual growth is still strong at 6.8%yoy and it did follow three strong monthly gains, but weakness was also evident in falls in spending on discretionary items like clothing, footwear and recreation. This is consistent with the renewed weakness being seen in consumer confidence on the back of the rate hikes and rising costs. It’s too early to be definitive but it is a case of watch this space and consumer spending could be at a tipping point.

Home building approvals fell another 6% in August and look to have peaked around an annualised rate of 210,000 homes reflecting the impact of rate hikes and tax hikes on investors consistent with falling new home sales. The fall was due to falling unit approvals with house approvals still trending up but we need more units if we are to boost housing supply to catch up to Housing Accord target for 240,000 homes a year.

Overall credit growth remained solid in August, but there was a further slowing in housing credit growth to investors reflecting the impact of the tax changes and rate hikes.

The slump in home prices continued in September with another 1.2% fall in home prices and accelerating declines in Brisbane, Adelaide and Perth. We have been expecting a 10% top to bottom fall in prices but with national average prices already down 5.2% with no loss of negative momentum, the drags on demand from rate hikes, tax hikes and poor confidence set to continue for a while yet and a likely rise in distressed selling likely to add to listings particularly as unemployment increases, we are revising our expected fall to a range of 10-15%. This is deeper than the range of average capital city property price declines seen over the last 40 years or so but is consistent with the perfect storm now hitting the property market and in particular the structural shifts in terms of the taxation of investors and the rising trend in interest rates along with the rising risk of a sharp rise in distressed selling on the back of rising unemployment. The risk is for an even deeper fall, particularly if the RBA ends up over tightening and tipping the economy into recession resulting in much higher unemployment which in turn could drive a sharp rise in distressed selling. The negative wealth effect from the property slump is expected to knock around 1% to 2% off consumer spending.

The ABS measure of job vacancies fell again in August reflecting falling private sector vacancies. They remain high relative to pre-pandemic levels, but the trend is down suggesting a gradual cooling in the labour market.

The trade surplus shrunk in August. While exports rose 3.7%mom, imports surged 5.8%mom reflecting a further surge in IT imports in response to the data centre boom. The former suggests that data centre investment is surging again this quarter but its impact on GDP growth will be offset to some degree by surging imports.

The final Federal Budget deficit for 2025-26 came in at $22bn (or 0.8% of GDP), down from a forecast $28bn in the May Budget and $37bn in the December MYEFO. The improvement was mainly due to stronger than expected revenue. Monthly data up to May had already indicated an improvement so it was no surprise and the $6bn difference is only 0.2% of GDP and so is not significant in terms of the economic outlook. And we are still creeping into deeper budget deficits. That said Australia’s budget deficit at 0.8% of GDP is a fraction of those in the US, UK and France which average around 6-7% of GDP.

A broader concern is that Federal spending as a share of GDP rose to 26.9%, its highest level outside the pandemic since 1986-87. This is well above the pre-pandemic norm and reflects real growth in spending in the last three years averaging 4.2% pa. The problem is that the high level of public spending is contributing to capacity constraints in the economy and lower than otherwise productivity driving contributing to high inflation and rate hikes. And revenue as a share of GDP rose to 26.1%, also its highest since 1986-87 and this comprised the highest level of tax revenue as a share of GDP since the mining boom in the mid-2000s. With the boom in revenue, we should have a decent surplus.

What to watch over the next week?

In the US, the minutes from the last Fed meeting (Wednesday) that saw rates hiked are likely to reiterate a hawkish tone. The ISM services conditions index for September (Monday) is likely to remain strong around 55.

In Australia, the Westpac/MI consumer confidence survey (Tuesday) is likely to show a further fall following the latest rate hike. The MI Inflation Gauge (Monday) and ANZ-Indeed job ads data (Tuesday) will also be released.

Outlook for investment markets

Global and Australian share markets are at risk of a further correction given the lack of any resolution to the Iran War and high oil prices, rising bond yields and stretched valuations, sticky inflation and central bank rate hikes, political uncertainty associated with the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession likely to be avoided, albeit it’s a rising risk in Australia, and strong global profit growth and likely rate cuts next year.

Bonds are likely to see subdued returns.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres. Rising bond yields could become a constraint though.

Australian home prices are expected to fall around 10-15% top to bottom, of which they have already done 5.2%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence. Rising distressed sales risk also becoming a drag.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although Fed hikes may limit this. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 2 October, 2026 appeared first on AdviserVoice.

Global share markets mostly rose over the last week helped by strong US economic data, a return of AI optimism and renewed hopes for a diplomatic solution to the Strait of Hormuz blockage. US, European and Japanese shares all rose but Chinese shares fell. The Australian share market remained under pressure falling around another 0.8% not helped by ongoing expectations for RBA rate hikes on top of worries about the impact of rising oil prices, rising bond yields which act as a drag on share market valuations and falling property prices. The falls in the ASX 200 were led by utility, telco, energy and bank shares.

Gold fell on the back of increased expectations for Fed rate hikes and rising bond yields which raise the opportunity cost to holding gold, but Bitcoin broke decisively above $US80,000. Metal prices rose but iron ore prices fell as did the $A with the $US up.

Despite a fall early in the week on hopes for a diplomatic solution flowing from US/Iran talks during the UN General Assembly, Saudi Arabia moving to reopen its east-west pipeline and signs of more ships getting through Hormuz, oil prices rebounded as the talks didn’t appear to make much progress. Trump’s comments threatening to “annihilate” Iran again before then saying the talks were “very good” didn’t add much clarity. Trump is likely to try and do what he can to cap energy prices given the increasing probality of a Republican wipe out in the midterm, but the risks are high with the now more hardline Iranian leadership likely wanting to keep it bubbling along to inflict more damage on Trump politically.

Petrol prices in Australia at around $2.39/litre have now caught up with and overshot the rise in oil prices. This is partly due to a blow out in oil product prices relative to crude oil prices due to Ukranian attacks on Russian oil refineries which have curtailed Russian fuel exports. A failure to resolve the crisis could see oil head to $US150/barrel and petrol prices head above $2.70/litre.

The past week saw another surge higher in bond yields reflecting ongoing concerns about high energy prices adding to inflation, rising expectations for central bank rate hikes, worries about big budget deficits in the US and elsewhere, increased corporate borrowing to fund data centre investment, erratic US policy marking and a rising trend in Japanese bond yields leading to a reversal of the so-called carry trade. The US 10-year bond yield rose to its highest since 2007. As US bond yields are the base for global yields their rise has continued to flow through to Australia with the local 10-year bond yield rising to its highest since 2011. Bonds are oversold and due a tactical rally but their continued sell off despite being oversold is a sign of the strength of the bear market in bonds.

Rising expectations for Fed rate hikes are progressively flattening the US yield curve, which if it inverts (shorter term rates above long-term rates) will start to drive renewed talk of recession, even though an inverted yield curve gave a false signal in 2022-24. Rising bond yields present big problems for governments as they mean more revenue has to be devoted to paying interest on past debt. This in turn is likely to drive pressure for spending cuts or if not then even higher budget deficits. Australia is less at risk than most but is not immune.

Australian shares are down around 4.6% so far this month, consistent with the historical track record of September being a weak month. Eurozone shares are also down 2.3% but US shares are up slightly. However, the risk of a deeper correction in shares remains high. Along with the back up in bond yields at a time when equity risk premiums are low (see the next chart) the worry list for shares remains high and includes: the likelihood of more central bank rate hikes; the ongoing oil supply shock; worries about an AI bubble; and political uncertainty ahead of the US midterms with a Democrat win potentially flagging the risk of US tax hikes.

The extension of the US/China trade truce for another two months into January is good news but the Trump/Xi summit didn’t really resolve the economic and geopolitical tensions between the two countries, including around AI or the Iran War. But at least they are still talking with more summits likely. Investment market implications are minimal. US tariffs on China are currently around 20-25% – comprising tariffs from Trump’s first term and the forced labour tariff of 12.5% – which is below where they were when the truce was first agreed but are still likely to ramp up again with “excess capacity” tariffs probably after the midterms and maybe even more next year if the truce expires.

AI-nnihilation. Talk of AI ranges from super optimism based on a huge boost to productivity to extreme pessimism with worries about a jobs wipeout (even though it seems to be generating more jobs than its destroying so far) to panic over the last few weeks that it will wipe out humanity by the end of the decade. The latter emanated from Anthropic and was then backed by Sam Altman at Open AI and Elon Musk but it looks more like a virtue signalling publicity stunt to support lofty valuations ahead of capital raisings and protect US AI from cheaper Chinese models combined with a bit of nervousness about being locked in an unsustainable AI arms race and a desire to find an off ramp to slow the AI capex boom. There are lots of risks with AI and some guardrails are wise. But the threat of harm applies to all new technologies – whether it be fire, steam engines, electricity, cars, nuclear energy, etc. Humanity has long had a fascination with things that could wipe it out – whether it’s the bomb in films like Fail Safe, nuclear energy in The China Syndrome, Hal the computer in A Space Odyssey, population growth in Paul Ehrlich’s The Population Bomb, global cooling and more recently global warming. AI is just the latest of a long list of things the handwringers can worry about.

In Australia, the RBA (Tuesday) is expected to hike the cash rate by 0.25% for the fourth time this year, taking it to 4.6%, its highest level since October 2011. While unemployment surprised on the upside in August the data was messy, and the RBA will likely still see the jobs market as a “bit tight” and consistent with meeting its full employment objective. But this is not the case for its inflation objective with underlying inflation at 3.6% running well above target and July inflation data along with the latest surge in energy prices, the AI spending boom and extreme weather indicating it will take longer to get back to target than the RBA was forecasting just last month. While cooling economic growth, the rising trend in unemployment and the downturn in home prices should start to take pressure off inflation, after more than five years of inflation being above target threatening RBA credibility it does not have the luxury of continuing to “wait and assess”. Recent commentary from the RBA has been pretty clear in indicating that unemployment needs to rise, that its not too concerned about the fall so far in home prices and that inflation is its top priority right now. Of course, RBA commentary has left a bit of wiggle room but it’s August post meeting statement referred to “increasing the cash rate target further if upside risks [to inflation] materialise” and Governor Bullock told the House Economics Committee a week ago that “some of these upside risks to inflation appear to be materialising”. So, with the upside risks to inflation now materialising it’s likely to tighten in the week ahead as it has suggested it would.

We also expect it to be a hawkish hike with RBA commentary continuing to warn that it may have to raise interest rates further, albeit the move may not be unanimous. But by the time it gets to the November meeting there is likely to be more evidence of a cooling economy, falling home prices, a softer jobs market and rising recession risks so we don’t think a second hike let alone a third will be necessary. So, while a second hike is a high risk it’s not our base case and we should see an extended hold out to around mid-next year at 4.6%. The rising trend in unemployment evident in the August jobs data is consistent with this. The money market has priced in a 90% probability of a hike on Tuesday which we agree with but its expectation for another one or two hikes beyond that looks too hawkish.

Another double whammy hit for households. For mortgage holders another 0.25% rate hike would mean roughly an extra $110 a month in mortgage interest payments. This would bring the increase since January to around $440 a month or $5400 a year. For the property market it will reduce the capacity to pay for a home for a buyer on average earnings with a 20% deposit by another $10,000 bringing the total reduction after four rate hikes to around $40,000. At a time when petrol prices are nearing their March record high again the cost to the average household to fill up the car is pushing around $84 a week, up nearly $22 from where it was back in January. So around a $530 a month extra impost since January for those with a mortgage and petrol car which is quite a hit.

The Australian Government’s latest Intergenerational Report painted a somewhat bleak picture for the next 40. The key takeaways are:

• Treasury sees a further slowing in economic growth to just 2% pa for the next 40 years. This is depressing as 3% pa used to be the norm for Australia. The slowing is mainly due to slower workforce growth as a result of falling fertility and rising old age dependency.
• Lower projections for per capita GDP than in any of the IGRs so far. This means lower material living standards and partly reflects the low starting point – where real per capita GDP today is 13% or $15000 below what was projected for now in the 2002 IGR. But it would be even lower were it not for an optimistic assumption that productivity will grow 1.2% pa over the next 40 years, which is the same its been over the last 40 years. The trouble is that over the last decade its just been 0.2% pa and even if the Productivity Commission’s expectation that AI will boost productivity by 2.3% over 10 years is correct that maybe only gets us to 0.5% pa.

• Ongoing high levels of government spending and a budget deficit forever. The latter partly reflects the capping of tax revenues as a share of GDP at past highs on the realistic assumption that future governments will give back future bracket creep – in contrast to the May Budget that assumed an ever-rising trend in the revenue share to bring the budget back to surplus. But the bigger issue is that the IGR projects a permanently higher share of government spending in the economy due to the cost pressures flowing from an aging population and more spending on defence, NDIS and debt interest.

The good news is that the cap on revenue implies tax cuts ahead, but the problem is that IGR is not really fulfilling its original purpose which was to highlight the fiscal impact of an aging population and support spending cuts or restraint as an offset. More broadly to turn the budget back into a surplus and provide confidence that productivity will be at least as good as the 1.2% pa assumption and so improve the outlook for material living standards the IGR highlights the need for more serious economic reform:

• to get government spending back down to more in line with levels prevailing prior to the pandemic – the IGR estimates that the growth in the non-market or mainly public sector of the economy has cut 0.3% pa off productivity growth since 2017-18;
• substantially reduce the regulatory burden on business – Productivity Chair Danielle Wood’s pointing out that a doubling in company board time spent on compliance issues and the cost of this in becoming too risk averse is an example of the problem here; and
• tax reform to reverse the rising reliance on income tax, boost reliance on the GST & move to a road user charge.

While other factors including starting working life later are impacting, weak productivity is likely a key driver of those born in the 1990s not seeing the lift in real incomes relative to those born in the 1980s early in their careers, like previous generations had seen. So weaker productivity is likely a driver of angst about intergenerational equity.

In the 1970s Sydney based Alberts Productions ruled the rock and pop charts with what became known as the Alberts sound. This became synonymous with Australian pub rock and was characterised by a driving relentless drum beat, memorable razor sharp guitar riffs, heavy low end bass and a high energy delivery. A bit like a V8! It got its start with The Easybeats but is perhaps most well-known with AC/DC. Central to this sound was the songwriting and production team of former Easybeats’ Harry Vanda and George Young. After The Easybeats split they spent four years writing and producing songs in London but returned to Australia and Alberts in 1973. Their song Evie, Parts 1, 2 & 3 performed by fellow former Easybeats Stevie Wright is emblematic of the Alberts sound. Running 11 minutes it’s the longest Australian single to hit the charts, reaching number 1 and staying on the charts for 26 weeks. Apparently, disc jockeys loved it as they could go off for a cup of tea. The performance of Evie, Parts 1, 2 & 3 in June 1974 on the Sydney Opera House forecourt is an absolute classic with Stevie Wright, George Young and Harry Vanda performing together for the first time since The Easybeats.

Major global economic events and implications

Developed country business conditions PMIs for September were strong on average but with strength in the US and to a less degree Europe offsetting falls in the UK, Japan and Australia. Input and output price pressures rose and remain elevated with delivery times depressed.

It’s a similar story in the US but with conditions being much stronger, particularly in manufacturing. And US price indicators rose, particularly for input prices.

In other data US new home sales rose but remain weak and are likely to fall further as mortgage rates continue to rise on the back of rising bond yields. Jobless claims remain low pointing to ongoing labour market strength.

In Europe the Swiss and Swedish central banks left their policy rates on hold, but the Norwegian central bank hiked. Both the Swedish and Norwegian banks leaned hawkish.

Australian economic events and implications

Australian business conditions PMIs fell to a soft 50.8, with falls in employment and orders. Both cost and output price pressures rose consistent with ongoing high inflation.

Jobs data for August was messy. On the one hand unemployment rose to 4.6% – 4.646% to be precise! – and full-time employment fell but on the other hand total employment rose by 39,500, hours worked rose solidly, both are up 1.6-1.7%yoy, underemployment fell to 6.2%, the ratio of employment to the population remains near a record and participation rose to 67.1%. There was also some statistical issues that may have distorted the data. The overall picture though is that jobs growth is still solid but unemployment is continuing to trend up gradually.

Forward looking labour market indicators are now mixed. Job ads are either stable or rising…

…whereas business surveys point to a slowing trend in employment. While the RBA is boxed in by too high inflation necessitating a rate hike in the week ahead the rising trend in unemployment and the mixed outlook for jobs growth suggest it shouldn’t have to hike again.

New company insolvencies spiked in August reflecting the insolvency of the 542 companies in the Bathla Group. It’s not so bad if Bathla is excluded running in the same range as over the last two years. While the Bathla spike will reverse this month the trend may remain up given rising interest rates, slowing demand and tough conditions for home builders with rising costs but falling home prices.

What to watch over the next week?

In the US, the focus will be on core private final consumption inflation data for August (Wednesday) which is expected to rise 0.3%mom or 3.3%yoy validating the Fed’s decision to hike. Jobs data for September (Friday) are expected to show a solid 100,000 rise in payrolls with unemployment remaining at 4.1% but with wages growth remaining benign at 3.2%yoy. Other data is expected to show still soft growth in consumer confidence (Tuesday), solid growth in personal income and spending (Wednesday) and the manufacturing ISM (Thursday) remaining strong at around 55.

Eurozone inflation for September (Friday) is expected to rise to around 3.4%yoy with core inflation rising to 2.6%yoy.

Chinese business conditions PMIs for September (Wednesday) are likely to remain soft at around 50.

In Australia, as noted earlier the RBA (Tuesday) is expected to hike for the fourth time this year raising its cash rate by another 0.25% taking it to 4.6%, its highest since October 2011.  August CPI data to be released on Wednesday is likely to confirm that inflation remains a problem with a 0.5%mom rise taking annual inflation back to 4.1%yoy, not helped by a 17% rise in fuel prices, and trimmed mean inflation rising 0.3%mom leaving it at 3.6%yoy. Elsewhere on the data front, expect increased fuel costs to drive a 0.6%mom/7.6%yoy rise in household spending (Tuesday), a 6% fall in building approvals but a further slowing in housing credit growth particularly for investors (both Wednesday), a 1%qoq rise in job vacancies for August and the trade surplus to rise to around $2.2bn. Cotality home price data for September is expected to show a further 1% or so fall in property prices with prior months falls revised even lower as the combination of rate hikes, the tax hikes on investors and poor confidence continue to impact. Sydney is likely to lead the fall but with Adelaide, Brisbane and Perth catching down but falls slowing in Melbourne.

Outlook for investment markets

Global and Australian share markets are at risk of a correction given the lack of any resolution to the Iran War and rising oil prices, rising bond yields and stretched valuations, sticky inflation and central bank rate hikes, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession likely to be avoided and strong global profit growth and likely rate cuts next year.

Bonds are likely to see subdued returns.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres. Rising bond yields could become a constraint though.

Australian home prices are expected to fall around 10% top to bottom, of which they have already done 3.6%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although Fed hikes may limit this. Fair value for the $A is around $US0.72.

The post Weekly economic and market update – week ending 25 September, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• The Fed is likely to start raising interest rates to combat sticky inflation and affirm its credibility.
• First Fed rate hikes in a tightening cycle don’t normally signal the end of the bull market in shares but are consistent with volatility and the risk of a correction.
• A Fed hike is unlikely to impact the RBA which started hiking before the Fed & was already likely to hike again this mth.

Introduction

After much debate and anticipation, the US Federal Reserve looks likely to raise interest rates at its meeting this week by 0.25% taking the Fed Funds rate to a range of 3.75-4%. This will be its first hike since 2023.

In moving to hike the Fed will join numerous central banks in doing so including the ECB and those in Norway, Japan, Korea, Indonesia, and the Philippines, the RBNZ and of course the RBA which has hiked three times.

Why is a Fed hike likely?

As in other countries, the hike is likely because inflation is above the Fed’s 2% target with upside risks. Some Fed officials have been arguing for a hike for a while. The Fed’s June meeting saw half of the officials on the Federal Reserve’s Open Market Committee that sets interest rates flag an expectation for a rate hike this year and the Fed’s easing bias was dropped. Recent commentary from Fed officials indicated a need to see a downtrend in inflation to leave rates on hold with new Fed Chair Warsh turning hawkish and effectively backing this in a speech last month. Then underlying US consumer price inflation data for August surprised on the upside pointing to a 0.25% monthly rise in core private final consumption (PCE) inflation for August, which is not consistent with Fed officials’ requirement for a falling trend in inflation. At the same time, US economic data has generally been solid and the renewed surge in the oil price has added to upside risks. So, the US money market sees an 86% chance of a 0.25% hike this week, and has factored in 3.5 hikes by June next year.

Trump’s illogical intervention a week ago trying to get the Fed to “LOWER THE RATE” will have only made it more likely that more Fed officials will support a hike in order to reinforce Fed credibility. Were it not for Trump’s tariffs and War with Iran the Fed may have cut again by now! Like the RBA, after nearly six years of inflation running above target Fed credibility is now on the line and Trump’s interventions are not helping.

How far will the Fed hike?

It’s often said that central bank rate hikes are like cockroaches “if there’s one there’s probably more”. Fed communication following the meeting is likely to remain hawkish warning of further tightening to come and this is likely to include the so-called “dot plot” of Fed officials’ interest rate expectations signalling another hike by year end. And while I am not a great fan of historical overlay charts like the next one for US inflation – the US and the global economy have become more inflation prone thanks to deglobalisation, rising defence spending, bigger government, Trump’s erratic pro inflation policy making, etc.

And this provides a warning to the Fed to be cautious. After the surge in inflation in the early 1970s the Fed relaxed and then inflation came back with a vengeance, ultimately necessitating a far more aggressive monetary tightening to get it under control. The same could occur again.

Things probably aren’t that bad now though given the Fed and other central banks now have firm inflation targets – albeit the risk is there. But to head of this risk the Fed will likely hike again. However, at present it looks more like fine tuning. US inflation is not yet showing a renewed surge and nor is it in most countries. Rather, the concern in the US is that at 2.4%yoy for core CPI and around 3.2%yoy estimated for core PCE inflation, it is just above target rather than necessarily taking off again.

So, our base case is for one more Fed hike in this cycle, probably in December – as it’s October meeting is just before the midterm elections.

What does it mean for share markets?

The experience of the last 35 years suggests that while first Fed rate hikes in a tightening cycle can cause a dip in shares, the bull market usually resumes until rates become onerously tight, which weighs on profits. This can be seen in the next chart. US shares had wobbles when rates first started to move up in February 1994 (US shares had a 9% correction), in June 2004 (US shares had an 8% correction) and in December 2015 (US shares had a 13% correction) but thereafter they resumed their rising trend and a bear market did not set in till 2000, 2007 and 2020 after multiple hikes. Of course, the 2020 bear market was ostensibly due to the pandemic. Recession did not come for seven years after the February 1994 first hike, for three and a half years after the June 2004 first hike and for four years after the December 2015 first hike. This is because the first rate hike only takes monetary policy to less easy, and it’s only when monetary policy becomes tight that the economy gets hit. The start of Fed tightening in the last cycle in March 2022 was different as shares were already in a falling trend and this continued until October 2022 culminating in a 25% fall. But inflation was much higher then – with US core CPI inflation of 6.5%yoy when the Fed started to hike necessitating a more aggressive increase in interest rates whereas now it’s much lower.

One guide to whether monetary policy is tight or not is the shape of the yield curve (long-term bond yields less short-term rates) – with a period of long-term bond rates falling below short-term rates often preceding recession. Of course, this doesn’t always work and it gave a false signal from late 2022 through 2024. At present, different versions of the yield curve are both in positive territory and not signalling recession.

Correction risks

While past experience suggests little reason to be too concerned by the first US rate hike, there are two main risks:

• Correction risk is already high for shares – a Fed rate hike combined with worries about the rebound in oil prices, Trump’s latest tariff announcements, rising bond yields, AI bubble worries and concerns about the US midterm elections could combine to further push shares down in the near term in what is a seasonally weak period.
• There is a high risk that Trump turns up both the tariff war (with maybe more countries retaliating) and the Iran War post the midterm elections once political constraints from the midterm elections recede. This would add to inflation.

Impact on Australian interest rates and the $A

The RBA sets rates for Australian conditions and does not just follow the Fed. As the first chart shows the link between US and Australian rates has been tenuous in recent times with the RBA hiking in 2009-10 when the Fed did nothing and the RBA cutting or on hold when the Fed raised rates over 2015 to 2018. They only move together if there is cyclical alignment. However, the RBA led the Fed in hiking starting back in February and is on track to hike probably later this month and maybe once more this year, and the Fed’s likely hike this week won’t alter that either way.

A Fed rate hiking cycle is not necessarily bad news for the $A because it depends on how much the RBA raises interest rates. Current money market expectations suggest some slight narrowing in the rate differential between Australia and the US which would be negative for the $A. However, our view is that $A is yet to catchup to the widening in the rate differential this year, expectations for 3.5 Fed hikes look too hawkish and solid commodity prices should support the $A. So, unless there is a global recession, we continue to see the $A rising a bit over the next year.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP

The post The Fed looks like it’s going to hike – implications for investors & Australia appeared first on AdviserVoice.

Global share markets fell again over the last week as both oil prices and bond yields pushed higher with more upwards pressure on central bank interest rate expectations. Despite higher than expected US core CPI inflation data for August making a Fed hike in the week ahead almost certain, a small dip in oil prices on Friday saw US shares pare their losses but they still fell 1.2% for the week. Over the week Eurozone shares fell 0.9%, Japanese shares fell 1.6% and Chinese shares fell 0.8%. The Australian share market was particuarly hard hit with a 2.9% fall not helped by talk of back to back hikes by the RBA on top of worries about the impact of rising oil prices, rising bond yields which act as a drag on share market valuations and falling property prices. Energy shares rose but this was offset on the ASX 200 by big falls in IT, retail, property and mining shares.

Bitcoin and gold both fell as rising bond yields and rising expectations for Fed rate hikes reduced their relative attractiveness. So far Bitcoin is holding above its 200-day moving average which is a positive sign, but gold has fallen back below its 200-day moving average.  Metal and iron ore prices fell as did the $A despite a slight fall in the $US.

Oil prices are heading into a danger zone with Brent pushing near $US110 a barrel for the first time since May as the US-Iran conflict escalated further with more attacks on ships in the Strait of Hormuz, more US strikes on Iran, more retaliatory action by Iran on neighbouring countries and new Houthi attacks on Saudi Arabia. While oil prices dipped a bit on Friday, this looks temporary with Saudi Arabia shutting it’s East-West pipeline following attacks on it. This has been a key way of by-passing the Strait of Hormuz for 7 million barrels of oil a day and with Hormuz effectively remaining closed the risk to global oil supplies is rising as global reserves can’t be run down indefinitely. With oil now above the top of our $US70-$US100 range Trump is likely to do something – another TACO anyone? – to get them back down but the risk of a further rise is high. The hardline Iranian leadership may want to keep it going to inflict more damage on Trump politically and run the risk of what he may do after the midterms.

Particularly at risk are gas prices – with very little gas getting out through the Strait at all and few diversions from Qatar and very low European gas stockpiles as the northern winter approaches – and refined product prices especially for diesel given a hit to Russian refineries and exports. Petrol prices in Australia at around $2.12/litre have already retraced around half the fall from their March high but are likely heading even higher with rising global oil prices.

The past week saw another surge higher in bond yields reflecting concerns about big budget deficits in the US and elsewhere, increased corporate borrowing to fund data centre investment, worries about higher for longer inflation partly flowing from higher oil prices, a related need for central banks including the Fed and RBA to run higher interest rates for longer and a rising trend in Japanese bond yields leading to a reversal of the so-called carry trade. This is being compounded by US Government actions:

• While US Treasury Secretary Bessent tripled the size of the long-term bond buyback operation to $6bn this was largely ignored by the bond market and adds to fears that the US will monetise its debt and threatens to make the US Treasury a more erratic issuer of bonds demanding a higher risk premium. While he’s talking of reducing the budget deficit it’s hard to see it happening given the inability of DOGE to do much last year and given that Congressional approval will be required.
• Trump’s offer of $US5000 per adult if the Republicans retain the House and Senate underscore that the risk is a further deficit blowout not consolidation. That said, his election bribe is unlikely to be passed by Congress.
• Trump ramped up tariffs on Canada even further in response to Canadian retaliation, adding more to costs.
• And of course, Trump’s War with Iran is adding to energy costs which is adding to inflation.

Higher than expected US inflation data for August now points to a Fed hike in the week ahead. The CPI wasn’t all bad with core inflation dipping to 2.4%yoy and less items with 3-month annualised inflation now above 3%. But the monthly rise in core CPI inflation of 0.29%mom is likely too high to satisfy Fed officials who want to see a downtrend in inflation in order to leave rates on hold. Particularly with the renewed surge in oil prices posing a renewed threat to inflation. As a result, a Fed rate hike on Wednesday is now looking highly likely, with the money market now putting the probability of a hike at 88%. The Fed could decide to wait but that is complicated by its October meeting being just ahead of the midterm elections and waiting till December to move will be too long. Trump’s illogical intervention a week ago trying to get the Fed to cut will have only made it more likely that more Fed officials will support a hike in order to reinforce Fed credibility. Were it not for Trump’s tariffs and War with Iran the Fed may have been cutting by now!

While the Fed is likely to remain hawkish and signal a second hike, money market expectations for 3.5 hikes from here look over the top.

Bonds are starting to get oversold suggesting a short-term rally – it could be a case of sell on the rumour and then buy on the fact after Wednesday’s likely Fed hike. But the risk is skewed towards a further rise in yields longer term. As US bond yields are the base for global yields their rise has continued to flow through to rising Australian bond yields made worse by strengthening expectations for RBA rate hikes.

The rise in bond yields points to: higher fixed mortgage rates; pressure on share market valuations; threats to commercial and residential property; and pressure on Federal & state budgets as borrowing costs surge.

The back up in public debt interest costs at a time when stamp duty revenue is falling due to the slump in the property market comes at a difficult time for state governments with Queensland seeing its credit rating downgraded from AA+ to AA by Standard and Poors. S&P also cited large infrastructure spending programs in Queensland including for the Olympics. The downgrade to AA could add another 0.1 to 0.15 percentage points to Queensland’s borrowing costs pointing to further pressure to cut spending for a state government philosophically averse to hiking taxes. While some of the reasons for the Queensland downgrade were beyond the state government’s control, this arguably could have been avoided if it had focussed more on containing spending after the last election. That said I am not sure that cutting its rating to the same as Victoria’s is warranted! NSW moved from AA+ (negative watch) to AA+ (stable).

Trump’s election bribe should be seen in its wider context as a sign of desperation. If the US had the “tremendous strength and success” he claims, then the bribe would not be needed. But things are going the wrong way – the Iran war is an unpopular disaster, oil prices are surging again, the hardline Iranian government may want to keep it going, tariffs are on the way up again and the Fed is at high risk of hiking again. And the mid-terms are just two months away. Betting markets put Democratic control of the House at over 85% and the Senate is back to around 50%. The risk for markets may be that a Democrat win (particularly for Democratic Socialist candidates) will fuel fears of tax hikes after the election.

The RBA is looking like its seen enough bad news on inflation and will most likely hike this month, so we have moved forward our expectation for the next hike from November to September. Since before the July CPI release, we had been expecting another rate hike this year, most likely in November. The high CPI and okay GDP data released in the last three weeks then suggested its 50/50 as to whether its September or November, but RBA communication over the last week suggests its likely to be this month. Comments by RBA Assistant Governor Hunter and Deputy Governor Hauser were decidedly hawkish – despite both coming after soft consumer and business confidence data. The clear message was that the RBA sees growth around trend, unemployment as still low and is not too fussed about the fall in home prices as they are still up 3%yoy and 50% this decade but that inflation is too high and upside risks to it appear to be materialising. As a result, according to Hunter “inflation is top priority right now” and according to Hauser “people are furious about inflation…[and] want us to do our job and bring inflation down”. So, while there is a rising risk of recession with a renewed surge in oil prices and a negative wealth effect from falling home prices the more pressing issue for the RBA is inflation. And with inflation on track to be above target for five of the last six years including the current year, waiting till November to hike risks further damaging RBA credibility in terms of its commitment to getting inflation back to target. And once that credibility is lost it will be even harder to return inflation to target. As a result, we now expect the RBA to hike at its next meeting late this month and retain a tightening bias. A hike this month is not inevitable – as it could still be blown around by global developments or a very weak jobs report the week before the RBA meeting – but we would see it as odds on with a 75% probability. A second hike in say November would probably be overkill as it would risk tipping many households with a mortgage over the edge risking in turn a crash in property prices, much higher unemployment and a deep recession. That said, the probability of a second high is probably 50/50, and a third hike would definitely be overkill. Interestingly the money market now has nearly three hikes priced in by October next year – but that looks like an overreaction to the surge in oil prices.

Proposals to allow access to super to cover living costs may be popular but like other “cost of living” relief measures is not the way to address the “cost of living” crisis and could make it worse. A common approach offered by all sides of politics over the last few years to the cost-of-living crisis has been to offer support via things like energy rebates, fuel tax cuts, low home deposit schemes and access to super with another proposal on the super front from a minor party in the last week. The problem with all these schemes is that they don’t solve the underlying cost of living/inflation problem and by putting more money into the hands of people could make it worse by boosting demand in the economy adding to the inflation problem and leading to even higher RBA interest rates and then leave people with less in retirement and not much to show for it. Rather, the focus should be on reducing government spending to make more room for private spending in the economy and boosting productivity with deregulation and tax reform to expand the capacity of the economy to supply goods and services without adding to inflation.

The risk of a correction in shares is high. September has been the weakest month of the year on average over the last 40 years and shares are already down – with US shares down 1.8% from their high last month, global shares down 2.2% and Australian shares down around 5.7%. There are plenty of triggers for a further fall including: rising bond yields at a time when equity risk premiums are low; likely Fed and RBA rate hikes this month; rising oil prices; worries about an AI bubble; and political uncertainty ahead of the US midterms with a Democrat win potentially flagging the risk of US tax hikes. That said, with strong earnings growth we would see any pullback as a correction rather than the start of a new bear market.

Major global economic events and implications

US producer price inflation data for August was in line with expectations at 4.6%yoy for core PPI, but key components that feed into the core private final consumption (PCE) deflator were a bit higher than expected adding to upside risks to the core PCE and hence to the odds of the Fed hiking in the week ahead, similar to the message from the CPI. Meanwhile, jobless claims remained low.

The ECB hiked rates as expected by 0.25% taking its deposit rate to 2.5% with more hikes likely. Its messaging was hawkish seeing “inflation well above target for an extended period” with inflationary pressures from the Iran War still building and it revised up its inflation and growth forecasts. Another hike is likely by year end.

The success of the far-right populist Alternative for Deutschland in the German state of Saxony-Anhalt highlights the ongoing rise of the populist right but is not a sign of another Eurozone crisis being on the way…well not yet anyway. The AfD is clearly continuing to rise in popularity reflecting cost of living issues and a backlash against high immigration levels. But it needs to be put in context: the AfD is not a Nazi party; Saxony-Anhalt is a middling east German state with East German resentments; the AfD failed to win a majority in the election; it was founded as an alternative to the Euro but around 90% of Germans support the Euro; while the current German government is unpopular the next federal election is not till 2029; the government is likely to respond with more fiscal easing and a further tightening in immigration rules which along with any economic recovery will tend limit support for the AfD more broadly in Germany; and even if the AfD does attain German government it will likely moderate its views a bit like Meloni in Italy. Next year’s French election poses a bigger risk regarding threats to the EU and Euro with Le Pen of National Rally being the front runner, but again if she forms government, she will likely soften her views albeit there could still be tensions with the EU in terms of reducing France’s budget deficit.

Japanese wages growth accelerated to 4.7%yoy consistent with more rate hikes from the BoJ.

Chinese import and export growth remained strong in August. The strength of import growth is surprising given that it would normally suggest strong growth in domestic demand whereas weak retail sales and fixed asset investment suggest softness.

Chinese inflation rose slightly in August largely on the back of higher energy prices, but core CPI inflation also rose but only to 1%yoy.

Australian economic events and implications

Consumer confidence fell 5% in September on the back of rate hike talk and higher fuel prices, with the Westpac/Melbourne Institute consumer sentiment index back to a weak level of 84. All components fell with mortgage holders being the group with the biggest fall.  Weak confidence is consistent with a slowing ahead in consumer spending.

The Westpac/MI consumer survey also showed that consumers remain cautious with their savings preferring paying down debt and bank deposits, with real estate being a less popular destination for savings than shares.

Consumers’ expectations for home prices gains fell further as did perceptions as to whether now is a good time to buy a property – albeit it’s still up from its lows.

The August NAB business survey saw conditions fall to their lowest since the pandemic.

Meanwhile, the NAB survey showed that selling prices fell but purchase and labour cost pressures remain elevated posing risks for inflation.

Data released over the last week wasn’t all weak with ANZ Indeed job ads up again in August and looking like they are on the rise again – which is a bit hard to believe.

What to watch over the next week?

Interest rates will likely be the focus over the week ahead with three major central banks meeting: the Fed, the Bank of England and the Bank of Japan and two of those likely to hike.

In the US, the Fed (Wednesday) is likely to hike interest rates by 0.25% taking them from 3.5-3.75% to 3.75-4% on concerns about sticky above target inflation. Core CPI inflation data for August came in on the high side putting in question the downtrend that Fed officials indicated that they need to see to be able to leave rates on hold. The Fed’s commentary and guidance is likely to lean hawkish with the dot plot signalling an additional hike ahead. On the data front, expect the New York and Philadelphia regional manufacturing indexes to soften but remain solid, retail sales (Wednesday) to show a solid rebound, housing starts (Thursday) to bounce after sharp fall in July & production (Friday) to show a small rise.

Canadian core inflation for August (Monday) is likely to show the underlying measures remaining around 2%yoy.

The Bank of England (Wednesday) is expected to leave rates on hold at 3.75%, although it’s likely to warn of upside risks to inflation flowing from ongoing high energy prices. Meanwhile, CPI inflation for August (Wednesday) is likely to remain around 2.9%yoy with core inflation around 2.6%yoy.

The Bank of Japan (Friday) is expected to increase its policy rate from 1% to 1.25% and indicate that further gradual increases are likely with inflation around target. Inflation data for August (Friday) is likely to show a rise in core inflation to 1.4%yoy.

Chinese activity data for August (Tuesday) is likely to have remained soft with industrial production up 4.8%yoy, but retail sales up just 0.8%yoy and investment down 7.3%yoy.

In Australia, parliamentary testimony by RBA Governor Michele Bullock (Friday) will likely reiterate the hawkish signalling from other RBA officials recently with the implication that another rate hike is likely.

Outlook for investment markets

Global and Australian share markets are at risk of a correction given the lack of any resolution to the Iran War and rising oil prices, rising bond yields and stretched valuations, sticky inflation and central bank rate hikes, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession likely to be avoided and strong global profit growth and likely rate cuts next year.

Bonds are likely to see subdued returns.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home prices are expected to fall around 10% top to bottom, of which they have already done 3.6%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although a move to Fed hikes may limit this. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 11 September, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• Bond yields are being pushed higher by concerns about inflation, high public debt, rising corporate borrowing, rising Japanese bond yields and increasing economic uncertainty.
• This is part of a super cycle rise in bond yields that started in 2020, partly reversing the super cycle from the 1980s.
• The rising trend in bond yields could dampen other asset classes as it leads to a higher yield structure in the economy. This includes residential property.

Introduction

This year has seen a rising trend in bond yields with the US 30-year treasury bond yield reaching its highest in around two decades and the Australian Government’s 10-year bond yield rising to its highest since 2011. This is causing some consternation in terms of its impact on borrowing costs, public finances and what it means for shares and other assets. This note looks at why bond yields are likely now in a super cycle rising trend and what the implications are.

Bonds 101 – how bonds work

But first a quick refresher on how bonds work. Governments issue bonds to finance their budget deficits and companies issue bonds as a way to borrow to finance investment (as an alternative to borrowing from a bank). Since discussion of bond yields usually refers to government bonds we will focus on them, but the principles regarding their pricing and yields are the same. This can be a bit confusing, but my high school economics teacher belaboured the point that yields move inversely to price and so it’s always stuck with me. If the government issues a bond (which is basically a fixed amount of debt with a fixed interest payment) for $100 and agrees to pay $5 a year in interest, this means an initial yield of 5%. The higher the yield the better in term of the return that an investor will get. But in the short term the value of the bond will move inversely to the yield. If growth and/or inflation slows and the central bank cuts interest rates, investors might snap up the bonds paying $5 till the yield is pushed down to say 4%. In the process, the value of the bond goes up giving a capital gain which adds to the yield to give a strong return from bonds. But if growth or inflation pick up and bond yields rise, investors suffer a capital loss and whether the bond makes a return or not depends on whether the capital loss is greater than the yield on the bond. This is what’s essentially happened since 2020. For example, Australian bonds returned just 0.6% over the last year and lost 0.1% pa over the last five years and for global bonds it’s been 1.8% and -0.4% pa respectively. Of course, if you buy a 10-year bond yielding 16%, a level it reached in the 1980s, and hold it till it matures (10 years) the return will be 16%pa. But if the starting yield is say, 5.2% that’s all you will get for 10 years. And that 5.2%, which is the current Australian 10-year bond yield, is the rate of interest the government pays to borrow for 10 years.

Bond yield components

A bond yield reflects investors’ expectations for short term interest rates over the term of the bond plus compensation for locking their money away, called the term premium. So, a bond yield compromises:

• Investors’ expectations for inflation over the term of the bond for which they will want compensation. Central banks inflation targets of 2-2.5% are a good guide but with inflation running above target over the last five years or so, this may be seen as a less useful guide.
• A real rate of return. A key driver is expected real economic growth.
• And a term premium. This can be influenced by things like uncertainty about economic policy, budget deficits and public debt and how valuable bonds are as a diversifier to investors in their portfolios.

So: if inflation expectations rise; expected real economic growth picks up; and economic uncertainty increases, the government runs a bigger deficit and demand for bonds in portfolios falls investors will want a higher yield.

Super cycles in bond yields

It’s useful to see the recent back up in bond yields in their longer-term context. Over the last 80 years there’s been two big secular or long term moves in bond yields – up for around 40 years and then down.

• The near 40-year super cycle bear market in bonds that saw a rise in yields into the early 1980s was driven by rising inflation on the back of expansionist fiscal and monetary policies after the Great Depression and WW2, monetary financing of the Vietnam War, rising commodity prices, protectionism and slowing productivity along with rising economic uncertainty resulting in higher real yields, inflation expectations and the term premium. This saw 10-year bond yields in the US and Australia rise from 2-4% in the 1940s to around 16%.
• Then from the early 1980s a near 40-year super cycle decline in bond yields set in. This was driven by inflation targeting central banks, supply side reforms, globalisation, lower costs and rising competition flowing from digitalisation, rising inequality depressing spending, spare capacity and reduced worker bargaining power with worries about deflation post the GFC, rising demand for safe income yielding assets, strong demand for bonds as a portfolio diversifier, excess global savings & central bank bond buying post GFC. This saw a sharp downtrend in 10-year bond yields to around 0.5% or less in 2020.

A new super cycle bear market in bonds

However, starting in 2021 the long-term downtrend in bond yields started to reverse. There are several key drivers and my colleague Diana Mousina looked at some of these here in more detail:

• Higher inflation expectations – central bank inflation targets are starting to lose credibility. While inflation is down from its 2022-23 high, in many key countries it’s still above target including the US not helped by Trump’s tariffs and oil price spike in the last 18 months. And in Australia if this year is included it’s been above target for five of the last six years. Bigger government, the reversal of globalisation, increasing defence spending and less workers/more consumers with aging populations are making the world more inflation prone. By boosting productivity AI can act as an offset but for now the data centre boom is pushing up construction and computer chip costs.
• Higher expectations for central bank interest rates – sticky inflation is leading to expectations of higher rates higher for longer.
• Ongoing high budget deficits and public debt – e.g., the US budget deficit is around 6.5% of GDP and it’s hard to see much improvement in France with an election next year and the populist National Rally being the front runner. At least Australia is at the low end here.

• Surging corporate borrowing to fund data centre investment – this competes with public borrowing and combines to push yields up.
• Rising Japanese bond yields – this is reversing the “carry trade” where investors borrow cheaply in Japan and invest in say US bonds.
• Various factors are pushing up the term premium on bonds including: Trump’s erratic policies; US Treasury Secretary Bessent’s silly intervention in the bond market which revived concerns the US might monetise its debt (ie print money); and the correlation between bond and share returns has increased reducing investor demand for bonds.
• AI’s role is ambiguous. Over the long term, it may pull down inflation by boosting productivity but it could also boost real economic growth and hence real bond yields & in the short term it’s adding to inflation.

After years of being in abeyance it seems the “bond vigilantes” – investors who sell their bonds when they fear excessive public debt or inflation – may be back. At least they are a brake on silly populist policies. Since US bond yields are the base for global yields their rise has boosted Australian yields with the add on of higher expectations for the RBA’s cash rate. The risk is high that yields will rise further as it’s hard to see the drivers reversing soon. While the super cycle bear market in bonds – or rising trend in yields – likely has further to go with spikes and setbacks along the way the rise in yields is likely to be limited to well below 1980’s highs as central banks are still committed to their inflation targets. That said, the temptation of governments to monetise their debt is a tail risk supporting the case to have small exposures to gold and maybe Bitcoin as a hedge.

Implications of the super cycle rise in bond yields

The rise in bond yields has a number of implications for investors.

First, it means higher borrowing costs for governments. Public debt interest is the fastest growing major spending item in the Federal Budget currently accounting for around 5% of tax revenue. The more bond yields rise the faster this will rise and the more tax revenue it will take leaving less for welfare payments and other services. This means greater pressure for fiscal austerity. Which of course is what “bond vigilantes” want.

Second, it means higher corporate borrowing costs which can act as a dampener on company profit growth.

Third, it means banks are likely to raise their fixed mortgage rates which will reduce the attractiveness of fixed rate mortgages as an alternative to variable rate mortgages when the latter are likely to rise further. We expect the RBA to hike again soon, with a high risk of a second hike.

Fourth, it means bond returns are likely to stay mediocre. While starting points yields are up from 2020 which is good for returns this will likely be partly offset by the capital loss from rising yields over time.

Fifth, higher bond yields could pose a problem for shares as they already offer a very low risk premium over bonds, so a further rise in yields will reduce the relative attractiveness of shares. Right now, strong profit growth is providing an offset, but it could be an issue if profits weaken.

Finally, for all assets the rising trend in bond yields is reversing the tailwind they saw over the 1980s to 2020 whereby the fall in bond yields led to a “search for yield” which led to lower yields/higher prices for most assets – shares (with higher PEs), commercial property, infrastructure and housing. In terms of housing, it’s part of the reason why the super cycle surge in Australian home prices over the last 30 years may be over.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP

The post The super cycle bear market in bonds and the return of “bond vigilantes” appeared first on AdviserVoice.

Global share markets were mixed over the last week not helped by worries about rising oil prices and rising bond yields. US shares managed a small rise though as relatively dovish comments by Fed officials Williams and Waller implied that a September rate hike is not a dead cert. August inflation data in the week ahead will be key. But Eurozone, Japanese and Chinese shares fell. The Australian share market also fell around 0.9% with the hit from rising oil prices and bond yields compounded by falling home prices adding to concerns about the economic outlook at the same time that GDP growth was still strong enough to reinforce expectations that the RBA is on track to raise rates again with some now talking of two more rate hikes (versus none two weeks ago). Banks and financials rose on the ASX but were offset by falls in IT, mining and retail shares.

Bitcoin and gold both got a boost from the more dovish Fed comments which saw the $US fall, with both up for the week. Metal and iron ore prices also rose and the $A rose above $US0.72 for the first time since May.

Oil prices rose again with renewed military activity between the US and Iran. The renewed focus on sanctions by the US to pressure Iran had seen oil prices dip but the past week saw a return to US strikes after Iranian attacks on ships with Iran retaliating. Naturally Trump said the strikes would be short lived and he will no doubt soon proclaim something like “Iran wants to talk” or that the “war is over”. But the conflict remains as messy as ever with only bad options – return to full on war (which will go down very badly in the US and in any case its running low on key munitions) or agree a bad deal/just walk away (giving Iran what it wants). The bottom line is that nothing has been achieved by the War except the Iranian government is now more hardline and the Strait of Hormuz remains effectively closed with ships only getting through if they pay Iran or get military support from the US. Our base case remains that oil prices will stay in a $US70-100/barrel range with Iran preventing it going lower and the US moving to try and calm things down whenever it gets above $US100….but the risk is high that with no resolution the world will face much higher oil prices as reserves run down.

The past week saw the back up in bond yields continue taking the Australian 10-year bond yield to levels last seen in 2011.  The rise reflects a combination of concerns about huge ongoing budget deficits in the US and elsewhere, increased corporate borrowing to fund data centre investment, worries about higher for longer inflation partly flowing from higher oil prices, a related need for central banks to run higher interest rates for longer and a rising trend in Japanese bond yields leading to a reversal of the so-called carry trade. US Treasury Secretary Bessent’s silly intervention was a sign of desperation and taken that way by bond investors as it had no fundamental backing – like concrete moves to cut the massive US budget deficit which is running around 6-7% of US GDP versus 1% of GDP in Australia. It seems like the “bond vigilantes” are back after years of hiding in their caves. But it’s the sort of thing you would expect to see in a world of higher inflation and higher public debt. Since US bond yields are the base for global yields their rise has flown through to Australian bond yields with the add on of increased expectations for the RBA’s cash rate on the back of high inflation data. The risk is high that yields will rise further as its hard to see the key drivers going away any time soon. It wouldn’t be surprising to see the Australian 10 year bond yield push up to around 5.5%.

The rise in bond yields has a number of implications for in Australia. First its bad news for the Federal and state governments as it means public debt interest costs will rise even faster at a time for the states when their stamp duty revenue is going the other way. Public debt interest is the fastest growing major spending item in the Federal Budget currently accounting for around 5% of tax revenue but set to rise further. The more bond yields rise the faster the public debt interest bill will rise and the more tax revenue it will take up leaving less left over for welfare payments and other government spending. Second it means higher corporate borrowing costs which can act as a dampener on company profit growth. Thirdly, it means that banks are likely to raise their fixed mortgage rates which will reduce the attractiveness of fixed rate mortgages as an alternative to variable rate mortgages at a time when the latter are likely to rise further with RBA rate hikes. Finally, it could pressure the share market as the risk premium offered by shares over bonds was already very low.

In Australia falling home prices and cooling growth, but materialising upside inflation risks are providing a difficult choice for the RBA – but we expect it will prioritise dealing with inflation and hike rates again. Data over the last week showed a slowing in economic growth and an accelerating slump in property prices which – via wealth effects, a flow on to home building and housing related retail sales – will further weaken economic growth. Against this though growth is still running a little bit stronger than the RBA was expecting and wants to see to reduce excess demand and so far, property prices have just had a flick of the top with a fall of 3.6% nationally after a 50% rise since the pandemic. And in the meantime, July inflation data suggests that upside risks to the RBA’s inflation forecasts are materialising. This presents a real dilemma for the RBA but given that inflation is the more pressing problem and if left unchecked risks a bout of stagflation, which will come with more costs to the economy and all Australians than a recession, the RBA is likely to focus on inflation and hike rates again. This is also necessary to reinforce the credibility of its inflation target which at present is weakening. We have been of the view that the RBA will wait till the November meeting just to make sure that the high July inflation data is not an aberration, but a further delay risks damaging their credibility so there is a strong argument to move in September. At this stage we think its 50/50 as to whether its September or November, but either way we expect another hike. This is likely to be the top as two hikes risk tipping many households with a mortgage over the edge risking in turn a crash in property prices, much higher unemployment and a deep recession. That said, the money market sees a 63% chance of a hike this month, has fully priced a hike by November and puts about a 50% probability on a second hike.

The risk of a correction in shares remains high. Strong gains year to date have left US and global shares vulnerable as we enter September which has on average been the weakest month of the year for US and Australian shares over the last 40 years. A correction in the US would likely drag Australian shares down. There are plenty of triggers for a correction including rising bond yields at a time when equity risk premiums over bonds are low, potential Fed and RBA rate hikes this month, rising oil prices, worries about an AI bubble and political uncertainty ahead of the US midterms. But with strong earnings growth we would see any pullback as a correction rather than the start of a new bear market.

Meanwhile, the boom in sales of electric vehicles continues in Australia. In August EVs were 25% of new car sales from close to nothing six years ago. With hybrids they now make up 54% of new car sales. Its likely they have now reached a tipping point with prices collapsing, ranges getting longer, charge times heading to 10 minutes and fast chargers becoming increasingly ubiquitous. A bit like when cars replaced the horse and buggy – first a trickle then a flood and they are everywhere. And unlike in past oil price shocks this time drivers have an alternative! As with Dylan in 1965 once you go electric you probably won’t go back.

The latest ABS data on crime shows nice long-term falling trends in crime rates for homicide, robbery, theft and abduction. But that for sexual assault is in a depressing rising trend. Clearly there is more work to do on this front.

Like only a few other musicians Taylor Swift has an ability to churn out great song after great song! I Knew It, I Knew You is up there with her best. Here it is with August and All Too Well.

Major global economic events and implications

The US manufacturing and services conditions indexes remained solid in August, but with prices paid remaining relatively elevated, highlighting the ongoing risk of persistent above target inflation in the US. At least productivity growth was confirmed at a solid 2.2%yoy for the June quarter, leaving unit labour cost growth at just 1.4%yoy which is no problem for inflation. The trouble of course is that inflation is coming from other sources like tariffs and the flow on from higher energy prices.

Meanwhile labour market data remains consistent with a solid but stable jobs market with job openings and quits rates trending sideways, private sector employment growth moderating a bit and jobless claims remaining low. The Fed’s latest Beige Book of anecdotal evidence of the US economy basically noted solid growth, a stable labour market but persistent inflation.

Source: Macrobond, AMP

The Bank of Canada left rates on hold at 2.25% but leaned more hawkish noting upsides risks to inflation from higher energy prices. The money market still sees a rate hike coming by year end.

Eurozone CPI inflation rose to 3.3% in August due to higher energy prices, but core inflation fell slightly to 2.4%yoy. This is likely to not enough to head of an ECB rate hike in the week ahead, but it may limit future hikes. Meanwhile unemployment was flat in July at 6.4%.

Japanese industrial production, retail sales, housing starts and consumer confidence all rose more than expected. This along with higher inflation is adding to expectations for more BoJ rate hikes with the money market fully pricing in another hike this month and another one by year end.

Chinese business conditions PMIs improved slightly in August. They remain in the same range they have been in for the last three years though and are consistent with GDP growth around 4.5-5%yoy.

The Reserve Bank of New Zealand hiked by another 0.25% taking its cash rate to 2.75%. It continues to see monetary policy as easy, inflation too high and growth resilient and so further rate hikes are likely.

Australian economic events and implications

The pace of Australian GDP growth slowed over the last six months compared to the second half of last year.

But at 2.1%yoy in the June quarter, its running slightly above the RBA’s implied forecast of 1.9%yoy and a bit above its estimate of potential growth at 2%yoy. June quarter GDP growth was 0.4%qoq which was slightly stronger than the market expected. Smoothing out data centre investment related volatility, overall private demand growth remains strong averaging 0.9%qoq over the last six months which was the same as in the last six months of last year and its up 3.5%yoy.

Public spending remains too high. Sure, its slowed to 0.2%qoq or 2.1%yoy but it remains around 28% of GDP compared to a pre covid norm of 22-23%. This high level of public spending is using up spare capacity in the economy, depressing productivity and contributing to the inflation problem! Note that the May Federal Budget still had real Federal spending running at 4.3% through the last financial year – so not much slowdown there!

Unfortunately, productivity growth remains abysmal – flat in the June quarter, down 0.2%yoy and near stagnant over the last decade. This in turn is depressing growth in living standards and keeping inflation too high with unit labour costs up 3.6%yoy, well above the 2-3% inflation target.

Home building approvals fell 3.6% in July – this was after a 7.4% rise in June but that may be in the process of peaking. The good news is that approvals are trending around 210,000 at an annual rate which is well up from their lows a few years ago. The bad news though is that this is still well below the Housing Accord target for 240,000 new homes a year and the combination of rate hikes, falling existing home prices versus rising building costs for new homes, uncertainty around the tax changes for investors, falling new home sales and problems with developers point down for home building going forward. So, the housing supply shortfall is not likely to be removed anytime soon.

The collapse of Sydney property developer Bathla will compound the problems regarding housing supply. Interestingly though after a surge through 2022-2024 corporate insolvencies had been starting to fall. This fall may prove temporary. With inflation up and rates now rising again and growth slowing insolvencies may be on the way back up again, of which Bathla may be a forerunner!

Credit growth cooled in August, with continued solid growth in business credit but a sharp slowing in housing credit to investors reflecting the tax changes and rate hikes.

The slump in home prices deepened in August and likely has a lot further to go. We expect a 10% top to bottom fall in home prices, of which they have so far down 3.6%, as more RBA rate hikes, tax hikes on investors and poor sentiment continue to impact. The housing shortage, the 5% low deposit scheme for first home buyers and a lack of distressed selling are providing support. But the risks are for an even deeper fall – say 15-20% – given the structural changes from a long-term downtrend in interest rates to a rising trend and the tax changes for investors which could mean they require a 20-25% fall in property prices or rise in rents or some combination of the two to enter the property market. This could be compounded if the RBA ends up over tightening and tipping the economy into recession resulting in much higher unemployment which in turn could drive a sharp rise in distressed selling. Note that in a falling market Cotality tends to revise down the prior month’s price fall and so July was revised from a 0.7% fall to a 1.2% fall. So, the 0.9% fall reported for August is likely to be revised more negative too.

From an affordability perspective the fall in home prices is so far just a flick off the top after a 20% or so rise since the pandemic – so the negative wealth effect so far (which is about a 1% hit to consumer spending for every 10% fall in home prices) is likely to be small so far. And the gap between capacity to pay and home prices remain huge – which highlights the downside risk for home prices.

The Melbourne Institute’s Inflation Gauge for August showed a further worsening with both the headline gauge rising to 4.8%yoy and the trimmed mean gauge rising to 4.3%yoy. This adds to the risk that the high inflation seen in the official inflation data for July was not an aberration.

Australia’s goods trade surplus fell in July but remains around $2bn. Both exports and imports fell but capital goods imports rose consistent with a continuation of the data centre boom.

What to watch over the next week?

In the US, the focus will be on CPI inflation data for August (Friday) which is likely to show a 0.4%mom rise due to higher energy prices leaving annual inflation at 3.4%yoy and a 0.2%mom rise in core inflation resulting in a slight drop to 2.4%yoy. Following dovish comments by Fed officials Williams and Waller in the last week a 0.2%mom rise in core inflation may be enough to leave the Fed in a holding pattern at its September meeting but it’s a 50/50 call. If the CPI data implies a 0.25% or greater rise in the core PCE deflator for August, it will likely tip the Fed over into a hike. Existing home sales (Thursday) likely fell again.

The ECB (Thursday) is likely to hike by 0.25% again in line with recent guidance taking its deposit rate to 2.5%.

Chinese trade data for August (Tuesday) is likely to show continuing strong growth in exports and imports. CPI inflation data for August (Wednesday) is likely to have risen to 0.9%yoy with core inflation staying at 0.9%yoy.

In Australia, the NAB business survey for August is likely to show business confidence remaining weak but with price pressures remaining elevated and the Westpac/MI consumer sentiment index is likely to weaken in response to increasing talk of another rise in interest rates with both due Tuesday. Comments on Tuesday by RBA Chief Economist Sarah Hunter in a panel and in an ABC 7.30 Report interview will be watched for any clues on the interest rate outlook.

Outlook for investment markets

Global and Australian share markets remain at risk of a correction with the lack of any resolution to the Iran War and hit to global oil supplies, stretched valuations, sticky inflation, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession avoided and strong global profit growth and likely rate cuts next year.

Bonds are likely to see returns around running yield or a bit less.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home prices are expected to fall around 10% top to bottom, of which they have already done 3.6%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although a move to Fed hikes may limit this. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 4 September, 2026 appeared first on AdviserVoice.

After record highs in US and European shares a week ago, global shares pulled back in the last week reflecting concerns about rising bond yields, not helped by a further rise in oil prices and some continuing concerns about chip makers. The weak global lead along with mixed earnings reports also weighed on the Australian share market which is down around 0.6% for the week with falls led by retailers, banks, property and IT shares more than offsetting gains in health and resources shares.

Bond yields mostly rose, not helped by higher oil prices and despite US Treasury efforts to lower them.

Bitcoin broke decisively above its 200-day moving average, a move which confirmed the end of the last four crypto winters (which saw circa 80% falls) this time only after a fall of 53%. Technically Bitcoin looks like it’s on the way up again. If we have seen the bottom after a much milder winter than in the past it’s a positive sign that Bitcoin is maturing.

Similarly, gold also looks to be breaking higher after a 27% fall, although its currently right on its 200-day moving average. Both are benefitting from having had long positions and excessive optimism washed out and signs of renewed $US weakness. The latter is also seeing the $A hold above $US0.71. Meanwhile, iron ore prices also rose but metal prices fell.

Oil prices rose again with no resolution to the Strait of Hormuz. The past week saw mixed reports on how much shipping was moving through the Strait, the June interim peace deal expired, Trump indicated there are no talks with Iran, the UK reported a ship in the Strait had been hit and then Trump announced that the US will now use “Economic Warfare and Isolation on an unprecedented scale” against Iran with “TREMENDOUS Economic Consequences” for “ANY country” that supports it. The latter looks like a return to sanctions but its hard to see why these will work now when they haven’t for years or that the US will seriously ramp up pressure on China given the risk of blow back to the US economy. So the conflict looks as messy as ever with only bad options – return to war (which Trump knows will go down very badly back in the US) or agree a bad deal (giving Iran what it wants). Our base case remains that oil prices will stay in a $US70-100 range with Iran preventing it going lower and the US moving to try and calm things down whenever it gets above $US100….but the risk is high that with no resolution the world will have to face much higher oil prices (like $US150) as reserves run down.

Can the latest version of Operation Twist stop US (and hence global) bond yields rising? It’s doubtful. Quite clearly the US Government has become concerned about the rise in long term Treasury yields. They have been rising because of ongoing huge US budget deficits, surging corporate debt issuance to finance the AI boom, worries about higher inflation and rising Japanese bond yields. This has pushed the 30-year bond yield up to levels not seen for two decades – the main problem being that the level of Federal public debt to GDP is roughly double what it was 20 years ago and so the rise in bond yields in the last five years has seen net interest costs surge from 6% of tax revenue to 14% which is a record high in the context of the last 70 years. So, the US Treasury announced it is buying back more long term bonds presumably financed by issuing more short term Treasury bills. Since Treasury bills are anchored by the Fed Funds rate this helps bring down long term bond yields. It’s a bit like the Fed’s Operation Twists in 1961 and 2011. So far, the results are mixed with long term bond yields first down a bit but then reversing their fall. Since the operation does not change any fundamentals with the US still having to issue debt to finance its huge budget deficit of around 6-7% of US GDP and corporate borrowing still on the rise its likely only a temporary fix. Just like the recent interventions to push up the Yen. So, absent a recession the rise in bond yields is likely to continue. It could even backfire for the US Treasury if the Fed does have to raise rates and so Treasury has to pay even more to borrow long term down the track. If anything by easing US financial conditions this latest operation twist adds to the risk that the Fed with have to hike. Since US Treasuries are seen as the global risk-free rate upwards pressure on them is likely to result in upwards pressure on Australian long term bond yields which risks higher borrowing costs for Australian governments, companies and for mortgage holders borrowing with fixed mortgage rates.

Fortunately, public debt in Australia is a fraction of US levels (circa 55% of GDP here versus around 125% of GDP in the US, but its still well up from where it was before the GFC and Federally just went through $A1 trillion. While that’s just a big round number, as a share of GDP, which is more important, it’s projected to remain around the highest levels seen since the aftermath of World War Two. While the Budget projected a fall in public debt as a share of GDP next decade this depends on rather optimistic assumptions that the budget deficit will fall and turn into a surplus. More importantly, public debt interest is the fastest growing major spending item in the Federal Budget currently accounting for around 4.7% of tax revenue but set to rise further. The more bond yields rise the faster public debt interest will rise and the more tax revenue it will take up.

In terms of the Fed, the minutes from its last meeting were hawkish with “several” members favouring a hike and “many” members saying a hike would be needed if inflation did not decline. Inflation data released so far for July suggests that core private final consumption deflator inflation will come in at 0.2%mom or 3.3%yoy, which would probably leave the Fed on hold, but it’s a close call with unrounded forecasts coming in at 0.24%mom and if ticks up to 0.3% many at the Fed would likely support a hike.

In Australia, despite mixed economic data we continue to expect another rate hike from the RBA around November. RBA Deputy Governor Hauser reiterated the RBA’s concerns about inflation, that consumer spending and employment growth would need to slow further to get it down and that if upside risks materialise then the RBA will hike. Economic data in the last week provided a mixed bag regarding this with a bounce in consumer confidence, wages growth in the June quarter which was benign but likely to pick up this quarter and jobs data was softish in July but still consistent with a labour market that is a “bit tight”. All, up we continue to expect another RBA hike, probably in November as inflation is unlikely to slow to back to target quickly enough.

Seasonal weakness. After strong gains year to date left US shares overbought a pullback through the seasonally weak months of August and September is a high risk which would likely drag Australian shares down. Rising bond yields, a possible Fed rate hike, rising oil prices, worries about an AI bubble and political uncertainty ahead of the mid terms are potential triggers. But with earnings growth remaining strong we would see any pullback as a correction rather than the start of a new bear market.

Most would remember Johnny Young as the saccharine like host of Young Talent Time. But he was actually much more and gave Australia one of it’s best rock songs. In the late 1960s much Australian pop music was covers of overseas bands, but Johnny Young came up with The Real Thing which was sung by Russel Morris and produced by Ian (Molly) Meldrum into a psychedelic extravaganza lasting more than six minutes. Here’s a brilliant covid era version. Of course, Molly then went on to Countdown – so do yourself a favour and check out The Real Thing!

Major global economic events and implications

US housing indicators remained soft with housing starts down 12% and home builder conditions remaining weak. Industrial production rose less than expected in July but manufacturing conditions were strong, although price pressures remain elevated. Jobless claims remain low.

The US earnings reporting season has now seen 94% of S&P 500 companies report with 87.5% exceeding expectations. The consensus expectation for earnings growth has now risen to 33%yoy. Earnings growth is being led by energy and tech companies and 2027 earnings estimates have been upgraded by around 4% over the last two months.

Canadian CPI inflation rose to 3%yoy in July due to higher energy prices and some World Cup price hikes, and core inflation measures rose slightly to 1.9-2%yoy but since they are around target the Bank of Canada is likely to remain on hold in the near term.

UK CPI inflation also rose to 2.9%yoy in July due to higher energy prices, but core inflation was unchanged at 2.6%yoy, which along with unemployment still at 4.9% and wages growth cooling slightly to 4.1% probably leaves the Bank of England on hold for now. The money market still sees a rate hike by year end though.

Japanese June quarter GDP growth was weaker than expected at 0.3%qoq with falls in consumer spending, housing investment and business investment. Inflation rose to 1.9%yoy in July with core (ex food and energy) inflation rising to 1.4%yoy from 1.2%, partly due to soaring memory chip prices. Expect further gradual Bank of Japan rate hikes.

Chinese economic activity indicators for July were soft. Retail sales growth slowed to just 0.6%yoy, industrial production slowed to 4.5%yoy and investment fell further with property investment, sales and home prices continuing to slide. China requires more stimulus measures to boost consumer spending.

Australian economic events and implications

Australian business conditions PMIs for August fell slightly but to a still okay 52.5 with a fall in services, employment and orders. Output price pressures fell particularly in services suggesting some easing in inflationary pressures, but input prices rose and remain relatively high.

Jobs data for August was softer than expected but is not as weak as it looks. Employment fell by 15,800, hours worked fell and unemployment rose to 4.5% again. However, it’s not as soft as the headline numbers suggest as the fall in employment followed several strong months and so a soft month was inevitable sooner or later, full-time employment rose, the unemployment rate only rose from 4.43% to 4.46%, labour underutilisation fell slightly and the weakness was concentrated in NSW.

Forward looking labour market indicators like job ads and hiring intentions point to jobs growth remaining around current levels. This is highlighted in our Jobs Leading Indicator in the next chart and should keep unemployment hovering around current levels for the time being. All of which will likely see the RBA continue to characterise the jobs market as a “bit tight” whereas it needs to see jobs growth slow further for inflation pressures to recede.

Wages growth was unchanged at 0.8%qoq or 3.2%yoy in the June quarter.

There was a further slowing in the proportion of jobs with 3% or more wages growth, but wages growth will pick up this financial year as the 6% and 4.75% increases in minimum and award wages impact, & some seek compensation for higher inflation. This will remain a concern for the RBA given low productivity growth.

Cost of living pressures remain, although they are maybe not quite as severe as some comparisons suggest. Over the year to the June quarter real wages fell 0.8% as inflation was 4%yoy. And since 2020 prices in the CPI rose 27% compared to the wage price index that rose 21%, resulting in a real wage fall of 6%. However, a broader measure of average earnings in the national accounts – which allows for people moving jobs, promotions, hours worked, etc – shows that total labour earnings have kept up with inflation. The truth is probably in between.

Consumer confidence rose another 6% in August, which is surprising, but the rise was concentrated in mortgage holders relieved at the RBA decision to hold rates this month. This is of course leaves it very dependent on what the RBA does going forward. And its worth noting that it remains weak with the alternative ANZ/Roy Morgan consumer sentiment survey even weaker.

The Westpac/MI consumer survey also showed a further sharp fall in home price expectations, but falling prices have led to a sharp rise in perceptions of whether now is a good time to buy a dwelling.

The HIA reported that new home sales fell for the third month in a row in July as rate hikes impact and falling home prices make building new homes less viable. Tax policy uncertainty around the impact of the investor tax changes may also be impacting. Expect another year with home completions running well below the Housing Accord target for 240,000 homes a year.

The Australian June half earnings reporting season is now around 60% complete, and while profits are up nicely its narrowly based with results on the soft side. Profits are seeing a rebound after three financial years of falls, but it remains subdued compared to the AI enhanced profit boom being seen in the US, where profits are up more than 30%, and elsewhere. The consensus expectation for 2025-26 earnings growth of 12% has already been revised down to 11.7% with 2026-27 earnings growth expectations also revised down slightly to 10.5%. Strength is narrowly based on a rebound in mining sector profits which was confirmed by good results at BHP and solid growth for financials with profits in the rest of the market only likely to see growth of 2.5%. So far banks have been under pressure on concerns about slowing housing finance, and stocks exposed to the consumer (eg JB HiFi) and housing (eg Temple and Webster) have had difficult results.

• The proportion of results beating expectations are running ahead of misses but only marginally at 33% versus 30%. And the number of beats was less than the norm of 40%, but so too was the number of misses where the norm is 41%.

• 71% of companies have seen earnings rise on a year ago, and this is better than the norm of 56% and confirms the rebound in profits but as noted above its coming in a bit weaker than expected in aggregate.
• 59% of companies have increased their dividends on a year ago which is in line with the norm, but down slightly from the last reporting season. The failure of dividends to match the rise in earnings suggests a degree of corporate caution about the outlook.

What to watch over the next week?

In the US, expect to see a fall in consumer confidence and soft growth in home prices (Tuesday) but continued solid gains in underlying capital goods orders (Wednesday). July consumer data is likely to show modest growth in spending. Meanwhile, the core PCE deflator inflation rate for July is likely to be 0.2%mom leaving it at 3.3%yoy. A 0.2% monthly rise would be consistent with the Fed holding but if it tips over to 0.3%mom it will increase pressure on the Fed to hike next month. Comments by Fed Chair Warsh at the annual Jackson Hole Symposium (Friday) will be watched for any clues regarding whether the Fed might raise interest rates but its doubtful he will give much away.

In Australia, the July CPI (Wednesday) is expected to rise 0.8%mom reflecting higher prices for fuel, travel, water, clothing and computers offsetting some fall in electricity prices but because of the base effect of a very strong rise a year ago dropping out it’s likely to see annual inflation fall back to 3.2%yoy (from 3.8%). Trimmed mean inflation is also likely to fall slightly but only to 3.5%yoy (from 3.6%) due to base effects with the monthly increase remaining too high at 0.3%mom. In other data, expect just a 2.5% rise in June quarter construction (Wednesday), a 1% rise in June quarter business investment and a 0.7%mom rise in July household spending (both due Thursday). The minutes from the last RBA meeting (Tuesday) are likely to reiterate the RBA remains hawkish and biased towards another rate hike.

The Australian June half profit reporting season will wrap up with about 85 major companies reporting including Bendigo Bank, Woodside, Woolworths, Qantas, South32 and Harvey Norman.

Outlook for investment markets

Global and Australian share markets are likely to remain volatile with the lack of any resolution to the Iran War and hit to global oil supplies, stretched valuations, sticky inflation, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession avoided and strong global profit growth and likely rate cuts next year.

Bonds are likely to see returns around running yield or a bit less.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home prices are expected to fall around 7% top to bottom, of which they have already done around 2%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although a move to Fed hikes may limit this. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 21 August, 2026 appeared first on AdviserVoice.

Global share markets mostly rose over the last week helped by good earnings results and some moderation in expectations for Fed rate hikes. US and Eurozone shares rose to new record highs and Japanese shares also rose. The Korean share market has broken its down trend after long positions were washed out into a 39% fall, with a similar story in semi conductor stocks. Chinese shares fell slightly though.  Despite the positive global lead Australian shares fell around 1.7%, which was partly a correction after a 5.6% rise in the prior two weeks left them overbought but earnings reports are off to a mixed start with worries about slowing housing finance commitments weighing on the banks and sharp falls in industrial, property and material shares also weighing on the market. And of course, the Australian share market doesn’t have much exposure to the AI related stocks that are back in favour again.

Bond yields were flat to up over the last week. Metal and gold prices fell slightly, but iron ore rose slightly. Bitcoin fell slightly and is managing to hold above support around $US60,000 but has yet to confirm the latest crypto winter – which has seen a 53% fall from the high in October last year – is over. While the $US rose slightly the $A was little changed.

Oil prices had another bounce as there is still no deal to re-open Hormuz (to get up back to where we were before the War started), let alone regarding Iran’s nuclear ambitions (which was the key point of the War in the first place).

While there is still no resolution to the Iran/Hormuz impass, our base case remains that oil prices will stay in a $US70-100 range with Iran preventing it going lower and the US moving to try and calm things down whenever it gets above $US100. While shipping through Hormuz remains depressed, reports from US sources suggest that it is helping more shipping get through (with transponders turned off), but this is unclear. The risk remains that there will be no sustainable peace deal, the flow of oil out of the Middle East remains down 10-15% on normal levels and that we will have to face higher oil prices as reserves run down. This risk may escalate if Trump determines he has got nothing to lose by going a lot harder on Iran, maybe after the midterm elections.

The next chart highlights the slump in the supply of oil since the War began. The global economy has been able to weather this by running down reserves which had built up ahead of the War with a large spike in supply and by some cutback in demand. Note though that some the fall in demand shown in the chart reflects countries like China cutting their purchases of oil as they dipped into reserves so may exaggerate the true fall in oil use. There was a bounce in supply with the brief reopening of Hormuz but there is a limit to how long the world can dip into reserves.

On the geopolitical front another issue to watch is the whether the escalation in the Russia/Ukraine war, marked by increasing attacks in Russia, leads to an aggressive Russian response like a “provocation” of NATO. Ukraine has been increasingly successful in bringing the war into Russia by attacking its energy industry and more than 20 Wildberries warehouses (which is similar to Amazon) to deprive it of export revenue and bring the war home to ordinary Russians. Ukraine’s aim is to bring Russia to talks but Russia may react by provoking NATO to try and get Europe to put pressure on Ukraine. Russia is unlikely to ultimately succeed but it could still briefly unnerve investment markets.

Benign July US CPI means less pressure on the Fed for a rate hike (for now). The core CPI rose an as expected 0.2%mom seeing the annual rate drop back to 2.5%yoy. Producer price inflation also fell but key components were a little bit stronger. Together this implies that the more important core private final consumption deflator will also rise around 0.2%mom and remain at 3.3%yoy. This is still too high but key Fed officials have nominated 0.2%mom or less as required to stay on hold so along with mixed jobs data and benign wages growth means that the Fed will probably stay on hold at its September meeting with the money market’s probability of a hike then dropping to 32%. However, it’s a close call though as projections for the core PCE are running around 0.24% unrounded so it could easily click up to 0.3%mom which is too high for many Fed officials and in any case there is another round of inflation and jobs data before the next Fed meeting. The money market continues to fully price in a hike by year end.

In Australia, the RBA left rates on hold as widely expected, but it signalled a clear tightening bias. Softer than expected readings for underlying inflation, jobs and house prices enabled it to remain in wait and assess mode. But it doesn’t see inflation back to target until late next year, sees the risks as being on the upside to this with Governor Bullock noting that it will raise rates further “if required”, that its “thinking very hard about when to raise” rates and that it only considered a hold or a hike in rates at the August meeting, not a cut. Of course, this could just be jawboning but it’s clear the RBA’s tolerance for more upside disappointment on inflation is low. And rightly so, as the credibility of the inflation target and the RBA is now at risk.

Against this background we expect another RBA hike by year end, possibly in September but probably in November, taking the cash rate to 4.6% as underlying inflation is likely to take too long to fall back to target and the RBA will need to do more to reinforce its credibility. The money market is now seeing a 56% chance of another hike by year end, albeit this is bouncing around with the oil prices.

After spiking to around $2.10 a litre in early August on the back of the removal of the final half of fuel tax relief along with a spike in oil prices petrol prices in Australia have fallen back to around $2 a litre – well above their pre-War levels. They are now around roughly where you would expect them to be given the level of world oil prices.

This leaves the weekly petrol bill for an average Australian household (of $70) at the high end of the range from the last five years, excluding the March high ($90.3). It’s about $8 a week above where it was over the year prior to the War.

The roller coaster ride in US tariff revenue. Last year tariffs were the big story globally as Trump ramped them up into the so-called Liberation Day in particular. This saw custom duty revenue push above $US30bn a month in the second half of last year. But it’s gone negative this year as the Supreme Court ruled many of the tariffs illegal and so the US Government has had to pay out refunds. New “forced labour” tariffs of 10% and 12.5% depending on the country and soon to be announced “excess capacity” tariffs – both under a different laws – will see tariff revenues bounce back but probably only to around $US20-25bn a month.

16th August marks the 49th anniversary of Elvis leaving the building (or so I was told) so here’s my new favourite Elvis song Spinout again. And from a decade later a new take on his last hit while he was alive, Moody Blue.

Major global economic events and implications

US economic data was mostly consistent with solid growth. Small business conditions rose and jobless claims remain low, but existing home sales remain weak.

The US earnings reporting season has now seen more than 90% of S&P 500 companies report with around 87% exceeding expectations. The consensus expectation for earnings growth has now risen to 33%yoy. After adjusting for one off asset revaluations at Alphabet and Amazon its now blown out to 50%yoy. Earnings growth is being led by energy and tech companies. Capital spending by the top five hyperscalers has now been revised up by around 50% and while it initially caused some concerns, those concerns appear to have faded for now.

Eurozone and Japanese earnings growth is also up strongly.

Chinese inflation fell more than expected in July with CPI inflation of just 0.5%yoy and core inflation to just 0.9%yoy. With the Chinese economy continuing to run a huge saving rate with significant excess capacity, inflation is unlikely to be a problem and the old saying that “whatever China exports it deflates” remains valid. EV’s are an obvious example. China continues to require more policy measures to encourage its consumers to consume.

Australian economic events and implications

The July NAB business survey saw a slight improvement in business conditions, but confidence remained soft. Overall conditions look softish but there is no sign of collapse.

Meanwhile, the NAB survey showed that capacity utilisation rose and cost and price pressures all rose with labour costs rising to their highest since 2023 on the back of the latest rise in minimum and award wages. With these measures remaining above 2024-25 levels and even more above those seen in the pre-pandemic years it points to ongoing inflationary pressures.

Housing finance commitments fell 5% in the June quarter as rate hikes, tax hikes on investors and poor buyer confidence hit. As would have been expected given the tax changes, finance commitments to investors (-10%) fell more than to owner occupiers (-2%), but there is likely further falls ahead as the Budget was only in the middle of the quarter and reports from the major banks indicate a 15-20% slump in mortgage applications since May (with one report of a 28% fall from investors). This is consistent with other indicators of a downturn in the property market. Fortunately, finance commitments for dwelling construction still rose for now.

Average weekly earnings for full-time adult ordinary time workers slowed to 3.7% in the year to May its lowest since 2022. This measure is impacted by compositional change in the workforce and so tends to exaggerate the rate of wages growth for a worker doing the same job at the same level. This is best measured by the Wage Price Index and its running at 3.2%yoy. Whatever, it is both are running below inflation which was 4% over the year to May and highlight the slide in living standards. While the simplistic solution is to just force through higher wages growth this risks higher price rises unless it’s backed up by stronger productivity growth. So, the key is for government to undertake a round of productivity enhancing reforms of the sort economists have been talking about for years – deregulation, smaller government, tax reform, etc – to enable wages to rise at a faster pace without generating more inflation. I live in hope!

The gender pay gap remains, but at least its narrowing. The next chart shows that an average male employee still earns 38% more than an average female employee – see the dark blue line. Of course, this partly reflect males working more hours than females. If we compare full-time adult ordinary time earnings males earn 12.8% more than females – the blue line. The big factors here are likely to be women being disproportionately represented in roles and industries (like in accommodation, food services, retail and health care) that pay less than in the roles and industries that men are disproportionately represented (like mining, utilities, finance and insurance) and womens’ careers being disrupted by child bearing.

Its early days in the Australian June half earnings reporting season with only about 22% of major companies having reported. The consensus expectation is for 2025-26 earnings growth of 12%. However, strength is likely to be narrowly based on a rebound in mining sector profits and solid growth for financials with profits in the rest of the market only likely to see growth of 2.5%. Forward estimates have been falling recently reflecting the impact of rate hikes and cost pressures. So far banks have been under pressure on concerns about slowing housing finance and Seek fell in response to a slowing jobs market but others like AGL saw gains. Just bear in mind too that there is a tendency for companies with good results to report early so results may soften over the next couple of weeks.

• So far beats are running above misses with 33% of results surprising consensus earnings expectations on the upside, but this is less than the norm of 40%, and just 25% have surprised on the downside which is less than the norm of 41%. But its early days.

• 70% of companies have seen earnings rise on a year ago, and this is better than the norm of 56%.
• 64% of companies have increased their dividends on a year ago which is above the norm of 59%, but down slightly from the last reporting season.

What to watch over the next week?

In the US, expect home builder conditions (Monday) and housing starts (Tuesday) to remain soft, industrial production (also Tuesday) to rise modestly and key regional manufacturing conditions and the PMI for August (Friday) to show solid conditions.

Canadian inflation data for July (Monday) will likely show the core measures around 1.9%%yoy.

Eurozone business conditions PMIs for August (Friday) it likely to slow.

UK inflation data for July (Wednesday) is likely to show a core inflation around 2.5%yoy.

Japanese June quarter GDP (Monday) is likely to show reasonable growth of 0.5%qoq after 0.4%qoq in the March quarter with solid gains in consumer spending, business investment and trade a 0.4%qoq gain. July inflation (Friday) is likely to show a rise in core inflation to 1.3%yoy. The Japanese PMI for August (Friday) is likely to remain solid.

Chinese economic activity for July (Monday) is likely to show continuing subdued growth with industrial production up 4.9%yoy, but retail sales up just 1.5%yoy.

Australian wages growth for the June quarter (Wednesday) is likely to be unchanged at 0.8%qoq, resulting in annual growth slowing to 3.2%yoy, however it’s likely to spike in the current quarter reflecting the higher increase in minimum and award wages granted this year by the Fair Work Commission. Consumer confidence for August (Tuesday) is likely to have remained weak given the rebound in petrol prices and RBA hawkishness on rates. Jobs data for July (Thursday) is likely to show just a 3,000 gain in employment after the surprise surge seen in the previous two months with unemployment remaining at 4.4%. The business conditions PMI for August (Friday) is likely to slow slightly with ongoing cost and price pressures.

The Australian June half profit reporting season will continue with about 70 major companies reporting including in the week ahead including JB HiFi, NAB, BHP, HUB 24, Stocklands, Santos, Brambles, Dexus and TPG.

Outlook for investment markets

Global and Australian share markets are likely to remain volatile with the lack of any resolution to the Iran War and hit to global oil supplies, stretched valuations, sticky inflation, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession avoided and strong global profit growth and likely rate cuts next year.

Bonds are likely to see returns around running yield or a bit less.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home prices are expected to fall around 7% top to bottom, of which they have already done around 2%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although a move to Fed hikes may limit this. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 14 August, 2026 appeared first on AdviserVoice.

Share markets were mixed over the last week helped by some pull back in oil prices as the US held back from escalting further with Iran, a rebound in tech stocks and specifically chipmakers from oversold levels and the US Fed leaving rates on hold. However, it was a bit messy with only modest gains in US shares despite strong earnings results, a reasonable gain in Eurozone shares, but falls in Japanese and Chinese shares. The heavily AI exposed Korean share market rose strongly later in the week along with chipmakers helped by optimism that the unwinding of leveraged AI trades (including by a hedge fund called Situational Awareness) may be over or nearing an end. It’s the nature of bull markets to see relatively steady gains but then occasional sharp sell offs as investors who are predominantly long unwind their often leveraged positions. Of course the rebound in chip makers and Korean shares could just be a bear market rally so its best approached with some caution. Despite the global volatility Australian shares rose around 2.5% for the week helped by lower than expected inflation adding to expectations that the RBA will leave rates on hold at its August meeting. Gains were led by IT, health, telco, retail and property shares.

Bond yields mostly fell slightly, but as can be seen in the next chart remain in a rising trend. Copper and gold prices rose slightly but iron ore prices fell slightly. Bitcoin was little changed although it remains shaky and yet to confirm that its latest crypto winter is over. It was helped by a slightly softer $US which also saw the $A rise slightly.

Oil prices intially fell sharply early in the past week following Trump’s latest TACO (with the US holding off on further escalation and Trump talking again about a “good chance” of a peace deal) and easing in hostilities but then reversed some of its falls as hostilities resumed, but it still fell over the week.

The combination of high and rising oil prices, ongoing pressure on central banks to raise rates, a rising trend in bond yields and worries about an AI bubble amidst stretched valuations leaves shares at high risk of another correction as we come into the seasonally weak months of August and September. Of course, just as Australian shares didn’t get much benefit on the way up in the AI boom they may not fall as much if and when it does really start to unwind. That said, we remain a bit sceptical that we are at the peak of the AI story just yet as related capex has a way to go and growth in demand for AI is real.

The latest de-escalation and re-escalation in the Iran War seen in the last week just highlights the mess Trump has got himself into with Iran. While he clearly wants to TACO – with key munitions running low, uncertainty about whether more strikes on Iran are achieving anything along with sensitivity about rising gasoline prices and bond yields  – Iran is not so willing to play ball. And so the War continues with more attacks on energy infrastucture and Saudi Arabia joining strikes on Iran, the Strait of Hormuz remaining largely closed and uncertainty about the reliability of Saudi shipping through the Red Sea.

Another peace deal remains our base case with oil perhaps in a $US70-100 range with Iran preventing it going lower and the US moving to try and calm things down whenever it gets above $US100 as happened a week ago. On the latter Trump remains under immense pressure politically as Americans care most about inflation and affordability and not so much the Iran War which is just adding to inflation concerns – see the next chart. However, the risk remains that there will be no sustainable peace deal, the flow of oil out of the Middle East remains down 10-15% on normal levels and that we will have to face ever higher oil prices as reserves run down. This poses ongoing upside risks to inflation and downside risks to economic growth.

This brings us to inflation and rates where the messages over the last week were mixed, but with more of a bias to modestly higher rates:

• The Fed left rates on hold but poor communication is seeing it lose inflation fighting credibility. While relatively benign inflation readings for June gave the Fed cover to leave rates on hold at 3.5-3.75%, which it did, the lack of clear guidance on how the Fed will react, three dissents in favour of a rate hike and the ongoing threat to inflation from higher oil prices is starting to see the bond market fret more about inflation and what the Fed might do with rates. While new Fed Chair Warsh reiterated the Fed’s commitment to the 2% inflation target, this was undermined by a failure to clearly articulate how the Fed would get inflation back to target and what the target actually is along with a misrepresentation as to why bond yields had been trending up. In terms of the latter, he seems to think the bond market is doing some of the Fed’s job for it, which may be partly true but more importantly the rise in yields appears to reflect increased uncertainty about the Fed and an assessment that the Fed will need to raise rates. This is consistent with pipeline inflation pressures from energy and other costs remaining elevated.

• Absent better inflation data in the next seven weeks the Fed will probably have to hike in September with the money market now seeing a 64% chance.

• In the UK, the Bank of England left rates on hold at 3.75% and sounded a bit dovish noting labour market weakness and limited second round effects from oil so far. However, the vote was 6 to 3 in favour of holding verses hiking.
• The Bank of Japan also held at 1%, but revised up its economic growth forecasts, flagged the risk of underlying inflation exceeding its target and indicated that it will continue to raise rates. Another hike is likely by October.
• Money market expectations still lean towards higher interest rates from major central banks although not dramatically so.

• In Australia, lower than expected inflation for June provided relief with the RBA likely to hold in August – but it might just be a false dawn. June inflation fell to 3.8%yoy helped by a 10.9% fall in fuel prices and underlying or trimmed mean inflation remaining at 3.6%yoy. June quarter trimmed mean rose to 3.6%yoy too from 3.5%yoy in the March quarter but was materially lower than the RBA’s expectation for a 3.8% rise providing hope that inflation may have peaked.

• The combination of lower-than-expected inflation along with weaker than expected jobs and housing markets provide scope for the RBA to remain in wait and see mode and so we now expect the RBA will leave rates on hold at its August meeting. We are not as confident as the money market though which sees a less than 1% chance of a hike – we would put it at 30%! However, the RBA is likely to retain a hawkish bias and we continue to expect one further hike by year end because: trimmed mean inflation at 3.6%yoy is still too high with no clear evidence of a downtrend in monthly data; second round impacts of the oil price rise are still in the pipeline with oil and petrol prices up again; housing related costs are still trending up; there are still more items with inflation greater than 3% than less than 2%; and the RBA needs to be more cautious than it was in the last rate cycle because after five years out of six with inflation above target there is now a greater risk of the inflation target losing credibility.

• Out of interest while demand side factors likely drove the bulk of the rise in underlying inflation through 2025-26, supply side cost pressures are now elevated as indicated in our Pipeline Inflation Pressure Indicator for Australia threatening to keep inflation elevated.

On the cost front – petrol prices in Australia look headed to around $2.10 a litre if the Government follows through with its plan to end fuel tax relief on 2^nd August. They have already rebounded to $1.95 a litre from the 30 June low of around $1.53 a litre reflecting the 16 cents a litre from the halving of the 32 cents a litre fuel tax cut from 1 July and the flow through of the rebound in global oil prices. If fuel tax relief ends as scheduled, then petrol prices will rise around another 17 cents a litre (which is the remaining 16 cents a litre along with a 1 cent CPI adjustment). This will push up headline inflation again as well as the cost of the average households’ weekly fuel bill by around $20, although its still well below the levels reached in March.

Vale Bill Evans, former Chief Economist of Westpac. I first met Bill in 1991 soon after he was appointed to the Chief Economist role at Westpac and got to know him on the ABE committee. I quickly learned to highly value his well-reasoned and invariably entertaining insights, particularly in terms of where the RBA was headed. Back in 2011 I was thinking of changing our view on interest rates to be that the next move would be down rather than up which was the consensus at the time – but Bill beat me too it and was completely right! Being with Bill on a panel of economists always led to excellent debate and great fun. I miss him.

Major global economic events and implications

US June quarter GDP growth slowed to just 1.5% annualised but this was due to detractions from trade – as data centre capex sucks in tech imports, a bit like in Australia – and inventories with strong growth in investment and consumption.

Monthly data showed continued solid growth in personal spending, strong growth in capital goods orders and shipments, a slight pickup in home prices but softish consumer confidence and a deterioration in consumer perceptions of the jobs market. Jobless claims remained low.

Meanwhile, US core private final consumption inflation data for June edged down to 3.3%yoy from 3.4% consistent with more benign CPI data already released – but it remains too high.

The US earnings reporting season has now seen around 60% of S&P 500 companies reports with around 87% exceeding expectations. The consensus expectation for earnings growth has now risen to 27%yoy (after adjusting for one off asset revaluations at Alphabet which had blown it out to 38%yoy). Earnings growth is being led by energy and tech companies. So far investors appear increasingly wary though of the AI capex spending boom though.

Eurozone June quarter GDP rose a stronger than expected 0.4%qoq with annual growth improving to a 1%yoy. Spain saw growth of 0.7%qoq with Germany, France and Italy all at 0.2%qoq. Unemployment was flat at 6.3% in June, with May revised up from 6.2%.

Japanese economic data was mixed with strong growth in industrial production and low unemployment but a fall in retail sales. Inflation in July in Tokyo rose to 2%yoy.

Chinese official business conditions PMIs fell in July but are just bouncing around in the same range they have been for the last few years – although services sector conditions might be breaking lower. The July politburo meeting suggests some incremental step up in fiscal support for the economy might be on the way.

Australian economic events and implications

Housing credit growth for June was little changed. It has slowed from its highs, but a further slowing is likely as past rate hikes hit and the Budget tax changes push many investors to the sideline, but its early days yet. Reports from NAB of a 15% fall in home loan applications points to a further slowing ahead as it will take a while to show up in actual housing credit data. Business credit growth remains solid picking up to 10.8%yoy with total credit growth rising to 8.5%yoy. No evidence of a collapse in the economy here – well not yet anyway!

Home price falls accelerated in July. Cotality’s monthly home price data for July won’t be released till Monday, but its daily indexes through to the end of July show a further acceleration in the pace of decline to 0.9%mom for the five big capital cities. This was led by Sydney (-1.4%mom) and Melbourne (-1.2%), Brisbane (-0.6%) and Adelaide (-0.2%) are now going negative with Perth (+0.1%) looking like it is too. The combination of higher mortgage rates, tax hikes on investors, poor confidence and poor affordability are the main drivers. The likely move by the RBA to leave rates on hold at its August meeting will come as a relief but it’s not likely to be enough to arrest the fall in prices just yet as the RBA is likely to retain a tightening bias and we think that it will hike again in November. Overall, we expect a top to bottom fall of 7% in national average home prices, of which they have currently fallen about 2%. Rate cuts next year should start to support property prices, but not till the June quarter next year.

One source of support preventing a deeper slump in property prices is the housing shortfall and this is unlikely to change anytime soon despite a rising trend in home building approvals. Approvals bounced 7%mom in June thanks to volatile unit approvals rising 18%mom. The good news is that the trend is up and is now running at 220,000 annualised which is getting closer to the Housing Accord target to build 240,000 homes a year which is necessary to eat into the shortfall. The trouble is that rate hikes, rising costs and project abandonments will likely see it rollover soon and completions continue to run at much lower levels such that the housing shortage will linger longer.

What to watch over the next week?

In the US, the focus will be on jobs data for July (Friday) which is likely to show a 90,000 gain in payrolls, unemployment staying at 4.2% and benign wages growth around 3.5%yoy. The manufacturing conditions ISM (Monday) and the services ISM (Wednesday) for July are expected to show solid conditions around 54 with price pressures remaining elevated. Job openings data will also be released (Tuesday). Another 170 S&P 500 companies will report June quarter earnings results.

Chinese trade data for July (Friday) is likely to show continued very strong growth in exports and imports.

In Australia, Cotality data for July (Monday) will confirm an acceleration in home price falls to around 0.7-0.8%mom (allowing for a smaller fall in regional prices) with Sydney and Melbourne both down by more than 1%, Brisbane and Adelaide starting to fall and Perth looking like it may be doing the same. In other data, expect the Melbourne Institute’s Inflation Guage for July (Monday) to show a bit of a bounce on higher fuel prices, household spending for June (Tuesday) to rise 0.1%mom and the trade deficit for June (Thursday) to fall to around $2.6bn.

The Australian June half profit reporting season will start to get underway with about 12 major companies reporting including AMP, Resmed and Nick Scali. Consensus expectations are for 2025-26 earnings growth of 12%. However, strength is likely to be narrowly based on a rebound in mining sector profits and solid growth for financials with profits in the rest of the market only likely to see growth of 2.5%. Forward estimates have been falling recently reflecting the impact of rate hikes and cost pressures partly due to higher oil prices so guidance will be watched closely in terms of whether profit expectations will be reduced further.

Outlook for investment markets

Global and Australian share markets are likely to remain volatile with the risk of another correction given the resumption of the Iran War and surging oil prices, stretched valuations, sticky inflation, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI and whether there is an AI bubble. However, returns should still be okay for the next 12 months as a whole thanks to continuing economic growth with recession avoided and solid profit growth.

Bonds are likely to see returns around running yield or a bit less.

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

Australian home prices are expected to fall around 7% top to bottom, of which they have already done around 2%, out to the June quarter next year as a result of poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and poor confidence.

Cash and bank deposits are expected to provide returns around 4-5%.

The $A is likely to rise reflecting the wider interest rate differential to the US, although a move to Fed hikes may limit this. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 31 July, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• Despite rising GDP per person, measures of happiness have been flat to falling in western countries including Australia.
• Key drivers are likely to be rising expectations, the rise of social media and falling housing affordability.
• It may be driving the rise of extreme political parties.
• Some suggest we are on an “hedonic treadmill” and want a broader policy focus on something like Gross National Happiness, but by suppressing individual freedom and achievement this could in turn depress happiness.

Introduction

The pursuit of happiness is at the centre of our existence. Along with life and liberty it’s even a central idea upon which the US was founded. And rightly so because happiness is good for us – happy people live longer, are healthier, more resilient, more creative, better leaders and more sociable. And happy countries are less likely to wage war with other countries.

This is where economics comes in. The basic “economic problem” which economics is focussed on solving is: how to maximise utility or satisfaction when human wants are unlimited but resources available to satisfy those wants are limited. Of course, utility is basically happiness, so economics is all about happiness. To borrow from the Dalai Lama, it may be said that economics is really the “art of happiness”. But in the absence of definitive measures of happiness, economists long assumed that consumer spending per person or GDP per person are good proxies which ultimately led economics down a path of focussing on material wellbeing.

The problem is that over the last two decades, despite rising measures of material well-being, measures of happiness have been flat or falling in many developed countries. Indeed, the decline in happiness may be contributing to the rise in support for populist more extreme political leaders, like Trump in the US, and parties like in Australia with One Nation.

Material prosperity has surged

The 19th century saw the start of rapid global economic growth. This really took off in the 20th century as innovations such as electricity, the internal combustion engine and silicon chips came together to rapidly boost productivity. Consequently, real income or Gross Domestic Product (GDP) per person surged.  This in turn led to a massive rise in material prosperity, eg, with: big climate-controlled homes; high speed affordable travel; a high quality and variety of food; a huge array of goods; much longer lives; and instant communication & entertainment. While living standards in Australia may have fallen in the last five years, Australians are substantially better off materially compared to 25 or 50 years ago (see here).

But happiness has been stagnant in recent decades

The next chart compares income and happiness – as measured by surveys of how people see the quality of their lives. People in rich countries are mostly happier than those in poor countries. According to the 2026 World Happiness Report Finland ranks #1 as the happiest, Australia ranks #15 with the US at #23. Lebanon, Zimbabwe and Afghanistan are at the bottom. However, there are diminishing returns to income. At lower levels, extra income can have a big positive impact. But for countries beyond a certain level (around $US50,000), extra income has little impact. Eg, income levels in Switzerland are nearly double NZ but happiness is the same.

What’s more, despite a huge surge in material prosperity there is little evidence that happiness levels in developed countries have improved in the last fifty years. This is illustrated in the chart below for the US which shows the percentage of people who say they are “very happy”, versus real GDP per person. As income has gone up, happiness has gone down.

It’s a similar for Australia – a rising trend in income but falling happiness.

In general, the 2026 World Happiness Report finds that several western countries have seen flat to declining happiness over the last 15 years.

Other findings from the happiness studies are as follows:

• Rich people are happier than poor people, but people compare themselves to others (“keeping up with the Joneses”) so if average incomes rise, they may be no happier.
• Younger people in anglo countries are the least happy. This appears due to the rise of social media driving more anxiety and depression.
• Physical and outdoor leisure, shopping, reading books, seeing relatives, listening to music and attending sporting and cultural events are associated with higher happiness. Time on the internet is not – the higher the rate of social media use the lower the level of happiness.
• Freedom to make life choices contributes to happiness.
• People adapt to their situation: evidence shows we are born with a genetically pre-set level of happiness to which we return to after good events (like winning the lottery) and bad (like having an accident).

Why has happiness fallen?

Explanations for the declining trend in happiness over the last twenty years include: increasing stress associated with the rising complexity of life (e.g. more choices); increasing pressure to “keep up with the Joneses”; rising expectations; falling housing affordability; the rising use of social media contributing to a decline in real human interaction and magnifying grievance and feelings of inadequacy. In particular, some have claimed that most people are on an “hedonic treadmill” of working ever harder to attain material wealth in the belief this will make them happier only to find it doesn’t but resolving to work even harder!

Why not ditch GDP for Gross National Happiness?

These findings present a challenge for economists. If GDP, income and consumption are positively correlated with happiness, then policies to boost economic growth will boost happiness. But, if not, this may be misplaced so some argue economic policy needs to be refocused on broader measures of wellbeing such as Gross National Happiness. This would mean a radical change in economic policy with proposals to boost happiness like: taxing or banning excessive work; re-distributing more income and wealth (because inequality leads to envy and keeps people on the “hedonic treadmill”); reducing the focus on competition and rivalry; spending more money on public goods such as parks; refocussing on community; limiting advertising to information to avoid creating demand for stuff we don’t need; and regulating access to social media.

However, in reality it’s never that simple and there are good reasons to be sceptical of proposals for government policy to target happiness:

• Nationally determined concepts of happiness could be used to justify religious or ethnic persecution and to advance authoritarian aims.
• Just because we get used to something doesn’t mean we should stop doing it. Rising material wealth may not permanently boost happiness beyond a certain level as we adapt to it. But just because the huge increase in healthy lifespans or overseas holidays hasn’t boosted happiness does not mean we should cut health spending & ban travel.
• While material progress may not be boosting happiness, it is doubtful stagnation will either. Curiosity and the desire to advance are fundamental to humanity. Policies to supress them may reduce happiness, by taking away satisfaction derived from achievement.
• Restricting choice in favour of officially mandated happiness guidelines may actually reduce happiness as evidence suggests that freedom to make life choices contributes to happiness.
• Finally, we are partly dealing here with the outworking of success including the rise of social media. Affluence has given people in rich countries the time and money to think about things which can sometimes make them less happy (“too much time on their hands!”) Finding better ways to live with the success, including social media – a bit like the rules around driving cars – is better than reversing it.

There is a danger in trying to legislate for happiness. There is nothing new in the concept that material wealth beyond basic needs won’t lead to lasting happiness. Most religions have long been pointing it out. Buddha observed that most human suffering comes from desire (the Four Noble Truths) and this has to be controlled (with The Eightfold Path) to achieve happiness.  But seeking happiness and enlightenment is up to individuals, not the state (or government). Maybe as Thomas Jefferson implied, happiness is something we have to “pursue”! And the state’s role is to enable that pursuit, while protecting the rights of all other citizens to the do the same.

By Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP

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