The deal provided a boost for global share markets with US shares up 0.9% for the week albeit with a more hawkish Fed limiting the gains, Eurozone and Japanese shares reaching new record highs and Chinese shares also up. Australian shares were helped by the positive global lead but only rose around 0.1% for the week not helped by a fall in BHP after it announced a project cost blow out. Gains on the ASX were led by health, finance and retail shares but these were largely offset by falls in energy, utility and telco shares. Australian shares remain relative underperformers so far this year as RBA rate hikes, worries about the impact of the Iran war and Budget tax changes have impacted.

Bond yields fell in the last week helped by the further fall in oil prices. Iron ore prices were flat but copper and gold prices fell as did Bitcoin and the $A, as the $US rose on the back of a more hawkish Fed.

The US/Iran deal is good news and likely removes a worst case stagflationary scenario, but it could all still flare up again. The deal basically extends the ceasefire by 60 days with flexibility to extend it further, with a phased reopening the Strait of Hormuz and removal of sanctions on Iranian oil with negotiations to commence towards a final agreement over Iran’s nuclear program in return for the release of frozen Iranian assets and establishment of a $US300bn rebuilding fund. Both sides have an incentive to support the deal and in the near term this supports lower oil prices and removes a big risk hanging over the global economy. However, Iran’s nuclear program is still not fully resolved (yes it reiterated that it will never produce nukes but its been saying that for years), it retains a large stockpile of missiles and retains an ability to support its regional proxies like Hezbollah and Hamas. All of which suggests that we are back where we were before the War started with nothing resolved. If anything, Iran is now stronger having shown it can easily stop ships through the Strait of Hormuz. So it all begs the question – what has been achieved despite the huge cost of the War? It does look like Iran won. And it could all flare up again after the mid-term elections are out of the way!

The backdown on Iran coming on top of the US backdown in its trade war with China – highlights perceptions that its in relative decline and lacks the stomach to follow through to complete victory. Which in turn is consistent with increasing geopolitical instability as the US is in retreat as the world’s cop. But of course, that’s a separate issue!

Back to oil prices – in the short term further declines may be limited as a deal was largely already priced in and it will take a while for Middle East energy production and flows through the Strait to return to normal and markets are likely to price in a risk premium to allow for the risk it could all flare up again. So global central banks are likely to be wary of relaxing too much regarding the threat to inflation. However, past oil price shocks have eventually been followed by a big fall in prices as higher oil prices encourage more supply and kill more oil demand and this time is unlikely to be any different.

The peace deal may not necessarily lead to a further fall in Australian petrol prices just yet – much depends on what happens to the fuel tax cut. At around $1.64 a litre they are below where they were before the War started! This reflects the $0.32 fuel tax reduction that is scheduled to end this month, implying a rebound to around $1.96 a litre if the tax cut is reversed. But as the decline in global oil prices over the last month gradually flows through the petrol price is likely to settle around $US1.75. In other words, up from pre-War levels but not significantly so and in the range of the last few years. Of course, it the fuel tax cut is continued petrol prices could drift another 10-20 cents or a litre lower from here as the oil price fall flows through. Economics suggests that the fuel tax cut should end as scheduled – as it adds to the Budget deficit, will only boost spending when the RBA is trying to slow it and there are better ways to help those who need it. But the Government is under pressure from One Nation promising to halve fuel excise for 3 years.

While there was good news on the US/Iran conflict, the past week also saw a further drift towards higher interest rates by central banks.

• The Fed under new Chair Warsh left rates on hold at 3.5-3.75% as widely expected, but its message was clearly hawkish. The median dot plot of Fed officials interest rate expectations moved up with half now expecting a hike this year and half a hold, the easing bias was dropped from the post meeting statement, the Fed’s inflation forecasts were revised up to be well above target and the statement ended with a commitment to “deliver price stability.” As a result, the US money market now sees a hike by September and another one by April. So much for earlier expectations that Trump appointee Warsh might deliver on the President’s desire for a rate cut – that has been made impossible by the combination of the tariffs, the energy shock and policy stimulus leading to higher inflation making it impossible for Warsh to convince Fed committee members of the case for a cut even if he wanted to. Meanwhile, Warsh is implementing big changes at the Fed including a briefer statement and no clear guidance – which could mean increased volatility in money market expectations and financial markets as markets have to work it out for themselves.

• The Bank of England left rates on hold at 3.75% but with a 7/2 hold versus hike vote. Its commentary was hopeful of inflation returning to target without another hike, but the money market still sees a hike this year.
• The Swiss, Swedish and Norwegian central banks all left rates on hold but the last two had a tightening bias.
• Central banks in the Philippines and Indonesia raised their policy rates.
• The Bank of Japan raised its policy rate by another 0.25% taking it to 1% and flagged more hikes ahead.
• In Australia, the RBA provided no surprises and left rates on hold as three rate hikes in a row and signs of softer demand growth provided scope to pause and assess. However, this should not be seen as the top with the Reserve seeing the growth slowdown as what is needed, underlying inflation still rising in line with its forecasts, inflation still being too high and likely to remain so for some time and noting that its prepared to hike further if required. What’s more while the US/Iran peace deal is good news the RBA is likely to remain wary of the second-round flow through to inflation from the oil supply disruption that “will take some time to resolve”. We are continuing to allow for a further rate hike in August and have another one pencilled in for November reflecting the still rising trend in underlying inflation and risks that it will take longer to control.

Our view on shares hasn’t changed and we continue to see them providing positive returns this year, albeit with more volatility. The combination of sticky inflation, an upwards drift in central bank interest rates, worries about an AI bubble, huge US IPOs, political uncertainty around the US mid-terms and lingering Iran risks even with the deal are likely to continue to result in a volatile ride with a high risk of yet another correction. But continuing economic growth, solid profit growth and Trump likely to pivot somewhat to more consumer-friendly policies ahead of the mid-terms should result in okay overall returns.

In Australia, the Federal Government announced carve outs for its capital gains tax and trust changes. These basically increase the number of small businesses eligible for a 50% CGT concession by raising the revenue threshold from $2m to $10m, allow start ups meeting an “innovative business” definition with less than $50m revenue to retain the 50% discount, exempting donations from trusts from the 30% minimum tax and exempting testamentary trusts from the 30% minimum tax rate. The changes are welcome and should have been included in the Budget announcement to head off a lot of criticism. However, it’s debatable whether the changes go far enough. In particular the rules around innovative start-ups look very onerous with a cap on capital gains which looks too low – particularly once allowance is made for many such startups ultimately failing. And the change to CGT still apply in relation to share investing which by biasing share market investors towards income could mean less capital available for growth stocks. A failure to allow for the smoothing of capital gains for tax purposes unlike the old Keating model will also lead to inequitable outcomes where someone earning the same income as a salary earner but via a lumpy capital gain will end up paying a lot more tax.

Populism taking off in Australia with the continuing surge of One Nation in opinion polls. It began as the Coalition imploded and then more recently has started to threaten Labor too. So, the rise of right-wing populism looks to be coming to Australia even though many thought it might pass us by! As in other countries its drivers appear to be a mix of cost-of-living pressures, perceptions of rising inequality and a feeling that mainstream parties aren’t delivering, all magnified by grievance driven social media for which the populist right and left seem made for. The danger is that many get attracted to simplistic solutions that might appear to be “common sense” only to find years later that they don’t work and only make the problem worse. Sure, immigration needs to be returned to more sustainable levels but cutting visas to just 130,000 a year risks negative population growth as annual departures are double that and going too far on immigration will lead to labour shortages, make it harder to deal with the aging population and decimate our fourth biggest export earner – education. Likewise, it’s common for populist parties to offer all sorts of tax cuts and tax breaks and say it will be financed by slashing government waste only to find that’s easier said than done (just think of DOGE in the US) which can then lead to worse budget deficit blowouts and often even worse inequality. And while it’s not really clear what exactly “monoculture” refers to – eg is it multiracial diversity but with everyone having the same values or really a desired return to a more anglo Australia? – returning to the sort of monoculture of my childhood in the black and white 1960s sounds kind of dull and unappealing after the diversity and dynamism that multiculturalism has brought. It would be a bit like trying to go back to things as they were in the first half of Pleasantville. Without multiculturalism its doubtful we would have a team like the Socceroos. A problem is that it’s hard to separate culture and ethnic background so Australia pushed down the multicultural path with bi-partisan support 50 years and global comparisons would suggest that it’s been very successful. Over the long term the rise of populism including populist responses to it by mainstream political parties risks a less favourable economic environment – less growth, more inflation and more volatility which could weigh on investment returns. See here for a deeper analysis.

Another El Nino. In the last week the Bureau of Meteorology declared an El Nino weather event. This follows the Southern Oscillation Index – which tracks differences in surface air pressure across the Pacific – falling into El Nino territory. It tends to be associated with drier conditions down Australia’s east coast which can lead to higher food prices. But of course, this is not always case and its correlation with Australian agricultural production can be very hit and miss (outside the 1982-83 El Nino drought).

And for Juneteenth Day here’s Galveston – It’s one of the best anti-war songs but the arrival of Union troops there on 19^th June 1865 was a special thing.

Major global economic events and implications

US economic data was mixed as it often is. Retail sales rose solidly in May, and jobless claims continue to remain low.

But US housing starts, permits to build new homes and home builder conditions were all weak.

UK inflation came in weaker than expected at 2.8%yoy in May, with core at 2.6%yoy helping take some pressure of the Bank of England for rate hikes. Against this though services inflation rose more than expected to 3.7%yoy and jobs and wages growth were a bit stronger than expected in the 3 months to April, with unemployment lower.

Japanese inflation rose to 1.5%yoy in May with core inflation remaining at 1.1%yoy.

Chinese economic activity data for May was weak with falls in retail sales and investment along with ongoing falls in property investment, sales and home prices. Extra policy stimulus is likely to remain incremental though.

New Zealand March quarter GDP rose a solid 0.8%qoq or 1.5%yoy with solid in consumption & business investment, consistent with the RBNZ hiking rates next month.

Australian economic events and implications

Population growth in the December quarter slowed to 1.5%yoy. This represents a 412,000 increase in the population over the last year, of which 301,000 was net migration. Net migration is down from the record 556,000 over the year to the September quarter 2023 but remains high. To meet annual new housing demand flowing from population growth and demolitions and rising demand for holiday homes we currently need new dwellings of around 200,000 a year but ideally need something like the Housing Accord’s 240,000 to reduce the accumulated undersupply as well – but we are currently only managing to build around 175,000. So, the housing shortfall will continue.

Taking an average of monthly data for visas and arrivals suggests net migration will remain relatively high for a while yet.

The housing shortage in Australia continues to be evident in very low rental vacancy rates, which points to a high risk of growth in average rents accelerating going forward.

What to watch over the next week?

Developed country business conditions PMIs for June will be released Tuesday and are likely to show some improvement in conditions reflecting the US/Iran peace deal and some pull back in price pressures.

In the US core private final consumption deflator inflation (Thursday) for May is likely to show a further rise to 3.4%yoy from 3.3% and underlying growth in capital goods orders and shipments (also Thursday) is likely to have remained solid.

Canadian inflation data for May (Monday) is likely to show core inflation remaining around 2.1%yoy.

In Australia, CPI inflation for May (Wednesday) is expected to fall 0.4%mom partly reflecting a 15% fall in fuel prices, but this will see annual inflation rise slightly to 4.3%yoy.   Unfortunately trimmed mean inflation is expected to rise 0.3%mom taking it to 3.5%yoy from 3.4% partly reflecting second round effects from the oil shock. In other data expect a 35,000 rebound in employment for May with unemployment falling to 4.4% after oddly weak April data, a 1% fall in job vacancies over the 3 months to May and 0.1% fall in household spending for May (all due Thursday).

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the oil shock assuming the flow of oil quickly resumes but the risk of further falls remains high given uncertainty the peace deal with Iran, still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies ahead of the mid-terms and solid profit growth.

Bonds are likely to provide returns below running yield this year.

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 1% this year and by 5% over the next 12 months 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. A 5% fall is consistent with just another cyclical downswing of which there have been several over the last two decades.

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

The $A is likely to rise as the interest rate differential in favour of Australia widens, 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 endng 19 June, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• After three consecutive rate hikes the RBA left rates on hold at 4.35% at its June meeting.
• However, the RBA retained a tightening bias noting that inflation Is “still too high” and is likely to remain so for some time and that it will do whatever is necessary to achieve its mandate, “including increasing the cash rate further if required”, but with no reference to cutting it.
• We are continuing to allow for a further rate hike in August and have another one pencilled in for November reflecting the still rising trend in underlying inflation and risks that it will take longer to bring it back under control.
• The US/Iran peace deal likely heads off a worst-case scenario in terms of a further hit to inflation and growth – but the RBA is likely to remain wary of the second-round flow through to inflation from still high oil prices and the oil supply disruption that “will take some time to resolve”.

The RBA in wait and assess mode

The RBA’s decision to leave rates on hold at 4.35% was no surprise with the money market pricing in no change ahead of the meeting and all 26 economists surveyed by Bloomberg expecting the same. This followed three consecutive hikes which fully reversed last year’s cuts and taken the cash rate back to the level reached in 2023. The decision to hold was unanimous.

Why the RBA left rates on hold

In leaving rates on hold, the RBA noted that there are signs that the economy is slowing as expected (and required to cool inflation) and that it was appropriate to leave rates on hold as it assesses the response to the three previous rate hikes this year. In this regard it noted that financial conditions have tightened, consumer spending is showing signs of slowing and house prices are falling in some cities. Given all this, pausing to assess makes sense.

Against this though the RBA noted that while unemployment rose in April other labour market indicators are more resilient, business investment is strong, resolution of the War is at an early stage with oil supply issues likely taking time to resolve and maintaining upwards pressure on inflation and most importantly inflation is still too high and is likely to remain so for some time and that some firms are passing on cost increases. RBA Governor Bullock also noted that demand in the economy has to slow to get inflation down and that “unless we get inflation down then ultimately it will lead to higher unemployment.”

All of which suggests that while the RBA has paused its rate hikes, its primary concern remains excessive inflation. This was highlighted in the final paragraph in the RBA’s post meeting Statement where it noted that it will be “attentive to the data” as always but that “it will do what it considers necessary” to deliver on its dual price stability and full employment mandate, “including increasing the cash rate further if required.” Its omission of any reference to cutting the cash rate taken in context with its ongoing concerns about inflation indicate that it retains an inclination to raise rates further.

So, this month’s pause should not be taken as a sign that we are necessarily at the top on rates.

Governor Bullock’s press conference comments basically reinforced the Bank’s concerns about inflation and left the door open for further interest rate hikes if needed.

The money market is still expecting around a 55% probability of another hike in Australia by year end with Australian interest rates expected to remain higher compared to other major countries. This reflects other major countries mostly having inflation much closer to target before the War started, whereas Australia already had an inflation problem which the oil shock has threatened to exacerbate.

We continue to expect a further rise in interest rates

We are continuing to allow for a further rise in interest rates with the next hike likely to come in August as underlying inflation is still trending up with business surveys and the stronger than expected award wage rise this year warning of ongoing cost and price pressures, posing a high risk that inflation expectations will move higher.

• Trimmed mean inflation rose to 3.4%yoy in April and appears on track with the RBA’s forecast for a 0.95% rise in the June quarter taking it to 3.8%yoy. RBA Governor Bullock confirmed this in here press conference.

• The Fair Work Commission’s granting of a 4.75% increase in award wages and 6% increase in the minimum wage from July – impacting around 21% of the workforce – was a higher-than-expected acceleration from last year’s 3.5% increase and along with its influencing effect on other wages points to an acceleration in wages growth this year. As its unsupported by productivity growth which is running around 0.3%yoy, it points to a further acceleration in cost pressures.
• While the NAB business survey and PMI for May showed some easing in cost and price pressures, both show them remaining elevated and running well above pre-pandemic levels.

• The US/Iran peace deal – assuming it’s delivered upon and leads to a reopening of the Strait of Hormuz – is good news but the RBA is likely to remain wary. The deal likely heads off a worst-case scenario in terms of a stagflationary further boost to inflation and hit to growth and should see energy prices fall further. But the fall is likely to be gradual, and the RBA is likely to remain concerned of the second-round flow through to underlying inflation from the supply disruption that will take a while to return to resolve.
• The oil supply shock coming on the back of the 2022 pandemic and Ukraine related supply shocks risks locking in higher inflation expectations. The combination of bigger government, deglobalisation, decarbonisation, increasing defence spending and aging populations are all making the global and Australian economies more inflation prone and the run of supply shocks is only adding to this. Inflation expectations tend to be backward looking, and the longer inflation stays above target – and it now looks like doing so for five of the last six years including the present year – the more people will expect it to stay above target and so for inflation expectations to rise. In the last five years Australia’s headline inflation rate has been above 3% for 44 months or 73% of the time and trimmed mean inflation has been above 3% for 51 months or 77% of the time. The longer this continues the less Australians’ will have faith in the 2-3% target. This will show up in faster wage demands and businesses more inclined to put through price rises more regularly. All of which risk making it harder for the RBA to get inflation back down
• Ideally, the Government could have taken pressure off the RBA in the May Budget by cutting back spending for the year ahead in order to free up capacity in the economy and doing more to help boost productivity. Unfortunately, though Federal spending is projected to remain around 27% of GDP for the next few years, which is well above pre-pandemic levels and in turn implies that public spending overall will remain around 28% of GDP, which is also well above pre-pandemic levels. There were some good moves to deregulate in the May Budget but these will take years to bear fruit and the wind back of tax concessions – around negative gearing, capital gains and trust – amounting to a tax hike will likely be neutral to slightly negative for productivity.

So, to provide confidence that underlying inflation will come back to target in a reasonable time frame and that inflation expectations will remain consistent with the target we are continuing to allow for a further rise in rates, with the next hike likely to come in August and another one pencilled in for November.

Failure to bring inflation back to target in a timely manner will only mean more pain for Australians – but particularly low-income households – facing ongoing cost of living pressures and stagnant/weak growth in living standards. On this I completely agree with the RBA.

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

The post The RBA undertakes a hawkish pause – we continue to expect a further rise in rates appeared first on AdviserVoice.

The past week saw another round of gyrations regarding whether there will be a US/Iran deal to end the war or not driving volatility in investment markets along with mixed US inflation data and the SpaceX intial public offering raising $US75bn, which is the biggest ever IPO. Around mid week shares were under pressure as missile exchanges with Iran ramped up to their highest since the ceasefire started as Trump said he will hit Iran “very hard”, driving oil prices up again. But on Thursday shares spiked as Trump (yet again) said a deal may be signed “in coming days” with tech stocks also buoyed by the successful SpaceX IPO.

For the week this has left global share markets mixed – up slightly in the US but down in the Eurozone, Japan and China. Australian shares rose a solid 2% or so for the week having proven more resilient in the face of US weakness mid-week and possibly getting a boost from talk that the RBA may be at or close to the top on interest rates. Gains on the ASX were led by consumer, property, health and industrial shares. Despite the bounce in the last week, Australian shares remain relative underperformers so far this year as RBA rate hikes, worries about the impact of the Iran war and Budget tax changes have impacted.

We continue to see shares overall providing positive returns this year but expect more volatility. The combination of sticky inflation – not helped by the oil supply shock and AI boom related demand, an upwards drift in central bank interest rates, flagging consumer demand, worries about an AI bubble, huge US IPOs (with $US200bn from SpaceX, Anthropic and OpenAI alone as against only $US77bn raised in the US for the whole of last year), and political uncertainty around the US mid-terms are likely to continue to result in a volatile ride.

Surging capital raising via IPOs are a mixed blessing for shares. On the one hand they add to hype around the market with many wanting to get on board. On the other they suck cash out of the market which can be a drag for future gains. I wouldn’t rely on them as a timing indicator though.

A 10% or so plunge in Korean shares earlier in the week caught a lot of attention. This just looks like a correction after a doubling year to date on the back of booming AI semiconductor demand. Such falls are not unusual after big run ups, but with Korean share valuations still cheap – with a forward PE of 7-8 times – and super strong earnings growth it may have further to go yet assuming the AI boom itself has further to run. The rise could be volatile though.

Bond yields were flat to down helped by news of another Iran deal. Gold and iron ore prices fell but metal prices rose and Bitcoin rose too continuing to bounce around its February low. The $US fell but the $A was little changed around $US0.704.

Trump’s latest claim that a deal is imminent could yet again come to nothing. Iran has proven far more resilient to US pressure than Trump seemed to expect, and it could yet string things out further given sticking points around its desire to toll ships through the Strait, it’s enriched uranium, it’s frozen assets, sanctions & Lebanon.  That said Trump remains under intense political pressure with the mid-term elections approaching to find a way to dress up a deal sooner rather than later and both sides in the recent re-escalation of fighting appeared to be holding their punches with the aim of leaving room for negotiations. So, our base case remains that a deal will be reached leading to a reopening of the Strait.

Expectations of a deal and Trump’s latest claims of a deal being on the way have kept oil prices at the low end of the range they have been in since the War started, with oil futures tracing our a gradual decline into next year. This appears reasonable as in the short term it will take a while for oil production to return to normal and the oil market will price in a higher risk premium for a while, particularly if any deal does not resolve Iran’s nuclear ambitions. That said past oil price shocks have eventually been followed by a big fall in prices as higher oil prices unearth more supply and kill more oil demand and this time is unlikely to be any different – especially with EV demand now going through the roof (even from me!). Of course, if a deal is not soon reached it will pose a major rik to markets.  While the US has been helping ships get through the Strait, with Trump taking of 100 million barrels of oil in recent weeks this is well below the normal flow of 600 million barrels a month. So far the world has been able to get by through the 12-13% cut to global oil production by running down reserves but there is a limit to that.

A deal to end the War and reopen the Strait of Hormuz may not necessarily lead to a further fall in Australian petrol prices just yet. At around $1.68 a litre they are currently around where they were before the War started! This is partly due to the $0.32 fuel tax reduction that is scheduled to end at the end of the month, implying a rebound to around $2 a litre which is just below what current oil prices and the $A imply they should be. Thereafter a gradual return to normal in global fuel markets would imply a gradual fall in petrol prices but they may still end the year above current levels. Unless of course the fuel tax cuts (costing $2.55bn each three months) are extended.

The past week also saw a continued drift towards higher interest rates by central banks. While the Bank of Canada left rates on hold, the European Central Bank hiked rates by 0.25% taking them to 2.25% with its commentary reinforcing expectations for more rate hikes ahead and the Bank of Indonesia raised rates for a second month in a row. The drift towards higher rates can be seen in the next chart.

US inflation likely keeps the Fed on hold for now but a hike later this year remains a high risk. CPI inflation rose further to 4.2% in May on the back of higher energy prices, and core CPI inflation also rose further to 2.9%yoy. The rise in core inflation was fractionally less than expected helped by softer readings in goods prices and likely leaves the Fed on hold in the week ahead. But elevated services inflation, the rising trend in core inflation with the AI boom stacking on top of the tariffs and the oil shock in adding to costs and core PCE inflation looking likely to come in around 3.4%yoy for May after hot components in the producer price index leaves the risk of a Fed rate hike later this year high.

The US money market is pricing in around an 80% chance of a rate hike by year end. Note that the ECB appears more hawkish than the Fed because of a lower starting point for interest rates and a greater exposure to the energy shock.

So Australia is seeming to be less of an outlier now on inflation and rates. Headline CPI inflation in the US at 4.2%yoy is now the same as in Australia. Unfortunately, we still look worse on an underlying basis though as can be seen in the next chart.

The RBA is expected to leave rates on hold at its June meeting this coming Tuesday, but it’s also likely to retain mild a tightening bias given concerns about inflation remaining above target for too long. The three rate hikes in a row this year have taken monetary policy from slightly easy to slightly tight and give the RBA some breathing space to wait and assess the impact of the hikes so far and the impact of the oil supply shock on the economy. The recent run of soft data for employment, household spending, home prices and confidence along with mixed April inflation data also support the case for a hold this month. That said, we expect that the RBA will maintain a tightening bias as underlying inflation is still trending up with business surveys and the stronger than expected award wage rise this year warn of ongoing cost and price pressures, posing a high risk that inflation expectations will move higher. As such we are continuing to allow for a further rise in interest rates with the next hike likely to come in August.

Major global economic events and implications

US economic data was soft. Small business optimism fell in May and existing home sales rose but remain weak. That said jobless claims remain low.

Chinese exports rose a stronger than expected 19%yoy in May helped by a rebound in exports to the US from the low base a year ago, the cut to US tariffs and AI related demand. Imports rose by more with a 27%yoy gain reflecting higher energy prices and suggesting stronger domestic demand.

Chinese CPI inflation was unchanged in May at 1.2%yoy with core inflation slowing to 1.1%yoy, but a further rise in producer price inflation points to some further rise in consumer price inflation ahead.

Australian economic events and implications

Consumer confidence fell back in June and remains at the low end of the range it’s been in for the last three decades or so with rate hikes, Budget tax hikes and the war continuing to depress consumers. The weakness in consumer confidence is warning of weaker spending ahead.

The Westpac/MI consumer survey showed a fall in home price expectations, and consumers continue to see now as a poor time to buy a dwelling.

Consumers also moved a bit more cautious with their savings with an increased preference for bank deposits and paying down debt and less interest in shares and property with more interest in super. This likely partly reflects the tax changes in the Budget which make property and to a less extent shares relatively less attractive compared to super.

Consumer inflation expectations remained elevated at 5.5% in June which is down from their recent high but well above their pre pandemic norm of around 4%.

The May NAB business survey showed unchanged business conditions at below average levels, with a rebound in confidence but to still weak levels. Capacity utilisation fell suggesting a softening in demand though relative to supply which is something the RBA wants to see.

Cost and price pressures eased after the initial response to the oil supply shock but remain elevated continuing to warn of potential inflationary pressures ahead.

What to watch over the next week?

The week ahead is likely to be dominated by central banks with central banks in the US, UK, Sweden, Switzerland, Japan and Australia all meeting to consider interest rates.

In the US the Fed (Wednesday) is likely to leave interest rates on hold and remove its reference to an easing bias. While this will be Fed Chair Warsh’s first meeting as Chair the rising trend in inflation and some improvement in jobs data will mean that he will find little support for a rate cut from Fed committee members with a majority now favouring removing the Fed’s earing bias. Warsh may also move to reduce the amount of policy guidance from the Fed, possibly including discontinuing the “dot plot” of Fed officials’ interest rate expectations, which had been flagging a rate cut this year and next. On the data front in the US expect a 0.2% rise in industrial production (Monday), home building conditions (Monday)) and housing starts (Tuesday) to remain weak and underlying retail sales (Wednesday) to show a solid 0.4%mom rise.

In Europe both the Swedish central bank (Wednesday) and Swiss central bank (Thursday) are expected to leave rates on hold at 1.75% and zero respectively although there is about a 30% chance of hike in Sweden.

The Bank of England (Thursday) is expected to hold at 3.75%, albeit with a tightening bias. British inflation data for May (Wednesday) is likely to remain around 2.8%yoy, with core around 2.5%yoy.

The Bank of Japan (Tuesday) is expected to hike by 0.25% taking its policy rate to 1% as it continues the gradual process of normalising interest rates. A report in the Nikkei indicates it will combine a rate hike with a decision not to further slow its bond buying beyond the March quarter next year. Inflation data for May (Friday) is expected to show a fall to 1.3%yoy though with core inflation around 1%yoy.

Chinese economic activity data for May (Tuesday) is likely to remain soft with retail sales expected to fall 0.6%yoy and investment to fall further.

In Australia the RBA (Tuesday) as noted earlier is expected to leave rates on hold but retain a tightening bias.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the oil shock if the flow of oil quickly resumes but the risk of further falls remains high given uncertainty around the flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies ahead of the mid-terms and solid profit growth.

Bonds are likely to provide returns below running yield this year.

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 1% this year and by 5% over the next 12 months 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 the hit to confidence from the War. As can be seen in the next chart – which shows the percentage decline in property prices from the start of each downswing by month – a 5% fall is consistent with just another cyclical downswing of which there have been several over the last two decades.

Cash and bank deposits are expected to provide returns around 4.3%.

The $A is likely to rise as the interest rate differential in favour of Australia widens. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 12 June, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• National average home prices were flat in May according to Cotality, the weakest since January last year. Prices fell further in Sydney and Melbourne, and the boom time cities of Brisbane, Adelaide and Perth are seeing growth slow.
• The housing shortage and expanded 5% deposit scheme are being offset by rate hikes, low confidence & the Budget tax hikes on investors with a further fall in prices likely.
• We now expect national average property prices to fall around 1% this year (revised from around 3% growth) and to fall around 5% over 2026-27.
• Units and lower end property are likely to hold up better due to the expanded FHB 5% low deposit scheme. The tax changes also favour properties with higher rental yields.
• The combination of a rising long-term trend in rates, poor affordability, the tightening of property tax concessions and a political shift towards lower immigration may mean the 30-year super cycle upswing in prices may be close to over. The housing shortage remains the key sticking point though.
• Asking rents rose 0.6% in May, with annual growth rising to 5.9%yoy as vacancy rates remain low. This is not good for inflation.

Home price cycle turning down

Cotality data shows national average home prices were flat in May, with capital city prices down 0.1%, their second monthly fall in a row. Prices have now fallen 2.1% in Sydney and 2.9% in Melbourne from their November highs. The boom time cities of Brisbane, Adelaide and Perth are also seeing slower growth.

The broad picture remains one of a continuing slowdown since late last year reflecting a combination of rate hikes, poor affordability, depressed buyer confidence partly reflecting the oil supply shock and the Budget changes to exclude new purchases of existing properties from negative gearing and shift to the taxation of real capital gains from the 50% discount approach. Interestingly, up until Budget day the five capital city average prices were up slightly in May with all the monthly fall occurring since then suggesting the tax changes are having a significant impact. Working the other way, the boost from the expansion of the 5% low deposit scheme for first home buyers is showing up in relatively stronger conditions in lower quartile property prices and in units. They are also benefitting from poor affordability pushing buyers into lower price points.

The slowdown is also evident in weak auction clearance rates.

Expect home prices to fall further over the next year

There are two key supports for the property market. First there remains an accumulated housing shortfall – of 200,000 to 300,000 dwellings – that has built up after years of very strong population growth. This is evident in low rental vacancy rates. Second, the expanded first home buyer 5% deposit scheme will help provide support lower priced entry level houses and units. But the bring forward of FHB demand due to the 5% deposit scheme will hit an air pocket at some point, probably next year.

However, despite these sources of upwards pressure on property prices, the Australian housing market is likely to cool further as rate hikes, already poor affordability, the impact of the War and a wind back in property tax concessions impact.

• Rate hikes – the RBA has raised rates three times back to their prior 2023 cycle high. While it’s likely to leave rates on hold this month we expect another hike in August. Rate hikes have usually been associated with some softening in property prices or slower growth. This is because they cut how much buyers can borrow, hit confidence and can boost distressed sales. Of course, this is not always the case as other factors can intervene like the population surge in 2023 which pushed prices up despite high rates but that seems unlikely this time.
• Poor housing affordability – the ratio of home prices to wages and incomes is at record levels. This, combined with rising mortgage rates, is leading to a widening gap between home prices and what an average buyer can afford to pay for a property.

• Poor buyer confidence – confidence has plunged as have perceptions of whether it’s a good time to buy a dwelling. The longer the Strait of Hormuz takes to return to normal the greater the risk of recession & higher unemployment, which could be a big drag on property prices.

• Tax hikes on investors – the move to remove negative gearing from new purchases of existing homes and return to the taxation of real capital gains with a minimum tax rate of 30% is likely to drive a decline in investor demand for housing in the near term. This is because the tax changes mean lower after-tax returns for investors going forward which will mean new investors will demand either lower prices or higher rents or some combination resulting in a higher starting point rental yield to make up for the less favourable tax treatment. This will be reinforced by banks reducing how much they can lend to investors due to their reduced cash flow from the tax changes. Various studies suggest this will reduce home prices by 1 to 5%. Given the risk investor sentiment weakens by more than justified by the tax changes we are assuming a 5% negative impact on property prices with the impact occurring over the next 12 months.

As a result, it’s a bit of a perfect storm for the property market. After 8.9% growth in 2025 we now anticipate a fall in national average home prices of around 1% this year and 5% over 2026-27.

However, this will likely mask a wide divergence between cities and property types. In terms of price to rent ratios adjusted for inflation as a rough guide to whether the market is over or under valued – a bit like the PE for shares – houses are 36% overvalued compared to units at just 9% and so are far more vulnerable to a fall in prices. See the next table. And units are likely to be supported by FHBs using the 5% deposit scheme. Using the same approach – in terms of houses Brisbane, Sydney and Adelaide are the most overvalued and vulnerable and in terms of units Brisbane, Adelaide and Canberra units are the most vulnerable.

Is the super cycle upswing in property prices over?

Since the mid-1990s Australian property prices have been in a long term, or super cycle, upswing. The next chart shows real home prices (average property prices after removing increases in inflation) indexed to start in 1926 at 100 (red line) against their long-term trend (blue line).

Over the last 100 years real property price growth has averaged around 3% per annum which is in line with long term average real GDP growth (which is a rough proxy for real income growth). We can see that real Australian property prices have gone through three major long-term (or super cycle) booms (highlighted with green arrows) and two major long-term busts or weak periods over the last century.

• The first long term boom was in the 1920s and was associated with an economic boom and very strong population growth from the end of WW1 until the early 1930s. See the first circled area in the next chart showing population growth.
• This was followed by a collapse in property prices associated with the Depression, a plunge in population growth and the early years of WW2, with real prices not bottoming until 1943 – maybe after many in Sydney’s Eastern suburbs sold up after the 1942 midget sub attack!
• The second long-term boom got underway after WW2 and ran into the early 1970s supported by very strong economic and population growth (the second circled area in the population chart). This saw real property prices rise from 50% below their long-term trend to be 50% above trend by 1973.

• This long boom ended in the mid-1970s with the economic malaise of the time, a step down in population growth and the high interest rates of the 1980s. Unlike the collapse of the first long-term boom, it saw real house prices churn sideways in a wide range with some strong periods along the way (such as in 1988-89). But because of a 20 year plus churn in real house prices, by the mid-1990s real prices were more than 20% below their long-term trend and little different to where they were in the mid-1970s. This was a great time to get into Australian property!
• This set the scene for the start of the current long-term boom in property prices in the second half of the 1990s, that has taken real property prices from well below trend to around 20% above trend.

The super cycle upswing in real property prices over the last thirty years has been propelled by a combination of:

• the shift from high mortgage rates – they were 17% in the late 1980s/very early 1990s – to low rates of 2-3% a few years ago, which enabled buyers to borrow more and hence pay more for homes;
• the easier availability of home loans with financial deregulation;
• the growth of two income households adding to how much buyers could borrow and pay each other for homes;
• a surge in underlying demand for housing as a result of a surge in population growth on the back of high immigration levels starting around 20 years ago which has continued albeit with a brief pause in the pandemic (see the third circled area in the last chart); and
• some would say the shift to taxing 50% of capital gains from taxing real capital gains in 1999 which combined with negative gearing and high marginal tax rates to boost investor demand for property.

This combined all goes a long way to explain how Australian housing went from cheap in the mid-1990s to expensive in the early 2000s and has stayed there ever since, in fact becoming more so. This can be seen in the surge in house price to wage and income ratios since the 1990s.

The main drivers have been the combination of low rates and an undersupply of property where people wanted to live (big cities). Other countries have had low rates and tax breaks too, but they have kept housing more affordable because of a better supply/demand balance.

The last two long booms or super cycle upswings were bought to an end by Depression and severe stagflation which hopefully won’t be the case this time. However, there are some reasons to believe that the long-term boom in Australian property prices may be close to an end as some of its drivers are starting to fade or have run their course:

• First, the long-term decline in mortgage rates that started in the 1990s and continued to 2020 when mortgage rates hit 2-3% looks to have bottomed. Rates rose in 2022-23, there was a brief and modest fall last year but now they are on the way back up again. For various reasons we now appear to have entered a more inflation prone world which means higher rates. So, the trend to ever lower mortgage rates driving ever higher amounts of money people can borrow enabling ever higher home prices may be over.
• Second, two income families are now the norm and so the boost from the move to this likely doesn’t have much further to go.
• Third, immigration is trending down with the Government forecasting a fall to 225,000 pa, the Coalition talking of 165,000 or so & One Nation talking of 130,000 with an aspiration of net-zero.
• Finally, the tax concessions for investors have been curtailed.

Calls for an imminent end to the property super cycle need to be treated with some caution though. I thought it might be close to over five years ago, but it was extended by a surge in immigration coming out of the pandemic and constrained home building resulting in a chronic undersupply of housing. Another surge in immigration is unlikely, but a 200,000 to 300,000 housing shortage remains. And with home building running around 180,000 a year and likely to slow in response to rate hikes it’s likely to remain well below the Housing Accord target of 240,000 a year which is necessary to meet annual housing demand and eat into the accumulated undersupply. So, at this stage while many of the conditions are falling into place it may be premature to call an end to the home price super cycle boom of the last 30 years until the supply shortfall comes under better control.

What to watch?

The key things to watch with respect to the next 12 months will be interest rates, the Strait of Hormuz, unemployment and investor demand in response to the tax hikes. Several more rate hikes, a sharply rising trend in unemployment and a big drying up in investor demand could result in much bigger price falls than 5%. On the flip side a quick resumption of rate cuts, a quick resolution of the oil supply shock and a subdued investor response could drive stronger property prices next year. Overall, the risks for home prices over the next 6-12 months seem skewed on the downside but note that in the absence of much higher unemployment, forecasts for a property price crash (say a 15-20% fall or more) are likely to be wide of the mark. A crash would require wide scale forced selling by homeowners – but without much higher unemployment forcing homeowners to sell this is unlikely as Australians will do whatever they can to keep servicing their mortgage.

In terms of the 30-year super cycle upswing – many of its key drivers are now fading but the supply shortfall is key. If it closes quickly thanks to stronger supply or a faster fall in immigration, then the super cycle upswing may well be over.

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

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Important note: While every care has been taken in the preparation of this document, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM), AMP Limited ABN 49 079 354 519 nor any other member of the AMP Group (AMP) makes any representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

The post Australian home prices getting hit by rate hikes and tax hikes – is the super cycle boom from the mid-1990s over at last? appeared first on AdviserVoice.

The past week has been dominated by developments around a US/Iran peace deal – but despite some gyrations its looking like a deal is on the way. The week started optimistically with Trump saying “final aspects & details are…being discussed and will be announced shortly”. But this was followed by more strikes on Iran and Trump saying he is “not satisfied”. But the indications are now that a tentative deal has been reached, pending Trump’s sign-off with him saying he is making a “final determination”. This looks like it would reopen the Strait of Hormuz and extend the ceasefire for 60 days during which negotiations regarding Iran’s nuclear program will proceed. Of course, the deal could still collapse with both sides sending mixed messages. Iran’s desire to toll ships through the Strait, it’s enriched uranium, sanctions & Lebanon are sticking points. And a cynic might say the likely deal just leaves us where things were before the War with no progress on Iran’s nuclear ambitions so it could all flare up again.

But the pressure on Trump to do a TACO and strike a deal is very high as his approval rating is continuing to collapse heading into the mid-terms. He has said it doesn’t matter but it likely matters to him bigly as the longer the Strait remains closed the more global oil reserves run down leaving the clock ticking on when the full impact of the roughly 12-13% cut to global oil production hits the global economy in full resulting in another spike in oil prices and even higher US gasoline prices – which US voters hate.

Of course, while Trump wants to TACO it requires Iran to provide the sauce.

With a deal likely nearing oil prices have fallen back to the lower end of the range they have been in since the War started. Oil futures are continuing to price a fall on the grounds that the Strait will be opened eventually but that prices will be above pre-War levels as it will take a while for oil and fuel production to ramp up again with a risk premium priced in to allow for the risk of a resumption of the conflict. This is in line with our own views.

Helped along by the reports of a peace deal nearing agreement and ongoing optimism about the boost from AI related demand to profit growth, global share markets rose over the last week. US shares rose 1.8% to a new record high, Japanese shares rose 4.7% also to a new record high, Eurozone shares rose 0.5% and Chinese shares rose 0.9%. Australian shares rose 0.9% for the week, with gains in retailers and miners partly offset by falls in telcos and energy shares, but they remain significant underperformers. While the US share market has surged to new record highs helped also by very strong profit growth and still solid economic activity, the Australian share market has been continuing to struggle not far from its March lows in response to profit downgrades, three rate hikes from the RBA, capital gains tax changes and greater scepticism locally regarding a quick reopening of the Strait.

News of a peace deal saw bond yields fall on hopes for lower inflation with lower oil prices. Metal and gold prices rose over the week, but iron ore prices and Bitcoin fell. The $A rose slightly as the $US fell slightly.

Despite optimism for lower oil prices, central banks continued to edge in the direction of higher interest rates over the last week. Another Fed Governor – Lisa Cook this week, Christopher Waller last week – came out warning of a rate hike if inflation doesn’t start to fall soon. And unfortunately, US core private final consumption inflation rose further in April to 3.3%yoy. And both the Bank of Korea and Reserve Bank of New Zealand while leaving rates on hold warned of rate hikes ahead. Its early days, but as can be seen in the next chart the percentage of global central banks hiking is hooking up.

The risk here is that expectations for higher inflation and rates could drive another leg higher in global bond yields which could put pressure on share markets. A quick reopening of the Strait could short-circuit this though.

In Australia though, mixed inflation data for April provided a bit of relief. The good news was that headline CPI inflation slowed more than expected to 4.2%yoy from 4.6%yoy with a bigger than expected fall in fuel prices (helped by the fuel tax cut) and free public transport in some states. Electricity prices fell 0.9%mom and the annual price ruling from the energy regulator points to falling prices from July helped by record output from wind farms and batteries. (So more clean energy can lower electricity prices!) The bad news was that underlying or trimmed mean inflation edged up further to 3.4%yoy from 3.3%yoy and appears to be tracking in line with the RBA’s forecast for a 0.95%qoq/3.8%yoy rise in the current quarter as a whole.

Some good news on the underlying inflation front was that the breadth of price rises has improved slightly with slightly more CPI items seeing inflation below 2%yoy than above 3%yoy. But against this the second round impacts from the oil supply shock to transport costs, plastics, food prices etc are yet to impact, housing costs are continuing accelerate with new dwelling prices up 0.7%mom and a rise in asking rents pointing to higher rents, business surveys continue to show a sharp rise in cost pressures and there is a high risk that an acceleration in minimum and award wage rises will contribute to stronger wages growth.

On balance the mixed inflation data for April, coming on the back of soft April jobs data, depressed confidence and signs of softening household spending will likely see the RBA leave rates on hold at its June meeting as it waits to see the impact from its three back to back rate hikes and how the oil supply shock pans out. However, we are continuing to pencil in a further and likely final rate hike in August as underlying inflation remains too high. The money is currently pricing zero chance of a rate hike in June and a 70% probability of a further hike by year end.

While some of the lyrics in Melting Pot are questionable and it doesn’t go down well with the identity politics and even multiculturalism of today – there is something naively appealing in the hippie sentiment of “what we need is a great big melting pot…and turn out coffee coloured people by the score” as way to a “get along scene”.

Major global economic events and implications

US economic data was mixed. Personal spending growth was soft but okay in April, the trend remains up in underlying capital goods orders and shipments – helped by the data centre boom – and jobless claims remain low. Against this though consumer confidence as measured by the Conference Board fell slightly, the falling savings rate is removing a source of support for US households, new home sales remain weak, and home prices fell slightly again in March. But while it’s mixed the Atlanta Fed’s GDPNow tracker for June quarter GDP has growth picking up to 3.8% annualised from just 1.6% in the March quarter.

Meanwhile, the US core PCE measure of inflation rose to 3.3%yoy and is likely to rise further in the months ahead. While it wasn’t as high as feared its moving further away from the Fed’s 2% target and supporting concerns that the Fed may have to raise rates this year.

Japanese economic data was strong with industrial production and retail sales up strongly and unemployment down. Against this, Tokyo inflation fell to 1.4%yoy.

Australian economic events and implications

Australian business investment in the March quarter looks to have been strong helped by booming data centre investment. Real private capital spending (capex) rose 6.5%qoq in the March quarter reflecting an 18%qoq surge in plant and equipment investment driven by another big spike in IT investment in data centres. This may be great for the economy longer term but just bear in mind that a big chunk of it will be imported so it doesn’t necessarily mean a surge in March quarter GDP growth. Mining capex is trending sideways albeit at a solid level, and non-mining non-tech capex fell but it is in a rising trend.

Business investment plans for the year ahead are for solid growth with capex plans 11% higher than a year ago.

Construction work in the March quarter was also stronger than expected, up by 3.4%qoq. The upside surprise though was in engineering and narrowly concentrated in WA suggesting it was mining sector related. In terms of building – home building actually fell 0.6%qoq but non-residential building actually rose 2.5%qoq.

Household spending data for April was a bit less bright falling a greater than expected 1.1%mom and slowing to 4.9%yoy. The fall was largely driven by lower fuel prices, but spending was softer generally including in reduced travel. Real spending growth is still running around 2.5%yoy, but the slowing in April may be a tentative sign of flagging consumer demand with rate hikes and poor confidence.

What to watch over the next week?

In the US, expect the May manufacturing conditions ISM (Monday) and the services ISM (Wednesday) to both remain solid around 53, job openings and quits data for April (Tuesday) to show okay labour market conditions and May jobs data (Friday) to show a 90,000 gain in payrolls and a rise in unemployment to 4.4%.

Eurozone data is likely to show unemployment remaining around 6.2% (Monday) and CPI inflation around 3.3%yoy for May with core inflation rising to 2.4%yoy.

Chinese business conditions PMIs are expected to remain consistent with subdued but okay economic growth.

In Australia, the focus is likely to be on March quarter GDP data (Wednesday) which is expected to show a growth around 0.6%qoq or 2.7%yoy up slightly from 2.6%yoy in the December quarter with strong growth in business investment, moderate growth in consumer spending, a fall in housing and a detraction from trade. In other data, expect Cotality data to show a 0.1% fall in home prices in May (Monday) with further falls in Sydney and Melbourne and a further slowing in Adelaide, Brisbane and Perth as higher interest rates, poor buyer confidence and the Budget move to increase property taxes for investors depress demand. Building approvals for April (Tuesday) are likely to show a 2% bounce and the trade balance (Thursday) is likely to swing back into a $1.5bn surplus after a surge in imports of fuel and data centre related equipment resulted in a $1.8bn deficit in March.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies and solid profit growth.

Bonds are likely to provide returns below running yield this year.

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

Australian home price growth this year is likely to slow to around flat with prices likely to fall over the year ahead due to poor affordability, RBA rate hikes, reduced investor demand flowing from the winding back of negative gearing and the capital gains tax discount and the hit to confidence from the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – Week ending 29 May, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• The combination of the natural human tendency to focus on bad news, expectations rising beyond the ability of the economy to deliver, the increased availability of information & the rise of social media are likely magnifying perceptions around worries and making it easier to be gloomy.
• However, to succeed as an investor it makes sense to err on the side of cautious optimism: otherwise, there is no point in investing; growth assets like shares have trended up over the long term; and trying to get the timing right of the 2 or 3 years out of 10 when they fall can be very hard.

“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” J.S. Mill

Introduction

In a recent Econosights my colleague Diana Mousina pointed out that much of the gloom and doom around Australia is overdone. This is not to say we don’t have issues – including poor housing affordability – or that we can’t do a better. But pessimism can feed on itself and lead to political – and notably populist – outcomes based on simplistically attractive notions that make any perceived problems far worse, not better.

But there is also another angle to this in that history tells us that succumbing to pessimism as investors doesn’t pay. Of course, this is often easier said the done. The “news” has always had a negative bent, but one could be forgiven for thinking it’s become even more so with constant stories of disasters, conflict, wrongdoing, grievance and loss. And the worry list for investors seems more threatening – with trade wars, social polarisation, rising geopolitical tensions and wars, alarm about climate change, talk of job loss from AI, higher public debt and higher inflation.

Four reasons why worries might seem more worrying

There is no denying there are things to worry about and that these may result in more constrained investment returns at some point. But four things may be combining to add to a greater sense of pessimism.

1. First, our brains are wired in a way that makes us natural receptors of bad news. Humans tend to suffer from a behavioural trait known as “loss aversion” in that a loss in say financial wealth is felt much more negatively than the positive impact of the same sized gain. This likely reflects the evolution of the human brain in the Pleistocene age when the key was to avoid being eaten by a sabre-toothed tiger or squashed by a wholly mammoth. This left the human brain risk averse and on guard for threats. Which in turn makes us more predisposed to bad news stories. Hence the old saying “bad news” sells. This is particularly true as bad news shows up as more dramatic (e.g. “billions wiped off shares”), whereas good news tends to be incremental (e.g. “shares rose 0.3% today”). Reports of a plane (or a share market) crash will generate far more clicks than reports of less plane crashes (or a gradual rise in the share market) ever will. This bias towards bad news means prognosticators of gloom are more likely to be revered as deep thinkers than optimists as observed by the philosopher and economist John Stuart Mill in the quote above.
2. Secondly, we are now exposed to more information than ever. It’s easier to check facts, analyse things and sound informed. But it’s often just noise. As Frank Zappa noted “Information is not knowledge, knowledge is not wisdom.” If we don’t have a process to filter this extra information, we can suffer from information overload. This can be bad for investors as when faced with more information we can freeze up & make wrong decisions with our investments. Our natural “loss aversion” can combine with what is called the “recency bias” – that sees people give more weight to recent events – to see investors project recent bad news into the future and so sell after a fall.
3. Thirdly, the explosion in social media is serving to amplify bad news. We are now bombarded with economic and financial news and opinions from apps, subscription services, finance updates, dedicated TV and online channels, chat rooms and social media. To get our attention news needs to be entertaining. And, following from our aversion to loss, in competing for our attention dramatic bad news trumps incremental good or balanced news in getting clicks. And the social media algorithms amplify extreme views. So naturally it seems the bad news is “badder” and the worries more worrying. Politics has added to this with politicians more polarised and more willing to scare voters. Just Google the words “the coming financial crisis” and you’ll find lots of references to a major disaster ahead. People have always been making gloomy predictions but prior to the information and social media explosion it was harder to be exposed to such stories.
4. Finally, expectations have likely risen above the ability of the economy to keep up. My mother’s generation born in the 1930s saw depression, a world war and the regular death of siblings. Their expectations were low and it didn’t take much to make them happy in the 1950s (for my Mum it was holidays spent in a tent at the beach around a surf club). For them getting a consumer good like a car, fridge or washing machine generated a huge pay off in happiness. Today it’s very different. Consumer goods are ubiquitous and while smart devices come with great things they also come with a lot of bad (doomscrolling, bullying, a sense of missing out, amplification of grievance, etc) which can lead to agitation and dissatisfaction. We have lots more and live longer, but our expectations have increased beyond that. This makes it harder for the economy to deliver even if economic growth is good. This is consistent with studies on happiness that show that from low levels of income, extra income and the more things that come with it, can provide a big lift in happiness, but at higher levels extra income has little impact. This is not to deny issues around the cost of living or that we can’t do better by boosting productivity – but it suggests that even if the economy were to perform more strongly, we may not be any happier. As the next chart shows while GDP per capita has trended up happiness has fallen.

The danger is that the combination of the ramp up in information and opinion, our natural inclination to zoom in on negative news along with expectations rising beyond the ability of the economy to deliver is making us gloomier and more pessimistic. It could also make us worse investors: more distracted, pessimistic, jittery and short term focused.

Three reasons to be optimistic as an investor

There are 3 good reasons to err on the side of optimism as an investor.

Firstly, without optimism there is not much point in investing.  As the famed value investor Benjamin Graham pointed out: “To be an investor you must be a believer in a better tomorrow.” If you don’t believe the bank will look after your deposits, that most borrowers will pay back their debts, that most companies will see rising profits supporting a return to investors, that properties will earn rents, etc, there is no point investing.

Secondly, the history of share markets in developed well managed countries has been one of the triumph of optimists. Sure, share markets go through often lengthy bear markets – where pessimists look like winners – but the long-term trend has been up, underpinned by the desire of humans to find better ways of doing things resulting in real growth in living standards. This is indicated in the next chart which tracks the value of $100 invested in Australian shares, property, bonds and cash since 1900 with dividends, rents and interest reinvested along the way. Cash is safe and so fine if you are pessimistic but has low returns and that $100 will have only grown to around $16,000 today. Bonds are better and that $100 will have grown to around $50,000. Shares are volatile, but if you can look through that they will grow your wealth and that $100 will have grown to around $3.8 million. Residential property offers similar returns over the long term – although the line in the chart should be seen as indicative of the average return from property.

This does not mean blind optimism where you get sucked into every investor mania. If an investment looks too good to be true and the crowd is piling in, then it probably is. So, the key is cautious, not blind, optimism.

Finally, even when it might pay to be pessimistic – and hence to get out of the market in corrections and bear markets – trying to get the timing right can be very hard. In hindsight many downswings like the GFC look inevitable and hence forecastable and so it’s natural to think you can anticipate them. But trying to time the market – in terms of both getting out ahead of the fall and back in for the recovery – is very hard. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that, if you were fully invested in Australian shares from January 1995, you would have returned 9.4%pa (with dividends but not allowing for franking credits, tax and fees).

But if you were pessimistic about the outlook and managed to avoid the 10 worst days (yellow bars), you would have boosted your return to 12%pa. And if you avoided the 40 worst days, it would have been boosted to 16.5%pa! But this is very hard, and many investors only get really pessimistic and get out after the bad returns have occurred, just in time to miss some of the best days. For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 7.5%pa. If you miss the 40 best days, it drops to just 3.7%pa.

Sure, on a day-to-day basis it’s around 50/50 as to whether shares will be up or down, but since 1900 shares in the US have had positive returns around seven years out of ten and in Australia it’s eight years out of ten.

Getting too hung up in pessimism on the next crisis that will, on the basis of history, drive the market down in two or three years out of ten may mean that you end up missing out on the seven or eight years out of ten when the share market rises.

“Choose to be optimistic, it feels better.” The Dalai Lama

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

The post Three reasons why it pays to be an optimist as an investor appeared first on AdviserVoice.

Global share markets mostly rose over the last week with ongoing hopes for a deal to unblock the Strait of Hormuz and strong earnings data. This was despite worries about a more hawkish Fed and concerns about the inflationary consequences of the War. Chinese shares were an exception though and they fell slightly. Helped along by the positive global lead the Australian share market also modest a rise of 0.3%, despite ongoing concerns about the impact of the Budgetary tax hikes on investing. Strong gains in consumer and financial shares on the ASX were partly offset by sharp falls in utilities and industrials.

Metal prices rose slightly over the last week but gold and Bitcoin fell with $A and $US little changed.

The past week saw more of the same in relation to the Iran War – more threats from Trump followed by soothing words about “very big discussions” with Iran. While a few ships got through, the Strait remains effectively closed maintaining a roughly 12 or 13% hit to global oil supplies. The upshot is that Trump wants to TACO but Iran is still not willing to provide the salsa with uranium and transit tolls through the Strait remaining sticking points. So, the standoff continues, posing bigger risks to the global and Australian economies the longer it goes on.  This is leaving oil prices range bound, but with oil futures pricing in a fall on the grounds that a deal will be reached eventually. This remains our base case and Trump has been showing some signs of shifting focus to Greenland and Cuba lately!

Meanwhile, the ongoing impacts of the Strait blockage have added to concern that inflation and inflation expectations will rise further. Inflation data for the UK, Canada and Japan was better than expected, but the minutes from the Fed leaned hawkish with “many” Fed officials preferring to remove language indicating an easing bias and a “majority” indicating that a rate hike would be appropriate if inflation remained above target. The US money market has now removed expectations for a rate cut this year and now sees an 80% probability of a hike. Meanwhile, some emerging country central banks are coming under pressure to raise rates with the Bank of Indonesia hiking by 0.5% in the last week. This is all combining to maintain upwards pressure on bond yields.

The RBA has “space” to be in wait and see mode, but remains hawkish. The minutes from the last meeting noted that financial conditions are probably now a bit restrictive and that the three hikes this year give the RBA space to see how the War develops and impacts the economy. Soft jobs data for April – the last to be released before the RBA meeting next month – adds to the likelihood that the RBA will leave rates on hold in June. But the overall message from the RBA remains somewhat hawkish. This was highlighted in comments by RBA Assistant Governor Hunter who noted that a combination of factors meant that the boost to inflation from the oil supply shock could be “faster and more extensive” because of the starting point for the Australian economy of capacity constraints and already high inflation and with RBA research finding that price changes become more frequent when inflation is high which can lead to underestimating future inflation. The RBA is right to be concerned about a flow on to inflation expectations because five of the six years up until this year will have seen inflation above the 2-3% target, which risks increasing scepticism that the target will be met going forward which in turns risks a step up in wage demands and price rises. With the release of UK and Canadian inflation data in the past week it is clear that Australia sticks out like a sore thumb, both in headline inflation and in underlying inflation despite the latter yet to really show much impact from the War. As a result, the RBA has had to hike rates this year when other central banks have held and has to continue to remain relatively hawkish. Unfortunately, the Budget did not make the RBA’s job any easier. While we expect the RBA to leave rates on hold at its June meeting as it waits to assess things, we continue to expect another hike in August. The money market sees a zero chance of a hike next month, but continues to expect a hike by year end.

The changes to negative gearing, the capital gains tax discount and the taxation of family trusts have received a lot attention, but a disappointing aspect of the Budget was that the changes were not assessed in the context of the overall income tax system. Even with access to these concessions the Australian income tax system was highly progressive with the top 10% of income earners paying 44% of income tax revenue being raised by Canberra and the top 20% accounting for 60%. The tax system should be progressive because the more you earn the more you should be able to contribute as a share of your income. But there is a danger in pushing it too far in that it risks creating a disincentive to work, form new businesses and expand to employ more people. And now with the concessions wound back it will become even more progressive adding to these disincentives risking weaker productivity growth and living standards. This risk is particularly high for start ups and small businesses and even if they are excluded from the CGT change the risk could remain in relation to less capital being available for growth stocks on the share market.

In short, the curtailment of the tax concessions should have been accompanied by income tax cuts or at the very least a commitment to indexing the tax scales to inflation. This is particularly the case with the top tax rate being above that in many other comparable countries and kicking in at a relatively low multiple of average wages. See the next chart. If the top tax threshold had been indexed to inflation since it was last significantly raised in 2008-09 it would now be $280,000 and not $190,000, which means far more taxpayers today are now paying the top rate than was originally intended for them.

It’s a bit sad that Australia missed out on winning Eurovision (again) as Delta had such a good song – better than Bangaranga. Here is La La La, the winner from 1968 which came from Spain – apparently the original singer of the song was Catalan and was switched out for Massiel at the last minute because he insisted on singing in Catalan which might not have gone down well with President Franco. This is covered in The Song Contest on SBS. It’s also amazing to see that Eurovision had a full orchestra back then. This was mandatory until 1998 – but it then went electronic and pre-produced.

Major global economic events and implications

Developed country PMIs for May showed a further whiff of stagflation with slightly weaker business conditions and higher price pressures. The weakness in activity was concentrated in Europe and Japan, but with manufacturing holding up and services down.

The US composite PMI is continuing to hold up a bit better – helped by the US’ status as a net oil exporter – but high & still rising price indicators are a problem for the Fed.

Other US economic data was mixed. In contrast to the PMI, manufacturing conditions in the Philadelphia region fell in May. While home builder conditions rose in May and housing starts rose in April, permits fell and all remain soft not helped by the ongoing rise in mortgage rates. Meanwhile, jobless claims remain low.

With Nvidia having reported, the US March quarter earnings reporting season is now largely over and profits have boomed. 95% of S&P 500 companies have now reported with 82.1% beating expectations and earnings growth for the quarter has now moved up to 29%yoy, up consensus estimates for a 14%yoy rise at the start of the reporting season. This is the strongest pace since 2021. Tech has led the charge with earnings growth around 61%yoy. Nvidia reported sales growth of 85%yoy and earnings growth of 129%yoy, both of which beat expectations but the market was hoping for more with its shares down 1.8% after reporting.

Canadian inflation rose less than expected to 2.8%yoy in April with the underlying measures around 2%yoy. This likely leaves the BoC in no hurry to raise interest rates from 2.25%. This contrasts dramatically with the situation facing Australia which has much higher inflation but note that Canada’s unemployment rate is 6.9%, well above Australia.

Similarly UK inflation in April was also less than expected falling to 2.8%yoy at the headline level with core inflation falling to 2.5%. As with the BoC this likely leaves the BoE in no hurry to hike, particularly with unemployment at 5%.

Japanese March quarter GDP was stronger than expected at 0.5%qoq with modest increases in consumption and business investment and a strong contribution from trade. Japanese inflation slowed to 1.4%yoy in April with broad based softness and core inflation slowing to 1.1%yoy which should keep the BoJ gradual in hiking.

China’s economic activity softened across the board in April. Retail sales growth slowed to just 0.2%yoy with a sharp fall in gold and jewellery sales, and the end of subsidies impacting the sale of household appliances. Property investment and sales continue to fall but at least the pace of decline in home prices slowed. The slowdown appears to reflect a payback after a strong March quarter and some policy tightening but the Government is likely to keep growth muddling along around 4.5%yoy.

Australian economic events and implications

Jobs data for April was soft but may have been distorted. Employment fell by 18,600, with unemployment rising to 4.5% its highest since 2021 and participation fell. However, it wasn’t all weak with hours worked up strongly and it may have been distorted by Easter and school holidays and a new data collection method by the ABS. What’s more female employment fell by 32,000 with the fall concentrated in Queensland where unemployment spiked from 3.7% to 4.2% which looks dodgy and subject to reversal next month. The softness in April may be a sign of a softening jobs market on the back of rate hikes and the oil shock, and we expect a further rise in unemployment but the weakness in April could just be statistical noise and so we will need to see May’s data to get a clearer picture.

Job vacancies are down from their highs but are at okay levels and may have been starting to bottom. So the RBA is likely to continue to characterise the jobs market as slightly tight.

Australian business conditions PMIs for May continued to show weak economic conditions as rate hikes and the oil supply shock impact. New orders and employment were both down sharply. At the same time the input and output price indicators remain around 2022 levels.

Consumer confidence improved slightly in May according to the Westpac/MI survey with lower fuel prices and Budget talk of small income tax cuts – but it remains very weak with the alternative ANZ/Roy Morgan index looking even weaker. The rise in confidence was amongst younger age groups suggesting a positive reaction to the changes to negative gearing and capital gains tax, whereas there was little change in confidence amongst those aged 45 and over.

The weakness in consumer confidence if sustained is warning of weakness in consumer spending ahead.

The Westpac/MI consumer survey showed a fall in home price expectations, but consumers continue to see now as a very poor time to buy a dwelling

Consumer inflation expectations fell back in May with lower petrol prices but remain high.

What to watch over the next week?

In the US, expect consumer confidence to remain weak (Tuesday) but the trend growth in capital goods orders (Thursday) to remain strong with core private final consumption deflator inflation (also Thursday) expected to have increased further in April to 3.3%yoy.

The Reserve Bank of New Zealand (Wednesday) is expected to leave its cash rate at 2.25%, but signal hikes ahead.

In Australia, April inflation data (Wednesday) is expected to show a slowing to a 0.6%mom rise helped by flattish petrol prices partly due to the fuel tax cuts with annual inflation cooling to 4.4%yoy from 4.6%yoy in March. Trimmed mean inflation is expected to edge up though to 3.4%yoy as second round effects from the higher fuel prices start to show up consistent with the surge in price pressures evident in business surveys (see in the Australian section above). In other data expect a 0.9%qoq rise in March quarter construction activity (also Wednesday), a 1% rise in business investment for the March quarter and a slowing in April household spending growth to -0.7%mom/5.5%yoy (both Thursday) and signs of a slowing in housing credit growth for April (Friday) as rate hikes impact.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies and solid profit growth.

Bonds are likely to provide returns around running yield.

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

Australian home price growth this year is likely to slow to around 3% and could go negative over the year ahead due to poor affordability, RBA rate hikes, reduced investor demand likely to result from the Budget moves to wind back negative gearing and the capital gains tax discount and the hit to confidence from the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens as the Fed holds then cuts maybe next year and the RBA hikes. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 22 May, 2026 appeared first on AdviserVoice.

Shane Oliver

Key points

• The oil supply shock remains a significant threat to economic growth and shares – particularly with the Strait of Hormuz remaining closed and oil reserves running down.
• It’s contributing to rising bond yields and putting pressure on share market valuations.
• The tax changes in the Budget will make shares and super relatively more attractive investments and favour high yielding over growth investments (ie, less risk taking).
• The Budget contains good moves to deregulate, but little real tax reform with public spending remaining too high.

Introduction

This note takes a look at some of the main questions investors have in a simple Q&A format, particularly around the oil supply shock, global bonds, China, the Australian Federal Budget and the RBA.

What happened to the oil supply shock?

While there was much angst when the US/Israel War with Iran led to the closure of the Strait of Hormuz at the start of March with a surge in oil prices, falls in shares and talk of a stagflation/risk of global recession, the fallout so far has been modest. In Australia, petrol prices are only just above where they were before the War began. What gives?

The global economy so far has been protected by the drawdown of oil stockpiles, the diversion of some fuel via other routes, fuel tax cuts, just in case buying, expectations that it will be temporary aided by Trump’s regular soothing comments to the effect it will soon be over and the AI boom in the US. However, the Strait is still closed, hopes for an imminent deal are fading and Trump is renewing his threats against Iran. Trump clearly wants to TACO but his threats have started to lose credibility. That’s always a risk when playing the “madman” in negotiations – and Iran looks happy to string it out. The trouble is that the world can’t keep running down oil stockpiles and sooner or later oil demand will have to adjust to a 10-15% reduction in global supply – with the International Energy Agency estimating global oil supply is down 13%. Rough estimates suggest this would require oil prices to rise to around $US150/barrel. Past experience tells us that oil crises impact oil prices, shares and economies with a long lag. For example, the full impact on oil prices unfolded over four months in the first oil shock in 1973 and over a year in the second oil shock in 1979. Hopefully, we are right and a deal is soon reached. If not, the risks of a much bigger boost to inflation/hit to growth will rise with a flow on to shares. The chart above shows that having overshot on the upside in March, Australian petrol prices have now overshot on the downside (even with the 32 cents fuel tax cut) & are at risk of rebounding.

Why are bond yields rising?

Rising bond yields reflect worries that rising oil prices will boost inflation, central banks will have to raise rates, the US budget deficit is blowing out and US capex remains strong with data centre spending. This is boosting borrowing costs for corporates and US home buyers and to a lesser extent for Australian home buyers by rising fixed mortgage rates.

Are shares expensive or cheap?

The rising trend in bond yields at a time of relatively high price to earnings ratios, particularly for US shares, leaves share valuations stretched with both US and Australian shares offering little risk premium over bonds. This has been the case for the last two years now so it’s no guide to timing, but indicates shares remain vulnerable if the news flow turns more negative.

What happened to the threat from US tariffs?

US tariffs have taken a back seat lately but are still bubbling away. The Trump Administration is now starting to pay out refunds for the reciprocal and Fentanyl tariffs the US Supreme Court declared illegal which could amount to $US166bn. This will lead to a temporary fiscal stimulus and budget deficit blow out. Those tariffs were then replaced with a temporary 10% tariff (under section 122) from late February that will expire on 24th July, but these have also been ruled illegal by the US Trade Court which will likely lead to another round of appeals. In any case they will likely be replaced by more permanent section 301 tariffs taking them back to where they were before the Supreme Court decision. Meanwhile from a peak of nearly 12% the average effective US tariff rate has fallen back to below 10% thanks to import substitution. It’s still way up on where it was at the start of last year…so still adding to US costs and distorting trade. Though, worst case scenarios have been avoided because other countries decided last year to take the “high road” and avoid a trade war with the US. And the trade truce between the US and China – extended by the recent Trump/XI summit – has avoided a trade war between the world’s two biggest economies (although the underlying structural tensions remain).

What about China?

China continues to face big challenges: a falling population; trying to get consumer spending to take over as a key growth driver; and political tensions with the West. The return of Trump last year saw a renewed flare up in tensions, but they have been defused with the trade truce. In the meantime, China simply diverted its exports to other countries. Chinese economic activity data was weaker than expected in April, but this looks like payback from stronger than expected March quarter growth. However, Chinese growth is likely to continue to muddle along with growth this year expected to be around 4.5%.

What does the Australian Budget mean for investors?

Because of the removal of existing property purchases from negative gearing, the shift to taxing real capital gains for all assets with a 30% minimum rate and the new minimum tax rate of 30% on distributions from discretionary trusts the Budget is the most consequential for investors in years. At a high level for investors this will:

• Reduce the after-tax return from investing in existing property.
• Favour new home builds over existing property (which means a narrower and potentially more problematic choice set).
• Boost the relative attractiveness of shares and commercial property relative to residential property as they can still be negatively geared.
• Favour high rental yielding residential properties over lower rental yielding properties as these are less dependent on capital growth.
• Favour high yielding assets over lower yielding growth investments.
• Make fixed interest and bank deposits relatively more attractive
• Make crypto and gold relatively less attractive as they are dependent on capital growth which will potentially now be taxed at a higher rate.
• Boost the relative attractiveness of super – because it retains its concessional tax treatment.
• Boost the attractiveness of the family home as it remains CGT free and could also be converted into a negatively geared investment property at some point. It could lead to more renovations.
• Make high turnover investment trading strategies less attractive because of potentially higher capital gains tax bills.

In short, the tax changes are likely to drive an increased focus on high yielding investments at the expense of those more focussed on capital growth which could mean a decline in risk capital in Australia.

How does the Budget stack up against my wish list?

Prior to the Budget, I produced a “wishlist” of the top five things needed in the coming Budget. These were to limit any “cost of living” relief, cut spending, undertake serious tax reform, less red tape and more incentives to invest, and to reform the Charter of Budget Honesty. On each of these:

• There wasn’t a lot of extra “cost-of-living” relief beyond the temporary fuel tax cut, with the $250 tax offsets more than two years away. This gets a tick.
• However, there was nowhere near the Keating like reduction in public spending that is necessary – $100bn or 2% of GDP over four years – to free up spare capacity in the economy and take pressure off inflation. Sure, there were spending savings later this decade – but these are dependent on the savings to the NDIS occurring as promised, no boost to spending ahead of the next election and still leave Federal spending well above pre-COVID average levels. And there is actually increased spending in the near term, so this gets a cross.
• There was a tilt at some tax reform, but this was more about tax hikes than tax reform. The Australian tax system should be moving from a very high reliance on taxing income to a greater reliance on taxing consumer spending in order to boost incentive and improve intergenerational equity. The Australian income tax system is also very progressive compared to other countries with a high top marginal tax rate kicking in at a low multiple of average earnings leading to the top 20% of taxpayers accounting for 60% of income tax paid, even with various tax concessions. See the next chart.

This in turn has motivated a high use of the tax concessions but, with their curtailment, the already very progressive nature of the tax system will become even more so. That will lead to further disincentive and work against the aim of boosting productivity. This may be compounded if the CGT changes lead to less capital being available for startups, private capital and growth stocks. Ideally the curtailment of the tax concessions should have been matched by lower income tax rates. So, it’s hard to tick the tax reform box so far.

• In terms of regulation and investment there were some good moves – with less red tape and moves to encourage investment mainly for small business. There was no move to unwind labour market re-regulation though. Overall, this gets a tentative tick.
• Finally, the Budget with its further boost to “off budget” spending – with actual budget deficit being $64.1bn more than double the $31.5bn underlying deficit that gets the focus – and an ongoing lack of fiscal rules continues to lack the discipline seen in times past.

Where does this leave the RBA?

The RBA is well aware that raising rates won’t make high oil prices go away but is rather responding to a pre-existing inflation problem in Australia – with underlying inflation around 3.3%yoy running well above target before the War – and seeking to make sure that the War does not make it a lot worse. The extra near-term stimulus in the Budget does not make the RBA’s job any easier but it’s not enough to change our prior expectations for the RBA to hike rates once more, probably in August. Through next year though, the RBA will probably be back to cutting rates.

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

The post Investment outlook Q&A – oil, bond yields, the Budget and the RBA appeared first on AdviserVoice.

Shane Oliver

Key points

• The key changes are a wind back in negative gearing, the taxation of real capital gains, numerous moves to reduce regulation, and modest net budget cuts over five years.
• The projected deficits are now slightly lower over the budget period by around $45bn, mainly due to more windfall revenue.
• With more stimulus in the near term though the Budget does nothing to make the RBA’s job in controlling inflation easier.
• The Budget continues to lock in structurally higher spending and budget deficits for the medium term.
• The tax changes look more like tax hikes than real tax reform and there is more work to do to boost productivity.

Introduction

This Budget is the most consequential in years given the Government’s committing to address poor productivity – and by implication stagnant living standards – while also dealing with the impact of the global oil shock and issues around intergenerational equity. As such it’s seeking to improve fairness, productivity and fiscal responsibility.

Key budget measures

Many of the key measures were pre-announced or leaked, but include:

• Negative gearing for new buys from now on restricted to new homes from 2027-28 onwards. For established homes losses can be used to offset other property income and can be carried forward. Shares and commercial property exempt from the change.
• The 50% capital gains tax discount to be replaced by the taxation of real gains from 2027-28 for all assets (with a likely exception for tech and startups) purchased from now and to face a minimum tax rate of 30%. CGT on existing assets to be assessed using a proportionate mix of the old and new tax models based on holding years. CGT on new builds given a choice of the old and new models.
• A minimum tax on discretionary trust distributions of 30%.
• A phased reduction of the EV fringe benefit tax break.
• Implementation of election promises with a 1% cut to the bottom tax rate (saving $5.15/week) & the $1000 standard tax deduction.
• A $250 income tax offset for all salaried workers for 2027-28.
• $20,000 instant asset write off for small business made permanent.
• Tax loss carry back so small biz can offset losses against past profits.
• The R&D tax credit expanded.
• Numerous moves to cut red tape with the aim of cutting regulatory costs by $10bn a year.
• Incentives & deals with states for productivity enhancing reforms.
• $2bn over 4 years to provide critical housing related infrastructure and $500m to speed up environmental approvals.
• $14bn in increased defence spending, $3.8bn for Melb rail project.
• $10.7bn “off-budget” to boost fuel reserves to 50 days plus.
• Gross spending cuts of $64bn incl NDIS, inland rail & public service.

Economic assumptions

Reflecting the impact of RBA rate hikes and the oil supply shock the Government sees inflation peaking at 5% and has revised down its growth forecasts for next year to 1.75% (from 2.25%) which is above the RBA’s forecast and implicitly assumes a smaller and short hit to growth from higher oil prices. The unemployment rate is still expected to reach 4.5%, unchanged from prior forecasts. As flagged in March it has also revised up its near-term immigration forecasts due to less departures but still seems a slowing to 225,000 in forward years which will slow population growth to around 1.3% pa.  The Government kept its medium-term iron ore assumption at $US60/tonne but pushed it out to March 2027. With iron ore above that, it’s still a source of revenue upside.

Still looking at big budget deficits

The Government is continuing to benefit from a windfall due largely to higher commodity prices (and hence resources profits) than assumed resulting in higher revenue. This is more due to good luck rather than good management. Compared to the projections in the December MYEFO this windfall – called “parameter changes” in the next table – is reducing the deficit over the five years to 2029-30 by another $37bn.  This table – nicknamed the “table of truth” – also shows how much of the windfall has been spent or saved (see the “new stimulus” line). The good news is that in this Budget all the windfall is being saved and then some, with the government saving more than it spends to the tune of $8bn over the period to 2030. But all of the “savings” are in the later years, with near-term years still showing more new stimulus than previously expected.

This in turn means that thanks to the good luck of the revenue windfalls and net policy tightening for later this decade the budget is now projected to be in better shape than previously expected with a surplus by 2036.

Gross public debt of nearly $1trn or 33% of GDP is projected to reach $1.2trn or 36% of GDP in 2028-29 before trending down.

Winners and losers

Winners include: wage earners, new and small businesses, first home buyers, venture capitalists, defence industry, and illegal tobacco users. Losers include: new property investors in existing homes, older investors with limited income, high growth investors, beneficiaries of discretionary trusts, NDIS rorters and some new electric vehicle users.

Assessment

This Budget represents a good move in the right direction:

• It’s the first budget under the current Government to see all the revenue windfall saved and net budget savings over the forward estimates. So in this sense it’s more responsible than the last few budgets.
• It’s a significant package of moves to deregulate and encourage more business investment which should help boost productivity.
• There are more measures to help boost housing supply.
• It includes tentative moves towards tax reform in regards to the tax concessions – which may go some way to reduce perceptions of unfair advantage by older generations when it comes to housing.
• There is more scope for upside revenue surprise with still cautious commodity price assumptions.

And the budget deficit and debt ratios are a fraction of the averages for comparable countries, with the debt/GDP ratio being around half.

However, the Budget has several significant weaknesses.

• Structural deficits. While the budget deficits are now smaller than projected, they continue out to mid next decade despite another round of revenue windfalls and new tax measures. This sees no money put aside for a rainy day over the forecast period until 2036 which is off in the never never. The ratcheting up of spending on temporary revenue windfalls in past budgets leaves the budget vulnerable to a reversal of the windfalls.
• Government spending was cut by far less than hoped leaving it higher than normal using up capacity in the economy. In the next two financial years net policy decisions have led to policy easing due to more spending. This arguably adds slightly to inflationary pressures in the economy rather than reduces them. And over the forward years policy has only tightened by $8.2bn due to increased revenue presumably flowing from the changes to tax concessions. And at a high level, Federal Government spending as a share of GDP over the next decade has been shaved only slightly to 26.5% from 26.9% in the December MYEFO this is still well above the pre-Covid average of 24.8%. This leaves little room for a pickup in private spending in the economy without hitting capacity constraints and higher inflation. And this is probably about as good as it will get as by next year’s budget we will bumping up against the next election where the pressure will be once again to ramp up spending.

• Reliance on bracket creep and higher taxes to return to budget balance. Revenue is projected to start trending up from 2028-29 reaching a record 27% of GDP by 2036-37 as bracket creep kicks in. The rising burden on Millennials & Gen Z is unfair and unrealistic. Politicians will eventually want to give some back as “tax cuts”. But then how will we get back to surplus then?
• Off budget spending. This remains a big issue as governments have been allocating increasing spending as “off-Budget” on the grounds that it’s an “investment”. This is resulting in a widening gap between the underlying cash balance (referred to above) and the headline balance (which includes “investments”). In fact, for the next financial year the headline deficit is projected to be $64.1bn compared to the underlying cash deficit of $31bn. However, much of this spending is not wise investment but it adds to public debt.

• Tax hikes are not tax reform. While curtailing access to tax concessions is a move in the direction of tax reform (as the CGT discount was arguably too generous and some rorted negative gearing) without addressing other failures in the tax system they amount to little more than a tax hike and are not tax reform. They have done nothing to ease Australia’s high reliance on income tax and will further add to the already very progressive nature of the Australian tax system – where the top 5% of taxpayers pay 32% of income tax collected and the top 10% pay nearly 50% – which will act as a further disincentive to work effort. Tax reform should be aimed at improving the tax system’s efficiency – so it distorts economic decisions and resource allocation less – by relying less on income tax and more on the GST. While income earned from assets may be taxed lightly relative to income earned as a wage and salary earner this should be addressed by lowering the taxation of income where our income tax rates are quite onerous compared to similar countries. Eg, the top marginal tax rate is well above the median of comparable countries and kicks in at a relatively low multiple of average earnings.
• More needs to be done to confidently boost productivity growth. To boost productivity growth – which is essential if we want to see faster growth in per capita GDP and hence living standards – the key things we need to see are: a reduction in the size of the public sector in the economy to free up resources for the more efficient private sector; tax reform to make the tax system simpler (so easier to comply with) and more efficient (so it distorts economic decisions less); and a range of reforms to make it easier for the private sector to grow and employ. The Budget saw some improvement but its modest overall: the public sector is still projected to remain larger than pre-Covid; the curtailment of the tax concessions may have boosted perceptions of fairness and improved simplicity but have done nothing to reduce the distortion to work incentive caused by our high reliance on income tax; and the moves to reduce regulation and encourage investment will help but there has been no move to address excessive labour market regulation. And “Future Made in Australia” subsidies run the risk of reducing productivity over time. So, all up there is likely a lot more to be done to confidently get sustainable productivity growth back to around 1.5% growth per annum.
• Housing. The changes to negative gearings and the CGT discount could result in a 5% of so fall in home prices in the short term as investors retreat due to a fall in the perceived after-tax return to property investment and this will no doubt be chalked up as a win for the policy change. But it’s doubtful that the moves will boost housing affordability much over the longer term – as the basic driver of this is a shortage of housing relative to underlying population driven housing demand. While negative gearing is to remain for new homes it’s likely to result in unintended consequences by eg making it harder for first home buyers to get into new housing. And policies that reduce investor interest in property overall will likely lead to less housing supply not more – with even the Budget papers estimating that the tax changes will reduce supply by 35,000 homes over a decade. Rather the focus should be on addressing the fundamental housing demand-supply imbalance, but the Budget is now projecting slightly higher immigration and so more demand and it’s not clear that it will improve supply despite the $2bn for new housing infrastructure and given the hit from the tax changes. The Government was right in its first term to focus on boosting supply but now two years into the Housing Accord goal to produce 240,000 homes a year we have been running around 60,000 below target and so making no inroads into the undersupply of housing which we estimate to be between 200,000 to 300,000 dwellings.

• Fairness. The move to wind back housing tax concessions may be popular with younger voters but its more about optics than fundamentals. Older generations have got the benefit of these tax concessions to grow their wealth and now they are being curtailed for the young! What’s more as noted above the property tax changes are unlikely to fix the undersupply of housing. The key ways to improve intergenerational equity are to: boost productivity growth so living standards grow at a rate older generations experienced; get the housing balance right with more supply and less immigration; and raise the GST so as to raise more tax from older self-funded retirees – and yes that will include one of us in a few years’ time! – and cut income tax in order to lower the tax burden on workers. And as already noted the tax hikes may also be judged unfair for older higher income workers because they amount to a tax hike at a time when the income tax system is already highly progressive.

Implications for the RBA

While the new $250 Working Australia Tax Offset is trivial and doesn’t kick in until 2027-28, the near-term fiscal easing shown in the “table of truth” above (ie $6.5bn over the year ahead) won’t make the RBA’s job any easier. Nor will the handouts already announced in various state budgets. That said, it’s not enough to change our base case for just one more RBA hike in August. However, with poor household and consumer confidence levels and the Budget unlikely to add much to economic growth in the near term along with the ongoing blockage of oil through the Strait of Hormuz risking a recession we remain of the view that the RBA will be cutting rates next year.

Implications for investors – negative gearing & CGT

The changes to negative gearing, the CGT discount and the minimum tax on trust distributions have potentially big implications for many investors. I will leave the details to those with more expertise regarding taxation, but the changes to negative gearing are probably the most significant with about 1.2 million taxpayers reporting a loss for tax purposes on property. However, whether the CGT discount change is significant going forward will depend on the interaction of the rate of property price growth and inflation. Since the introduction of the discount in 2000 it has been beneficial to most investors as asset price gains were high and inflation was low. But if we go back into a period where property price growth is more constrained (say 5% pa) and inflation higher (at say 3% pa) then under scenarios where the holding period is 12 years or less investors may actually end up better off.

Where the CGT tax change may bite is in relation to shares and businesses – particularly those which don’t meet any carve out for startups. The removal of the 50% discount could take the CGT rate for a high-income earner from the low end of comparable countries to the high end. This in turn could work against growth shares and small businesses and attracting talented workers to such businesses which could work against the Budget’s objective to boost productivity.

Implications for Australian assets

Cash and term deposits – no major implications.

Bonds – the projection for smaller medium term budget deficits imply slightly less upwards pressure on bond yields.

Property – the curtailment of negative gearing and the CGT discount by making property less attractive to investors could knock around 5% off property prices in the short term as investors retreat due to lower after tax returns. This is likely to be compounded by the backdrop of RBA rate hikes. However, the dip is likely to prove temporary as the supply imbalance reasserts itself.

Shares – since shares (and all assets apart from property) are not affected by the changes to negative gearing they will benefit as an investment destination relative to property. The CGT change will boost the appeal of high dividend stocks over growth stocks. Super will also benefit as an investment destination versus property as it tax rules are unchanged.

The $A – the Budget is unlikely to change the rising trend for the $A.

By Dr Shane Oliver, Head of Inv Strategy and Chief Economist & Diana Mousina, Deputy Chief Economist & My Bui, Economist.

The post The 2026-27 Budget – responsibility, productivity and fairness – or is it? appeared first on AdviserVoice.

Global share markets rose strongly over the last week led by US shares on the back of renewed hopes for a peace deal with Iran to reopen the Strait, strong US earnings results and mostly good economic data. The Australian share market initially had a strong rise too but ended pretty flat for the week on the back of renewed doubts for an imminent peace deal and Australia’s perceived greater vulnerability to an extended closure of the Strait of Hormuz. For the ASX 200 strong gains in resources and financials were offset by falls in health, IT and retail shares. Bond yields were little changed – rising slightly in the US but falling slightly elsewhere.

The $A has risen to its highest since April 2022, partly offsetting the relative underperformance of Australian shares. It’s now around fair value of $US0.72 but absent a global recession its likely to rise further in response to the widening interest rate gap to the US and strong commodity prices. Metal, gold and iron ore prices also rose over the past week as did Bitcoin with the $US basically flat.

Renewed hopes for a peace deal saw oil prices fall, but it remains messy. The week started badly with an exchange of fire between Iran and the US Navy and UAE as the US sought to escort stranded ships through the Strait, but progress towards a resolution appeared to be resuming again with Trump saying “we’ve had very good talks” with the US proposing a gradual reopening of the Strait and a lifting of its blockade of Iranian ships with negotiations of Iran’s nuclear program to come later. Of course, we’ve heard it all before from Trump and by the end of the week it was all looking shaky again with another exchange of fire between Iran and the US and Iran yet to respond to US proposals. Pressure for a deal remains immense though particularly on Trump with his approval hitting new lows, and Trump’s lack of follow through on many of his threats suggests he wants to end the War and move on. And China appears to be urging Iran to agree to a deal. So, our base case remains that Trump will do whatever is required to stay on the off ramp to peace and that a deal will soon be reached leading to a bigger fall in oil prices.

Of course, it could just be another false dawn on a peace deal and the clock is still ticking as the longer the Strait remains closed the greater the hit to the global and Australian economies as the world will have to adjust to a 10-15% reduction in global fuel supplies. This would mean even higher fuel prices (a rough calculation is that oil would need to go to around $US150/barrel) and/or fuel restrictions. So far the global economy has been protected by reserve drawdowns, fiscal handouts like fuel tax cuts, just in case buying, expectations that it will be temporary aided by Trump’s regular comments that it will soon be over and the AI boom in the US. But oil crises have always impacted oil prices, shares and economies with a long lag. For example, the full impact on oil prices unfolded over four months in the first oil shock in 1973 and over a year in the second oil shock in 1979. So hopefully we are right and a deal is soon reached. The other big risk is that any deal reached is of low quality – with Iran effectively more aggressive than before and progress towards nuclear weapons just delayed. In which case it could flare up again.

The RBA hiked rates a third time citing upwards impetus from the oil shock to already high inflation and the need to lower demand in the economy below depressed supply. The RBA has less flexibility than most other major central banks which have mostly held rates constant because depending on the country being compared to inflation is further above target here, productivity is weaker and or unemployment is lower. The Norwegian central bank was an exception and hiked rates this week to 4.25% because inflation was “too high” and of concerns about “eroding confidence in the inflation target” if it did not hike – a bit like the RBA. The experience from the 1970s supply side shocks is that the RBA is right to be giving priority to getting inflation back down as a failure to do so will only lead to higher inflation expectations making it even harder to get inflation back down later. In an ideal world fiscal policy should be used to spread the load more equally than mainly mortgage holders but politicians cannot be relied upon to do so and often make inflation worse so its best to rely on the RBA and the blunt instrument of rate hikes. Unfortunately cash handouts to households in the WA Budget (eg $700 for a family with two high school children) are a classic example of how Australian governments are just adding to the inflation problem and making life harder for the RBA and hence mortgage holders. Hopefully the Federal Budget doesn’t make the same mistake. Our assessment is that having hiked three times the RBA can afford to pause at its June meeting, but we are allowing for one final hike in August and then rate cuts next year in response to weak growth bearing down on inflation.

The Australian Federal Budget (Tuesday) has more riding on it than has been the case for many years with the Government promising a focus on reforms to address years of poor productivity while at the same time dealing with the impact of the global oil supply shock. Unfortunately, the latter could derail the former – but so far the signs are positive that it won’t. The Treasurer has promised a “responsible budget focussed on resilience and reform” with objectives around cost-of-living support that doesn’t add to inflation, budget savings, lifting productivity and capacity, tax reform, improving economic resilience and intergenerational equity. Key measures under each of these categories look likely to include:

• Cost-of-living support – a $200-$300 tax offset for all salaried workers. It looks like it won’t be means tested which is a bit silly as why do rich people need such help.
• Budget savings – Treasurer Chalmers and Finance Minister Gallagher have announced $64bn in gross savings and indicated that there will be net savings as well. The Treasurer has also indicated that any upward revenue revisions (which could be around $40bn over the forward estimates) will be banked. If this is all the case and any cost-of-living support is more than offset by savings elsewhere it won’t add to inflation.
• Productivity – cuts to red tape and money for states to make productivity enhancing reforms along with a boost to R&D tax incentives. Action to reform company tax as proposed by the Productivity Commission is possible.
• Tax reform – election promises for a 1% cut to the bottom tax rate and the optional $1000 standard tax deduction will be included. But beyond that so far leaks have flagged a return to taxing real capital gains with new builds given a choice of the old or new CGT systems, curtailing negative gearing to either limit the number of properties or limit it to just new builds, a minimum tax on trust distributions of 30% and a phased reduction in the EV fringe benefit tax break. Of course, if this is all there is it will amount to nothing more than a tax hike and not real tax reform. Ideally Australia needs an increase in the GST rate to finance a cut to income tax rates and tax indexation. This would make the tax system less distortionary, provide greater incentive and help deal with intergenerational equity by taxing self-funded retirees more (via the GST) & taxing workers less.
• Economic resilience – so far on this front a $10.7bn fuel security package has been promised to help boost fuel reserves to at least 50 days. There are likely to be more efforts to “make more things in Australia.”
• Intergenerational equity – so far all that’s been talked about on this front are measures to curtail the capital gains tax discount and negative gearing and the minimum tax rate for trusts. Unfortunately, I can’t see how these will improve intergenerational equity. Older generations have got the benefit of these tax concessions to grow their wealth and now they are being curtailed for the young! What’s more the property tax changes won’t fix the undersupply of housing. The key ways to improve intergenerational equity are to boost productivity growth so living standards grow at a rate older generations experienced, get the housing balance right with more supply and less immigration and raise the GST and cut income tax.

Ideally the budget needs to do these three things: cut government spending by around $100bn over the period to 2029-30 taking it back to around its long-term norm of around 24.8% of GDP to provide more space for private spending; provide serious tax reform and not just tax hikes; and slash red tape and provide more incentives to invest. It should also include a return to firm fiscal rules around spending, tax and the budget balance with a reform of the Charter of Budget Honesty to refocus on the headline budget deficit given the use of “off-budget” spending.

In terms of the budget numbers we will likely see this financial year’s underlying cash deficit forecast revised down to around $25bn (from $36.8bn in MYEFO) and next year’s to $24bn (from $34.3bn) with deficits still projected out to mid next decade. The Government’s growth forecasts are likely to be revised down to 1.5% for the next financial year with subsequent years revised down slightly due to slower productivity growth. Next financial year’s unemployment forecast is expected to remain around 4.5% and inflation is forecast to fall to 2.5% after 5% this financial year. Net migration forecasts are likely to be revised up.

Here’s another happy song in Andy Kim’s version of Baby I Love You. “So cool in a dorky way” sums it up. He also co-wrote Sugar Sugar, which was record of the year in 1969 and sang as part of The Archies.

Major global economic events and implications

US economic data was mostly solid. As with the manufacturing ISM the services conditions ISM remained strong in April, albeit down a bit. The main concern remains that prices paid remains high. New home sales rose but remain relatively low. The Atlanta Fed’s GDP Now growth indicator is tracking at a 3.7% annualised pace this quarter.

Jobs data was mainly solid suggesting a stabilisation in the labour market after a slowing through last year. The job openings and quits rates were pretty stable in March and the hiring rate actually rose. The ADP private employment survey rose solidly in April and initial jobless claims remain low. So no need for the Fed to rush into a rate cut here.

US productivity growth slowed to a 0.8% annualised pace in the March quarter, but remains very strong at 2.8%yoy and means that unit labour costs are up just 1.2%yoy posing very little upwards pressure on inflation.

US productivity growth continues to run well ahead of that in Australia. This translates to lower growth in living standards here and highlights the urgent need for productivity enhancing reforms in Australia.

US profits are booming. Nearly 90% of US S&P 500 companies have now reported with 81.8% beating expectations and consensus earnings growth for the quarter moving up to a whopping 28%yoy, up from 14%yoy a month ago. This is the strongest pace since 2021. Tech companies are leading the charge with earnings growth around 59%yoy, financials at 24%yoy, cyclicals up 11%yoy and non-cyclicals seeing flat growth.

US tariffs have taken a back seat lately but are still bubbling away. A week ago, Trump threatened the EU with 25% auto tariff citing dissatisfaction with the EU’s implementation of its trade agreement. It’s a risk, but likely to be avoided though much like a similar threat to Korea earlier this year. Meanwhile, the Trump Administration is now starting to pay out refunds for the reciprocal and Fentanyl tariffs that the US Supreme Court declared illegal which could amount to $US166bn. This will lead to a temporary fiscal stimulus and budget deficit blow out. Those tariffs were then replaced with a temporary 10% tariff (under section 122) from late February that will expire on 24^th July, but these have now also been ruled illegal by the US Trade Court which will likely lead to another round of appeals. In any case they will likely be replaced by more permanent section 301 tariffs taking them back to where they were before the Supreme Court decision. Meanwhile from a peak of nearly 12% the average effective US tariff rate has fallen back to around 10% thanks to import substitution from countries with high tariffs to those with lower tariffs. It’s still way up on where it was at the start of last year…so still adding to US costs and distorting trade.

Eurozone retail sales are slowing again.

Australian economic events and implications

Household spending rose a strong 1.6% in March and is up 6.3%yoy. A 5% rise in fuel spending due to higher prices was part of it but spending growth was solid in most categories  and real spending rose a decent 0.7%qoq in the March quarter. This suggests that consumer spending growth likely had a good head of steam going into the oil supply shock.

Home building approvals fell 10% in March driven by volatile units, but this was after a 31% rise in February leaving in place a rising trend. Approvals are running around an annual pace of 205,000 new dwellings which is up from recent lows but is still well below the Housing Accord target of 205,000pa and likely to slow over the year ahead due to rate hikes and cost increases and uncertainty caused by the oil supply shock.

Job ads slowed again in April according to the ANZ-Indeed survey. This could be a sign of uncertainty due to the oil shock and rising rates.

Australia swung back into a goods trade deficit in March with a surge in data centre equipment and fuel imports. Net exports are likely to cut 0.4 percent from March quarter GDP but this should be offset by investment & inventories.

The Melbourne Institute’s Inflation Gauge for April showed an acceleration in trimmed mean inflation.

What to watch over the next week?

Globally the summit between President’s Xi and Trump (Wednesday and Thursday) will be watched for any progress in easing trade tensions.

In the US, CPI data for April (Tuesday) will likely show prices rising 0.7%mom due to higher energy prices & rents. This will see annual inflation rise to 3.7%. Core inflation is also expected to pick up to 0.3%mom or 2.7%yoy. In other data expect a modest rise in existing home sales (Monday), slower growth in retail sales (Thursday) and a slight rise in industrial production for April but a pull back in the May New York manufacturing index (Friday).

Chinese inflation data for April (Monday) is expected to show a sharp rise in CPI inflation to 1.8%yoy reflecting higher fuel prices from 0.5%yoy in March.

In Australia, the Budget will be the key focus on Tuesday (see earlier for our preview). On the data front expect the Westpac/Melbourne Institute consumer survey for May (Tuesday) to show continued very weak levels of consumer confidence. Likewise, the NAB business survey for April (also Tuesday) will likely show continued weak in business confidence with some softening in business conditions and ongoing high levels for price indicators. March quarter wages data (Wednesday) will likely show wages growth of 0.8%qoq taking annual growth down slightly to 3.3%yoy, which is well below inflation of 4.1%yoy in the quarter.  March quarter housing finance data (also Thursday) will likely show a 3% or so fall in housing finance growth reflecting the move back to rate hikes.

Outlook for investment markets

Global and Australian share markets have likely seen the worst from the War and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the peace talks and flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Fed rate cuts likely later in the year, Trump still likely to pivot to consumer-friendly policies and solid profit growth.

Bonds are likely to provide returns around running yield.

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

Australian home price growth this year is likely to slow to around 3% due to poor affordability, RBA rate hikes and the hit to confidence from higher fuel prices and the War.

Cash and bank deposits are expected to provide returns around 4.25%.

The $A is likely to rise as the interest rate differential in favour of Australia widens as the Fed holds then cuts and the RBA hikes. Fair value for the $A is around $US0.72.

By Shane Oliver

The post Weekly economic and market update – week ending 8 May, 2026 appeared first on AdviserVoice.