Stephen Miller

The post The RBA: ‘pause and reflect’ despite a particular inflation proclivity, Fed and other central banks appeared first on AdviserVoice.

Stephen Miller

The onset of the Iranian crisis has unleashed a litany of dire prognostications surrounding the likely course of the price of financial assets.

Yet US equity markets are close to record highs.

What gives?

The favoured explanation among the commentariat is that markets are complacent – perhaps even “irrationally exuberant” – and a day of reckoning is nigh.

Viewed through a macroeconomic prism that explanation has some appeal.

Even if hostilities in the Middle East are about to be dialled down it is difficult to see oil prices return to their pre-conflict levels. Re-engineering of energy supply chains, a greater tendency to “just-in-case” rather than “just-in-time” oil inventory management and an ongoing risk premium attaching to the price of oil may see an extended period of elevated oil prices.

Inflation was “sticky” prior to the surge in oil prices. Furthermore, structural global inflation suppressants that had operated since the late 1980s up until the onset of the pandemic are in clear abeyance (think declining skilled migration flows from the former Eastern Bloc, China and India; the retreat of globalisation of goods markets; increasing labour and goods market regulation; and declining baby boomer workforce participation).

Those waning structural inflation suppressants and now the surge in oil prices have meant that central banks, including the US Federal Reserve, are required to be more attuned to upside inflation risks than they may have been in the three or so decades leading up to the pandemic. It has also meant that an anticipated decline in bond yields has not eventuated.

There is a view that current bond yields are “elevated” by some historical standard.

That notion, however, doesn’t bear scrutiny.

Between 2008 and 2022 (the period covering from the GFC to the pandemic) US 10-year bond yields averaged around 2.4 per cent.

That was a period of extraordinarily low yields by historical standards. Yet it is etched in the minds of a number of market participants as some benchmark of ‘normality’.

Between 2000 and 2007 the average US 10-year bond yield was around 4.7 per cent. That is a way north of where the current US 10-year bond yield is trading.

The latter is arguably a better benchmark (albeit one that is far from perfect).

(Interestingly the average through the 1960s was also around 4.7 per cent.)

In other words, current bond yields are not “high” by historical standards.

The corollary of that notion is that in the current period of relatively strong inflationary tailwinds, the forces preventing any substantial decline in global and US bond yields are formidable.

That would imply ongoing headwinds to economic activity growth and equity market performance.

So why are US equity markets at close to record highs?

For one thing the macro data is yet to show any substantial slowing in economic activity growth.

However, it is also yet to reflect fully the fallout from the Iranian conflict.

But more importantly, the answer is that equity markets reflect a whole lot more than the macroeconomy.

Global markets are currently wrestling with huge economic structural shifts that are arguably more important than conventional macro metrics in driving equity market performance.

At the forefront of these changes is the rapidity of technological advances. The incorporation of AI into economic life will likely see massive productivity growth that can mitigate any adverse macro influences.

Moreover, there is an element of US exceptionalism that attaches to AI and consequent productivity growth.

The US is at the epicentre of AI developments and there are signs that it is already reaping outsized rewards from that circumstance.

US productivity growth has averaged 1.7 per cent per annum since the end of 2021. The equivalent Australian figure is -1 per cent. To put it more starkly, US productivity has grown by almost 7 per cent in that time, Australia’s productivity has fallen by 4 per cent. (Australia’s experience is reflected more or less in the rest of the developed world outside the US).

That might in part explain why US equity markets are at record highs (despite an adverse prospective macro environment) and that is to some extent dragging the laggards with it.

An important investment dimension arising from the forgoing is that it is likely to result in a greater dispersion of individual stock returns. That being the case, the returns from “good” active management are accordingly higher compared with passively managed index funds.

So yes, the macro environment is a challenging one and likely to stay that way as bond yields remain at current levels or go higher.

And that should make investors wary.

But equity markets (particularly the US) can benefit from harnessing important structural mega-trends that can propel ongoing strong equity performance despite that adverse macro environment.

The RBA: where to next?

I had canvassed the possibility that the RBA might ‘pause and reflect’ at this week’s RBA Monetary Policy Board (MPB) meeting.

That was not intended as a prescriptive statement but more as a descriptive sense of what the RBA may deliver under the new arrangements that accompanied the An RBA Fit for the Future review initiated by Treasurer Chalmers.

That didn’t eventuate, but I think the RBA Monetary Policy Board made the right call.

Inflation was already both too high and broad-based ahead of the Iran shock, even if the March quarter consumer price index (CPI) outcome was slightly less than feared.

And despite that ‘better than feared’ March quarter outcome, newly issued RBA forecasts show a path for trimmed-mean inflation higher than forecast back in February. For this calendar year trimmed-mean inflation is expected to come in at 3.5 per cent (compared with 3.2 per cent forecast back in February).

For what it is worth, I think on balance the current environment is one that argues for further insurance against inflation expectations becoming unanchored and that should see a further tightening at some stage this year.

Both the Federal and State governments appear to reticent to abandon politically expedient but ultimately counter-productive spending measures. In large part the end result is higher policy rates.

This is also the product of an almost egregious inattention of past and present governments (both State and Federal and Labor and Coalition) to policies that might ease structural constraints on inflation. In most instances this involves “unintended consequences” of regulatory creep in labour and goods markets.

The forgoing is emblematic of a particular inflation proclivity in the Australian economy.

That is on top of structural global inflation suppressants that had operated from the late 1980s up until the onset of the pandemic now being in clear abeyance.

The forgoing suggest that the RBA might still need to reload later in the year.

Coming up: US non-farm payrolls is unlikely to move the dial for the Fed despite the Warsh ascendancy

The last meeting of the US Federal Reserve (Fed) appeared to indicate the Fed was some way from easing policy.

At this juncture it is difficult to see that changing even as Kevin Warsh assumes the Chair’s position, presumably later this month.

Warsh, conjectures that disinflation in the US will follow from tremendous (largely AI motivated) investment. In Warsh’s view that investment has wrought a productivity dividend that (other things equal) has raised the US economy’s ‘speed limit’. In other words, the US economy can grow at faster rate before igniting inflationary pressures.

That is a credible – if eminently debatable – position.

And there have been glimpses of that phenomenon in some of the less “noisy” inflation measures.

For example, the Dallas Fed ‘s trimmed mean core private consumption expenditures (PCE) measure was 2.4 per cent in March, minisculely above the February reading which was the lowest since August 2021, and comes despite broad-based price pressures emanating from the Trump tariff agenda.

That said, progress toward the 2 per cent target, even on the Dallas Fed measure, has been excruciatingly slow.

Judging by their commentary most members of the Fed’s rate setting Federal Open Market Committee (FOMC) remain concerned about the potential for the recent oil price surge to unanchor inflation expectations.

And it remains the case that the Fed’s favoured inflation measure, the core private consumption expenditures (PCE) price index, at 3.2 per cent in March, is well above the target 2 per cent and was the highest read since November 2023.

So absent some sharp deterioration in the labour market the incoming Fed Chair might be hard-pressed to convince his fellow FOMC members of the case for cutting the policy rate.

Friday of course brings the April non-farm payrolls report.

Indications are that the labour market remains in satisfactory condition.

The ADP April payrolls report was more robust than anticipated showing a gain of 109k (versus the 85k increase expected). The ADP report is sometimes dismissed (too easily in my view) because of its poor record in foreshadowing month-to-month movements in the Bureau of Labor Statistics payrolls measure. However, it is just as good a measure of the state of the labour market as the payrolls report.

The March Job Openings and Labor Turnover survey (JOLTs) report saw openings remain at a satisfactory 6.9m.

The April Institute of Supply Management (ISM) manufacturing index (PMI) released on Monday paints a reasonably satisfactory picture of the US manufacturing sector: the index coming in unchanged at 52.7. The employment component slipped to 46.4, which is a little on the soft side and consistent with some manufacturing job losses (50.0 is the neutral point between expansion and contraction). The prices component meanwhile increased to an elevated 84.6 (ringing clear alarm bells around accelerating inflation in the sector).

The April ISM services index also paints a satisfactory picture with the overall index remaining consistent with expansion at 53.6. The employment component improved a little to 48.0 from 45.2, although it remains consistent with some modest cooling in the non-manufacturing labour market. The price component remains elevated at 70.7 (again consistent with worrying acceleration in inflation).

A consensus outcome for payrolls of a circa 180k increase in employment and an unemployment rate unchanged at 4.3 per cent with average earnings growth of 3.5 per cent is unlikely to move the dial for remaining Fed members.

If Kevin Warsh does in fact wish to cut the policy rate, he has his work cut out.

By Stephen Miller, investment strategist

The post Are markets ‘complacent’? appeared first on AdviserVoice.

Stephen Miller

The sharp increase in the price of oil in the wake of the Iran conflict has ushered in a plethora of central bank warnings around the inflationary consequences of such an increase.

What worries central banks is that a surge in oil prices might result in inflation expectations becoming unanchored and ultimately self-fulfilling.

The decidedly hawkish tone adopted by developed country central banks is largely aimed at avoiding a repetition of what played during in the 1970s in the wake of the first oil shock that followed the 1973 Yom Kippur War and the second shock in the wake of the Iranian revolution in 1979.

When the history of central banking in the 1970s came to be written it was thought that central banks were “too accommodating” of oil price shocks.

The narrative seemed to be that central banks in general, and the Federal Reserve in particular, were too quick to ease the monetary brakes after the first oil shock thereby failing to seal the inflation genie securely in the bottle. The result was that when the second oil shock hit, already elevated inflation expectations became unanchored, and the genie got well and truly out of the bottle.

It took the harsh but necessary Volcker medicine of the late 1970s / early 1980s which saw US overnight rates (fleetingly) approach 20 per cent to get that inflation genie back in the bottle. (The process took a little longer in Australia).

The experience of the late 1970s / early 1980s notwithstanding, an alternative narrative with respect to oil prices tended to take hold under the Fed Chairmanship of Alan Greenspan.

This was that the activity diminishing consequences of an oil price surge were of greater consequence than the price effects. Therefore, the bigger risk was the economy tipped into recession and that would ultimately be disinflationary.

So which is it? Are oil prices inflationary or disinflationary?

I suspect that the answer largely depends what might be happening with structural elements that have a bearing on inflation.

Throughout the developed world, the post-World War 2 period through to the end of the 1970s was marked by a greater confidence in governments being able to seamlessly regulate desired economic outcomes.

There may have been some benefit from such an approach, but there were also substantial economic costs in terms of structural rigidities reducing the flexibility of economies to respond to shocks (inflation shocks in particular). The result was a growing inflation proclivity (or “stickiness”) in developed economies.

Perhaps that was why inflation expectations were so hard to contain in the 1970s.

The 1980s through to the early 2000s were marked by a more deregulatory approach. Certainly, that was evident in the financial sector but also in labour and goods markets. This increased economic flexibility in goods and labour markets and was a factor in the “Great Disinflation” of that period.

There were also other structural currents that served to put a lid on inflation. The collapse of Communism in the former Eastern Bloc and the opening of China and India elicited a wave of skilled migration to developed countries. Governments were focussed on lowering tariffs and fostering domestic competition. Baby-boomer participation in the workforce was increasing (particularly female participation) which led to a relatively abundant labour supply that arguably kept wage growth lower.

It was because of a litany of such structural suppressants to inflation that oil prices through the period from the mid-1980s to the early 2000s tended to have more disinflationary consequences, at least in the medium-term.

However, as noted by Professor Charles Goodhart, former Bank of England Monetary Policy Committee member and a distinguished Emeritus Professor at the London School of Economics, those structural suppressants (particularly those associated with labour supply shocks) are probably in reverse.

The globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating.

The globalisation of goods markets is in retreat as governments resort to protectionist measures (most notably with the Trump trade measures in the US); domestic regulation of goods and labour markets is increasing in scope leading to loss of flexibility in markets and attendant upward price pressures or “sticky” inflation”; and baby boomer workforce participation is declining.

A potentially important mitigant to the forgoing inflation scenario is put forward by Fed Chair designate, Kevin Warsh. He conjectures that disinflation in the US will follow from tremendous (largely AI motivated) investment. In Warsh’s view that investment has wrought a productivity dividend that (other things equal) has raised the US economy’s “speed limit”. In other words, the US economy can grow at faster rate before igniting inflationary pressures.

That is a credible, if still highly debateable position. For all the talk of US productivity exceptionalism (which certainly exists), the Fed’s favoured core private consumption expenditures (PCE) measure is “sticky” at just above 3.0 per cent, unchanged from where it was a year ago and still well north of the Fed’s target 2 per cent.

Bearing that in mind, and the abatement of structural inflation suppressants, it might mean that today’s world is more redolent of the 1970s and a surge in oil prices may have a longer lasting inflation impact.

That will mean that central banks have to be more attuned to the importance of anchoring inflation expectations than they may have during the three decades from the mid-1980s.

And that means a period of higher interest rates.

RBA: time to “pause and reflect”?

Yesterday’s relatively benign February monthly CPI report probably eases the pressure on the RBA to execute a “hat-trick” of rate rises when it meets in May.

If we take the Governor at her word (as I think we should), if the closeness of the vote at the last meeting was “more about timing than direction” then there may be some breathing space in May that affords the RBA to take on board a little more data before reconvening in mid-June to contemplate the utility of further tightening.

But it is a close call.

That is also the view reflected in the local bond market. In the wake of yesterday’s report markets were pricing roughly a 60/40 chance of a May tightening.

If pressed I would see the probability of a May tightening at something lower than 50 per cent (bearing in mind the Governor’s timing / direction comments). In other words, there may be some scope for “pause and reflection”. That might change in the event of an adverse March inflation report and / or any uptick in wage pressures in the wake of the ACTU claim for a 5 per cent increase in the minimum wage.

In any case, I strongly suspect that further tightening is in store as the year progresses because getting on top of the inflation remains the more important focus.

In my view, the Australian economy has developed an inflation proclivity that is greater than that which might exist in other developed countries.

There are elements to that proclivity that are homegrown, such as an almost egregious inattention of governments (both State and Federal and Labor and Coalition) to policies that might ease structural constraints on inflation. In most instances this involves “unintended consequences” of regulatory creep in labour and goods markets.

There are other elements that are more global in nature. In large measure these involve the reversal a number of structural forces suppressing inflation that were present in the three or so decades leading into the pandemic.

The globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating; globalisation of goods markets is in retreat as governments everywhere introduce protectionist measures; domestic regulation of goods and labour markets is increasing in scope leading to loss of flexibility in markets and attendant upward price pressures or “sticky” inflation”; and baby boomer workforce participation is declining (limiting labour supply and lifting wages).

In the wake of the oil shocks of the 1970s, developed country central banks’ big mistake was a premature retreat from an inflation focus. That “let the inflation genie out of the bottle” and resulted in the painful, but necessarily harsh Volcker medicine of the late 1970s / early 1980s which saw overnight rates (fleetingly) approach 20 per cent. (Inflation – and elevated interest rates – lingered longer in Australia.)

I am not suggesting that the current circumstance is one that is anywhere near quantitatively on a par with the stagflation of the 1970s. But there are elements that are redolent of that time, albeit on a substantially reduced scale – “stagflation-lite” if you will.

As to the argument that a surge in oil prices is ultimately disinflationary, I have my doubts (as explained above).

That may have been true through the 1990s and into the early 2000s when those structural inflation suppressants were active.

It is less true in 2026.

What the forgoing means is that central banks need to be more attuned to inflation risks now more so than at any other time since the 1980s.

That has particular relevance in Australia given its inflation proclivity.

So even with a “pause and reflect” in May, the RBA might still need to reload in June.

The RBA operating in a new communication paradigm

There was some suggestion at the RBA Governor’s press conference that followed last week’s decision to further increase the policy rate that the RBA had “miscommunicated” its position in the lead-up to the meeting.

The contention was that both the Governor and her Deputy had strongly intimated that a tightening of policy was extremely likely at the March meeting.

The fact that the decision was a finely balanced one, as exemplified by the 5-4 vote in favour of an increase in the policy rate, was taken in some quarters as RBA “miscommunication”.

The Governor (rightly in my view) pushed back strongly on that notion. She suggested that the new arrangements that accompanied the An RBA Fit for the Future review initiated by Treasurer Chalmers meant that every meeting was a “live” one and this was what she and her deputy had wished to communicate.

In other words, those new arrangements have changed the operating communications paradigm for the RBA’s monetary policy decisions.

The new arrangements sought to give alternative viewpoints to any RBA institutional one. Those alternatives now have a voice and the power to challenge and debate the RBA staff view.

That is arguably not a bad thing.

But in this context, it is inevitable that when a diversity of voices are heard then discerning a “consensus” view is made more difficult.

This perhaps reflects what markets (should?) have know all along; that monetary policy and its appropriate stance is something that reasonable people can disagree on.

The appropriate stance of monetary policy is not a black and white decision.

When non-RBA staff Monetary Policy Board (MPB) members feel inclined to communicate their views (as I understood the new arrangements to envisage) that will become clearer.

RBA communication might therefore become more about the various factors that feed into an eventual decision.

The downside might be that real debate at the MPB level of the RBA means that any particular decision become harder to telegraph.

The upside is a more rigorous debate where the operating institution is subject to a greater degree of interrogation of its recommendation.

As the Governor hinted in her press conference that sort of debate and diversity heralds a more disciplined approach to decision-making.

Markets and the media may have to get used to the new communications paradigm.

In that endeavour they might be assisted by more communication from non-RBA staff members of the RBA MPB.

By Stephen Miller, investment strategist

The post Is an increase in oil prices inflationary or disinflationary? appeared first on AdviserVoice.

Stephen Miller

The Federal Reserve (Fed) faces a somewhat different decision than the Reserve Bank of Australia (RBA).

In the absence of the sharp rise in oil prices, there would be an argument that the subdued February payrolls report released last Friday and a “benign enough” February consumer price index (CPI) report released overnight leaves the door ever so slightly ajar for the Fed to cut the policy rate when it meets next week.

The February core inflation measure at 2.5 per cent was the lowest since the depths of COVID back in March 2021 and comes despite the inflationary effects of tariffs. The US trimmed-mean measures came in around 2.7 per cent, the lowest since April 2021. By contrast the latest trimmed-mean inflation rate measure for Australia is at 3.4 per cent (12 months to January).

So on those measures, even with the price pressures arising from tariffs, the US better performed on inflation than Australia.

It is true that measures of the inflation “pulse” (3-month annualised measures) are less benign with core and trimmed-mean measures running at 3.0 per cent and 2.9 per cent respectively.

Also complicating the picture a little is that the Fed’s favoured core private consumption expenditures (PCE) measure is “sticky” at 3.0 per cent (12 months to December 2025), unchanged from where it was a year ago and still well north of the Fed’s target 2 per cent. The January figure is released on Friday. Consensus expectations imply little improvement and perhaps even a slight deterioration.

Federal Reserve Chair designate, Kevin Warsh, conjectures that disinflation in the US (of which there are glimpses in CPI-based measures) will follow from tremendous (largely AI motivated) investment. In Warsh’s view that investment has wrought a productivity dividend that (other things equal) has raised the US economy’s “speed limit”. In other words, the US economy can grow at faster rate before igniting inflationary pressures.

That is a credible –  if eminently debatable –  position.

That is what leaves the door ever so slightly ajar for policy interest rate reductions in the US.

Another question is oil prices. Do they have the potential to unanchor inflation expectations which were already under assault from tariff impositions? Are they inflationary? Or could they ultimately be disinflationary given the activity diminishing effects of higher oil prices.

During the 1990s and into the early 2000s oil prices had a stronger ultimate disinflation impact because there were a number of structural forces suppressing inflation.

It may be less true in 2026.

The globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating; globalisation of goods markets is in retreat as governments everywhere introduce protectionist measures; domestic regulation of goods and labour markets is increasing in scope leading to loss of flexibility in markets and attendant upward price pressures or “sticky” inflation”; and baby boomer workforce participation is declining (limiting labour supply and lifting wages).

But what the US has going for it is that the surge in productivity is a structural disinflationary force that is not visible elsewhere, including in Australia. US productivity growth has averaged 1.6 per cent per annum since the end of 2021. The equivalent Australian figure is -1 per cent. To put it more starkly, US productivity has grown by 6.4 per cent in that time, Australia’s productivity has fallen by 4 per cent.

That arguably puts the Fed in a better position than the RBA to “look through” any inflation impact from oil prices.

For what it is worth, in the unlikely event of a sharp decline in annual core PCE in January, I suspect that the Fed will eschew a policy rate reduction next week. The Warsh “productivity dividend” thesis is probably not yet sufficiently established to offset the current “stickiness” in core PCE inflation and there is the lingering potential for the surge in oil prices to un-anchor inflation expectations.

But if the incoming Fed Chair’s thesis is borne out, the policy rate may yet be lowered later in the year.

The post US CPI and the Fed: the door is ever so slightly ajar…but the Fed won’t walk through in March appeared first on AdviserVoice.

Stephen Miller

For those looking for some mortgage relief, yesterday’s release of the January consumer price index (CPI) didn’t make for pleasant reading.

The best thing that might be said about yesterday’s release is that it probably wasn’t that different to any expectation the RBA may have held.

The current RBA forecast has trimmed-mean CPI inflation coming in at an annual 3.7 per cent to the June quarter 2026. That implies something close to 0.9 per cent in the March and June quarters.

Yesterday’s release was by and large consistent with that.

Of course, the real question is whether attainment of the RBA forecast is sufficient to forestall a further hike, at least in the absence of an unforeseen deterioration in the labour market.

That is not yet clear but in her “fireside chat’ last night, RBA Governor Bullock noted that judgements on the path of monetary policy had become “more difficult” and suggested a “patient” approach to decision making was apposite given a lack of clarity on the balance of risks between inflation and the labour market.

She described the current circumstance as one “where the labour market…is a little bit tight and inflation is a bit elevated”.

Those comments suggest to me that the current thinking of the RBA Monetary Policy Board is to leave the policy rate unchanged when it meets in March, but that May is a “live” meeting. A “patient” approach would give the RBA time to assess not only the implications of more inflation data but gain some insight as to how other potential drivers of inflation (wages, fiscal policy etc.) are unfolding.

Given that the RBA increased the policy rate in February that seems appropriate.

The forgoing therefore points to the May meeting as the critical decision juncture.

By Stephen Miller, investment specialist

The post A “patient” RBA and January CPI: March unlikely but May “live” appeared first on AdviserVoice.

Stephen Miller

Last night’s January jobs report appears on the surface to put further Fed policy rate reductions in indefinite abeyance.

In the wake of President Trump’s “Liberation Day” announcement back in April 2025 there were a plethora of dire prognostications issued over the likely course of the US and global economy.  In essence the received wisdom was that the tariff announcements would at least in the short-term make inflation “stickier” and that further, in order to quarantine that price impact from becoming embedded in inflation expectations, and thereby become self-fulfilling, the US Federal Reserve (the Fed) would need to adopt a conservative approach to reductions in the policy rate. Additionally, a lax approach to the budget deficit that was already around 6 1/2 per cent of GDP would compound an already challenging bond issuance picture that would see bouts of market indigestion that would at the very least prevent bond yields from falling and perhaps send them higher. 

An environment of relative monetary tightness, combined with some activity diminishing impact from tariffs and higher bond yields were thought to presage a “stagflation-lite” type scenario with inflation stuck at 3 per cent or more, and activity growth flirting with a recessionary environment. That was thought to be a particularly challenging environment for risk markets. 

 Certainly, elements of that macroeconomic scenario did eventuate: inflation was “sticky” (but maybe not as “sticky” as feared); the Fed erred on the conservative side when it came to rate cuts: and US 10-year bond yields spent most of the time since “Liberation Day” comfortably north of 4 per cent.

 Economic growth, however, barely missed a beat even if labour markets did show some signs of cooling (albeit remaining some way from a feared cratering).

 Using the current Atlanta Fed GDPNow December quarter number of 3.7 per cent as a proxy for that quarter (which includes the softer than expected December retail sales data released on Tuesday), US GDP growth averaged around 2.8 per cent in 2025. That is healthy clip and way above what was thought likely back in April. 

Last night’s payrolls data seemed to indicate that the labour market remains in a satisfactory position. Employment grew 130k led by a 172k advance in private employment and the unemployment rate unexpectedly fell to 4.3 per cent. No real signs there of an AI led jobs apocalypse.

Despite being some way from an apocalypse, it is still probably the case that in aggregate jobs growth might have expected to have been a little greater over the last year or so given what we know about activity growth. The missing link is productivity and what it might imply for the US economy’s speed limit and inflation.

Since the end of 2022, US productivity growth has averaged around 2.5 per cent per annum. (By contrast, Australia’s productivity growth has been around -0.5 per cent over the same period.)  Currently consensus forecasts for January core inflation suggest an outcome of around 2.5 per cent when that report is released tomorrow. That would be the lowest since the depths of COVID back in March 2021 and comes despite the inflationary effects of tariffs. US trimmed-mean measures are thought to come in around 2.8 per cent, the lowest since May 2021. Again, by contrast Australia’s trimmed-mean inflation rate is higher than a year ago at 3.3 per cent (12 months to December).

As Federal Reserve Chair designate, Kevin Warsh, points out tremendous (largely AI motivated) investment has wrought a productivity dividend that has raised the economy’s “speed limit”, allowing the economy to grow faster before igniting inflationary pressures thereby opening up the prospect of policy interest rate reductions in the US. This is a credible, if debatable, position. 

The emergent disinflation picture suggests that a cut in the policy rate is still some possibility under Chair Powell even with a better performed labour market in January. That might be less likely with ongoing resilience in the labour market but not impossible should ongoing falls in inflation occur.

And a changing of the guard at the top of the Fed could well see the policy rate lowered multiple times this year, especially if the incoming Chair’s thesis is accurate.

Quick update on the RBA: further policy rate increases far from a done deal

In contrast to the US, the inflation picture in Australia seemed to deteriorate reasonably rapidly over the latter part of 2025.

The causes have been long discussed and are reasonably well known (too much monetary easing, lack of fiscal and structural / regulatory support for anti-inflation policies, deteriorating productivity / high unit labour costs) and I don’t intend to traverse them again. However, there is somewhat of a glimmer of hope on the inflation front even if there is a sting in the tail when it comes to profit margins.

The latest NAB Monthly Business Survey for January released earlier in the week revealed product price growth and retail prices growth fell to 0.5% and 0.3% respectively (January per cent change at a quarterly rate). Those price growth measures sit at their lowest levels since 2021.

Significantly, both purchase and labour cost measures are also at their lowest since 2021 but are running higher than product and retail price growth (and have been for some time), implying potentially significant pressure on profit margins. 

That glimmer of a more positive inflation picture at the margin suggests that further policy rate increases from the RBA are far from a done deal.  

By Stephen Miller, investment strategist

The post No AI jobs apocalypse but Fed rate cuts not dead yet appeared first on AdviserVoice.

Stephen Miller

As late as 21 January, markets had rated the probability of an upward adjustment to the policy rate at next week’s RBA Monetary Policy Board meeting at around 25 per cent.

That changed dramatically with the release of a blockbuster December labour force revealing strong growth in employment and a fall in the unemployment rate to 4.1 per cent. Markets revised that probability up to around 60 per cent.

Even then, and with some justification, the notion persisted in some quarters that with a greater than usual amount of uncertainty clouding the global economic landscape, the discretion of no change would prevail over the valour of a policy rate increase.

However, in the wake of the release of the December consumer price index, revealing inflation pressure over and above that forecast by the RBA, discretion may dictate a hike at the February meeting. The more valourous (if less advisable) path may be to leave the policy rate unchanged.

That is, inflation is a clear and present danger and attending to that danger now by raising the policy rate at the February meeting is the most appropriate RBA response.

A failure to do so may well necessitate more aggressive use of the policy rate instrument down the track. As the saying goes “a stitch in time saves nine”.

RBA Deputy Governor Hauser has warned last that the RBA doesn’t draw a line in the sand on inflation to the extent that there is an outcome for the trimmed-mean that mandates a tightening. But the December quarter outcome is impossible to ignore.

The annual trimmed-mean inflation rate is running at 3.4 per cent against an RBA forecast of 3.2 per cent and a target of 2 to 3 per cent.

With a strong rebound evident in consumer spending and the labour market looking to be in relatively good shape, this leaves the balance of probabilities strongly in favour of a policy rate rise.

Moreover, other arms of economic policy are doing little to get inflation down. Indeed, the inflation problem is being exacerbated by government policy at both state and federal levels.

At the risk of sounding like a broken record, I have in the past made the observation that Federal and State Governments have long averted their eyes to meaningful structural reform that may assist productivity growth and ameliorate inflation pressures. Indeed, successive Federal and State governments have reversed some of the progress made during the Hawke-Keating and Howard eras.

Of particular note are regulatory forays into wage-setting arrangements and the industrial relations arena which have proven inimical to productivity growth.

That has seen unit labour cost growth run at around 5 per cent, something manifestly irreconcilable with the RBA’s current 2 to 3 per cent inflation target.

Fiscal policy too (at State and Federal level) has done little to attack the fundamentals of inflation pressure.

That leaves me thinking that the RBA should raise the policy rate when it meets next week.

I suspect it will.

The Fed: not yet maybe later…

As had been almost universally expected, the Fed’s Federal Open Market Committee (FOMC) overnight announced that it had kept the policy rate unchanged in the 3.5 to 3.75 per cent range.

Of course, that won’t please the White House but with US economic activity growth exceeding expectations and inflation still exhibiting some “stickiness” the decision to leave the policy rate unchanged is eminently defensible.

The decision to hold the policy rate in its current range was not unanimous with two Fed Governors favouring a lowering of the policy rate.

In announcing the decision, the Fed Statement noted that “economic activity has been expanding at a solid pace” but that “job gains have remained low” even if “the unemployment rate has shown some signs of stabilisation” and inflation “remains somewhat elevated”.

Fed Chair Powell described the current stance as “at the high end of a neutral range” adding that it was hard to say that policy was overly “restrictive”. However, he refused to be drawn on the likelihood of when there might be a future rate cut. Rather he thought the Fed “well positioned” to respond to incoming data.

The “dot plot” issued at the last meeting in December 2025 indicated only one policy rate reduction would be appropriate in 2026.

In essence today’s decision reflects some anxieties around ongoing inflation in the system, even if those anxieties are slowly dissipating as disinflation continues in the service sector and tariff effects wind their way through the goods sector. In essence, the Fed Chair in his press conference appeared to imply some progress toward the Fed inflation objective but was careful to note that the Fed remains focused (and has had some success) on keeping inflation expectations anchored.

With signs of some stabilisation in the labour market therefore and given strong activity growth the Fed consensus doesn’t yet see room for cutting the policy rate.

Against that it might be argued that strong US productivity growth reflecting, inter alia, strong AI investment might well yield an inflation dividend, perhaps increasing the US economy “speed limit” and that the Fed can accordingly cut the policy rate.

To that end, there seemed to be some nod from the FOMC that they are cognisant of risks that the labour market may soften further noting that it “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals”.

All that added up to the Fed retaining maximum optionality in terms of when there might be an adjustment to policy meaning that the Fed course remains heavily data dependent.

The forgoing to my mind suggests that a cut in the policy rate at some stage is still a strong possibility under Chair Powell.

Whether a more aggressive approach to cutting rates eventuates, rather than just the one cut in 2026 implied by the “dot plot” depends not only on economic developments but probably also on whomever succeeds Powell as Chairman when his term expires in May.

That changing of the guard at the top could well see the policy rate lower than that implied by the “dot plot”.

By Stephen Miller, investment specialist

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Stephen Miller

Global markets will face a challenging year ahead with turbulence and uncertainty from some key areas dominating the investing landscape. Artificial intelligence, geopolitics and inflation will continue to influence market volatility in 2026, according to GSFM and its fund manager partners Auscap Asset Management, Man Group and CI Global Asset Management. 

GSFM investment strategist, Stephen Miller, says the existing “stagflation-lite” scenario and current macro and geopolitical uncertainties may dampen market sentiment in 2026.

“Ongoing resilience in the macroeconomy and slowly declining inflation – should it eventuate – may see a broadening of stock performance. But with “stagflation-lite” not yet vanquished as a scenario, and with conventional valuation metrics showing equity markets in extremely “rich” valuation territory, it pays to be cognisant of a number of macro and geopolitical uncertainties that may yet derail equity market ebullience.

“A clear uncertainty on the investment horizon for 2026 are the tectonic shifts in the geopolitical arena.

“President Trump’s “Donroe Doctrine” is perhaps the notable geopolitical development in 2026 along perhaps with the fracturing of the NATO alliance.

“By appearing to embrace a “spheres of influence” view of the world whereby the “Great powers” assert control over their respective regions, the Donroe Doctrine may well see the world divide into “Great power” blocks. That might encourage China to formally access Taiwan. It might empower Russia in the Baltics creating challenges for the European Alliance / European Union, itself a little fractured as politics in Europe becomes more polarised.

“Were those spheres of influence to also manifest themselves in an economic sense it might further damage global trading architecture through protectionist tariff measures and retaliation and prove a headwind for global economic activity,” says Miller.

Auscap Asset Management’s CIO, Tim Carleton says that the market may well continue to focus on inflation in 2026 given its potential to impact interest rates.

“We have persistent wage inflation, booming commodity markets and fiscal stimulation in Australia and the US, all leading to inflation levels above central bank targets. Should we see a dovish Federal Reserve chair appointed at the same time as we get a continued pickup in underlying inflation we are cognisant that there may be a reaction at the long end in the bond market. This could have the potential to impact equities markets.”

“From an investment perspective, this may create some great opportunities. During 2025 we saw the unwinding of a bubble in many high quality companies that has been in place for a number of years. The extremely low interest rate environment during the COVID period resulted in very strong performance and stretched valuations for many of the great listed businesses that were seen as having reliable growth that would be largely independent of the cycle and macroeconomic environment. Valuations for these businesses are now getting back to more normal historical levels. Should the derating continue, it will present some interesting and compelling investment opportunities in businesses we would be interested in owning at the right price,” says Carleton.

Given the year started in the midst of a commodity bull market, Carleton expects very strong earnings near term from companies exposed to commodities.

“Gold, precious metals, lithium and copper all kicked off this year very strongly, which should result in meaningful upgrades to earnings estimates. However, we are also wary that commodity strength is often typical of the late stages of a bull market.”

Carleton adds the big four domestic banks have started the year at near record multiples of earnings, despite the emergence of competitive pressures in the banking sector.

“We think caution is warranted in relation to the major domestic banks. They are likely to come under continued competitive pressure from Macquarie Group as it pushes further into housing lending, as well as from the Government in relation to the low interest rates that most customers are receiving in their savings accounts, despite advertised rates being significantly higher.”

Man Group’s head of Asia (ex-Japan) equities, Andrew Swan, says that Asian markets are in a renaissance, with the second-leg of growth expected as global growth strengthens.

“Having staged a quiet comeback and delivering its second best performance since 2010, Asian markets are on the path for further outperformance this year driven by the global demand for artificial intelligence (AI).

“We are seeing strong guidance from semiconductor companies in the region suggesting demand for AI remains strong. Earnings have also been on an upward trajectory over the years, and that is important for share prices.

A part of the next leg of growth in the region Swan says will come from the execution of China’s five-year plan, which starts this year in 2026.

“The Chinese economy needs to pivot away from just investment to more balanced growth, with a focus on consumption.

“However, the opportunity set is now broadening beyond China, with other markets in the region, like Indonesia, set to benefit from lower interest rates.

“Another opportunity we see is with India, which has been through a correction. Valuations have corrected along with earnings growth expectations. There are clear signs that that Indian economy is bottoming out now, and expectations are much more reasonable from an earnings point of view,” says Swan.

Geof Marshall, private markets lead at CI Global Asset Management, says just as the AI narrative has dominated public markets in 2025, it also impacted private equity and venture capital investment decisions last year, and he expects this will likely continue in 2026.

“Private markets continued to evolve in 2025, with private equity still challenged by a lack of monetisation impacting fundraising, and private credit continuing to disintermediate the banking channel.”

“Blurring the line between private equity given their size, and venture capital given their negative cash flows, the private market answer to the Mag 7 – the ‘Private Mag 7’ (comprising of Anduril, Anthropic, Databricks, OpenAI, SpaceX, Stripe, and xAI ) – now have an implied total valuation of more than US$1.4 trillion, or about the same size as the German stock market.”

“This will have a marked impact on private equity and venture capital investment in 2026,” he says.

Marshall adds that non-AI related activity is also likely to increase in 2026 despite a three-year period of muted returns.

“General partners (GP) – those that make the investment decisions for private market funds – are sitting on dry powder in excess of $1 trillion and credit markets are very accommodative, partly because the equity component of recent leveraged buyouts have been larger and the debt component smaller. This may auger a return to private equity roots of ‘buy cheap and fix or build’ over financial engineering.

“Over the past year generalist investors and the media have looked for problems in private credit. While it is true that rapid growth in an asset class can lead to poor underwriting and lower returns, as Apollo has pointed out, it is hard to reconcile equity markets at or near all-time highs with high default rates.

“In terms of asset classes, infrastructure has outperformed real estate on returns, volatility, and fundraising since 2022. This seems likely to continue in 2026 as real estate, while stabilised, continues to wrestle with secular changes. The infrastructure opportunity set grows, especially in power generation with the ongoing demand for AI.

“These asset classes are likely to outperform their public market equivalents in 2026, earning their illiquidity premium, and providing good opportunities for private market investors,” says Marshall.

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Stephen Miller

I’ve had a hard time convincing myself that the Reserve Bank of Australia (RBA) will raise the policy rate when it meets on February 10th.

Markets appeared to share that judgement. At the time of writing markets rated the probability of an upward adjustment to the policy rate at only around 30 per cent.

I had thought that with a greater than usual amount of uncertainty clouding the global economic landscape that the discretion of no change would prevail over the valour of a policy rate increase.

However, I’m now wondering if indeed that discretion may dictate a hike at the February meeting and the more valorous (if less advisable) path may be to leave the policy rate unchanged. That is, I am increasingly convinced that inflation is a clear and present danger, one that is only exacerbated by government inaction – probably much to the chagrin of the RBA.

Much was made of what looked to be a better November inflation read. But while that November inflation read may have been better than feared it is still difficult to see December quarterly trimmed-mean inflation number that is low enough (say below 0.8 per cent in quarterly terms or 3.2 per cent in annual terms) to at the very least provoke a meaningful discussion around the requirement for a policy rate increase.

RBA Deputy Governor Hauser warned last week that the RBA doesn’t draw a line in the sand on inflation to the extent that there is an outcome for the trimmed-mean (say above 0.8 per cent) that mandates a tightening.

That said the arithmetic is if not compelling then certainly persuasive.

Even an extremely modest increase in the December month trimmed-mean CPI of a little above 0.2 per cent implies a quarterly outcome somewhere between 0.8 and 0.9 per cent which is enough to drive the annual rate to 3.3 per cent. To repeat – that is with a very modest December monthly increase.

The current RBA forecast is 3.2 per cent.

With a strong rebound evident in consumer spending and the labour market looking to be in relatively good shape, this leaves the balance of probabilities favouring a policy rate rise. Indeed, by not doing so the RBA may leave itself facing the prospect of confronting an even more aggressive approach down the track.

At the risk of sounding like a broken record, I have in the past made the observation that Federal and State Governments have long averted their eyes to meaningful structural reform that may assist productivity growth and ameliorate inflation pressures. Indeed successive Federal and State governments have reversed some of the progress made during the Hawke-Keating and Howard eras.

Of particular note are regulatory forays into wage-setting arrangements and the industrial relations arena which have proven inimical to productivity growth.

That has seen unit labour cost growth run at around 5 per cent, something manifestly irreconcilable with the RBA’s current 2 to 3 per cent inflation target.

Fiscal policy too (at State and Federal level) has done little to attack the fundamentals of inflation pressure. Indeed it has tended to exacerbate inflation pressures.

That leaves me thinking that the RBA should raise the policy rate when it meets on February 10th.

I suspect it will.

The Fed: has the President put a bullet in his foot?

I had thought that the Federal Reserve (Fed) would stand pat on a policy rate adjustment at the meeting concluding on January 28th.

The markets currently assess the probability of a policy rate reduction from the Fed at around 20 per cent.

Certainly, the fallout from President Trump’s tariff measures have not been as damaging to activity as was perhaps commonly perceived back in April and while inflation has exhibited some “stickiness”, it hasn’t accelerated to an extent that inflation expectations became unanchored (maybe because the Fed showed a reluctance to aggressively lower the policy rate).

Indeed, the most recent January CPI and PPI have largely been better than feared.

In that context and given some signs of cooling in the labour market, it might be argued that the Fed could certainly justify a cut in the policy rate at its end-January meeting.

In that sense President Trump’s capricious and vindictive assault on Fed Chair Powell and the Administration’s vexatious employment of state judicial power to pursue the Fed Chair could conceivably constitute a self-administered shot in the foot.

Of course, the Presidents assault shouldn’t influence the Fed either way, but in what might be a lineball decision, it may psychologically push a number of the Fed’s rate-setting decisionmakers to eschew a rate cut at the coming meeting.

Certainly, such an eschewal is perfectly reasonable: economic growth is robust and inflation – though better than feared – is still some way north of the Fed’s 2 per cent target. In that context even if a rate cut is “justifiable” there is no compelling argument to enact one. Indeed it may be better to keep some monetary policy powder dry!

It will be an interesting meeting…not to mention aftermath!

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Stephen Miller

Structural versus macro: flying (a little bit) blind

The US government shutdown has made for a paucity of data with which to analyse how the US economy is evolving.

That said, markets do not seem overly fazed.

In some measure, that might reflect the notion that macroeconomic data has taken second place to emergent structural mega-trends as a driver of equity market performance.

Whether, and for how long, that remains the case is an open question.

In terms of the official data, inflation looks “sticky” even as activity appears to have held up well. Indeed, the Atlanta Fed GDPNow estimate is around a robust 4 per cent for the September quarter while consensus forecasts are settling at around a satisfactory 2.5 per cent.

Having said that, the data still admit the possibility of a ‘stagflation-lite’ scenario, without that case being overly apparent.

The Institute of Supply Management (ISM) manufacturing index (PMI) paints a weak manufacturing picture: the index slipped to 48.7 (consensus 49.5), marking an eighth consecutive month of contraction. The prices component remained at an elevated 58.0 (indicating accelerating inflation in the sector) while the employment component slipped to 46.0, consistent with ongoing manufacturing job losses. (50.0 is the neutral point between expansion and contraction).

The ISM non-manufacturing index released overnight paints a better picture with the overall index remaining consistent with expansion at 52.4 (up from a neutral 50.0 in September). However, the price component remains elevated at 70.0 (again consistent with a further acceleration – even marked acceleration – in inflation) and while the employment component improved a little to 48.2 from 47.2, it remains consistent with some modest cooling in the non-manufacturing labour market.

Meanwhile, the ADP October private payrolls report released overnight suggests some ongoing softness in the labour market increasing by a modest 42k (versus an expected increase of circa 32k) and follows a fall of 29k the previous month.

Overall, those numbers – particularly the price reads – are hardly flashing a green light for a further Federal Reserve (Fed) rate cut in December, despite such a cut being implied by the median “dot plot”. Markets have grown a little more circumspect regarding that prospect with the current implied probability of a rate cut in December around 60 to 65 per cent.

An environment of “sticky” inflation and attendant elevated bond yields combined with the prospect of slowing economic activity and employment is not a cocktail that equity markets would ordinarily find palatable.

However, as mentioned above equity markets have by and large been focused on structural elements – the so-called “mega forces” – that can be big drivers of equity market performance.

Arguably, it is these structural “mega forces” led principally (but not exclusively) by the AI revolution that are the principal drivers of equity market performance this year, at least since the “Liberation Day” tariff announcements.

There are others: a fracturing world has buoyed defence stocks; a tendency toward “oligopolisation” / “monopolisation”, particularly in emergent tech industries (think Meta, Google, Uber, Amazon, Nvidia).

Structural forces might still be the dominant theme going forward, particularly given the paucity of official data.

But an increasingly fraught macro picture that appears to indicate emergent ‘stagflation-lite’ may well yet assert itself.

RBA: flatlining or be careful what you wish for…

As was universally expected, the RBA Monetary Policy Board left the policy rate unchanged at 3.60 per cent when it met earlier in the week.

However, the tenor of the accompanying Statement, and certainly Governor Michele Bullock’s refreshingly direct media conference, very carefully sought to manage expectations to a more “neutral” footing.

That not only makes a December policy rate reduction unlikely but also that any policy rate reduction now looks to be closer to mid-2026. The caveat is the direction of the labour market: a “big miss” on employment/unemployment (sharp deterioration in the labour market) may bring reductions forward.

The Governor and the Board appeared wary of over-emphasising the increase in the unemployment rate from 4.3 per cent to 4.5 per cent revealed by the September labour force report, noting that a range of other labour market indicators suggested the labour market was in a satisfactory position.

The Governor was careful to articulate the notion that the Board did not have a bias. She noted that it was an “interesting question” whether there were more policy rate reductions to come.

Further, while at pains to note that the Board was alert to risks on both sides of the RBA’s dual inflation/ labour market mandate, she indicated that in the near-term the Board were a little more focused on getting inflation back sustainably within the 2 to 3 per cent target band, and more specifically as close to the middle of that band as possible.

Interestingly she noted (properly in my view) that having low and stable inflation is an important prerequisite for sustained employment growth.

There is now more than a hint of “last mile” complications in getting inflation back to the middle of the target 2 to 3 per cent range.

There are elements of those “last mile” complications over which the RBA has limited influence.

Federal and State governments have long averted their eyes to meaningful structural reform and indeed have reversed some of the progress made during the Hawke-Keating and Howard eras.

I have instanced recent regulatory forays into wage-setting arrangements and the industrial relations arena.

The motivation for such forays is unobjectionable: benefits such as higher wages and increased job security etc. But those benefits might amount to nothing more than short-term palliatives that dissipate into the ether of abject productivity growth, higher inflation, higher interest rates and do nothing to aid employment.

That those forays have produced a framework that is inimical to productivity growth is clear and by weakening the link between productivity and nominal and real wage growth, such measures imply a risk of entrenching higher inflation in Australia.

In the long run that framework might also increase the non-accelerating inflation rate of unemployment (NAIRU). The NAIRU is essentially a function of the current structure of the economy which is in turn very much influenced by the prevailing regulatory regime. It follows therefore that by reforming the regulatory regime, governments can reduce the NAIRU.

As the Governor implied in her media conference, lowering the NAIRU is not something that is within the remit of monetary policy.

Monetary policy (at least in theory) is more or less about the diminution of cyclical amplitudes. In that sense it is about managing the inflation / unemployment trade-off around the existing NAIRU.

Labour cost growth remains elevated, at least relative to productivity, and was always consistent with upside risk to prior RBA price projections, exemplified by unit labour cost growth of around 5 per cent.

Wage increases are digestible in times of reasonable productivity growth. However, productivity growth in Australia remains abjectly poor, reflecting, inter alia, the lack of application to structural policies that enhance economic flexibility.

That the non-market sector has been responsible for the resilience in the labour market in the face of tepid private sector activity growth is well-established.

With growth in public spending set to slow there will likely be an attendant slowdown in non-market sector employment. With private spending showing only tepid rates of growth it is questionable whether the market sector employment is in a position to pick up any slack.

The RBA is optimistic on that front. I hope that optimism is borne out. I have my doubts.

If the cycle leads to a softening of the labour market at the same time as the NAIRU drifts higher, the RBA faces an acutely difficult “high wire” act in meeting the requirements of its dual mandate.

Will there be further rate cuts in this cycle? Maybe, even probably in my view, but multiple and proximate cuts will only occur if the labour market is much weaker than projected by the RBA (and most other forecasters).

It might be case of “careful what you wish for”!

Bank of England; not just yet…

Unusually among the “Anglo” economies UK inflation has surprised on the downside.

Core inflation was flat in September to be up 3.5 per cent over the year from 3.6 per cent in August and compares with a consensus expectation of 3.7 per cent. Headline inflation came in at 3.8 per cent compared with an expected (by both the market and the Bank of England) 4.0 per cent.

However, inflation remains well north of the target 2 per cent.

And it is the case that services inflation remains elevated at 4.9 per cent while labour cost growth is close 5 per cent.

However, the Bank of England (BoE) may take some heart in the undershooting of the expected cyclical peak of 4 per cent that was expected to arrive in September, but, on balance, not enough heart to enact a cut at tonight’s meeting.

The September inflation report follows on from a higher-than-expected unemployment rate of 4.8 per cent in August and that is something that will exercise the Bank.

So while a cut is unlikely, it is a reasonably close call. NAB economists’ takeaway from public statements by the nine BoE Monetary Policy Committee members is that three favour a cut, three favour a hold, and three are “swing” voters (including Governor Bailey).

Markets are now pricing the probability of a reduction at tonight’s meeting at around 30 to 35 per cent.

By Stephen Miller, investment strategist

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