Markets and central banks
Share markets came under pressure again this week as investors focused on inflation, central bank decisions and ongoing geopolitical tensions. The ASX 200 edged down 0.1%, while global shares fell 1.8%. Within the Australian market, Resources fell 7.1% while Banks gained 5.0%. In the US, the Federal Reserve held interest rates steady, although the decision was not unanimous, and US inflation remains above the top of its target band. In Australia, the news on inflation was unwelcome. The September trimmed mean figure, the RBA’s preferred measure of underlying inflation, came in higher than expected, rising 1.0% over the quarter and 3.7% over the year.
The RBA and inflation
The RBA has continued to signal that it is prepared to keep raising rates, and tomorrow’s Cup Day meeting is likely to deliver a further 0.25% increase, taking the cash rate to 4.85%. Higher energy prices explain much of the rise in inflation, with Brent crude oil now above US$100 a barrel. Brent has risen 4.6% over the past week and 18.7% over the past month. The RBA also points to elevated government spending as adding to price pressures. Headline inflation stayed firm over the September quarter, driven by sharply higher fuel prices and continued strength in domestically generated inflation. Market services inflation rose to 1.3% for the quarter, and housing inflation remained high, even though new home prices are rising more slowly.
Interest rates, bonds and jobs
Inflation is becoming more entrenched across the economy. As a result, we now expect the cash rate to peak between 5.10% and 5.35%, higher than last week’s forecast of 4.85% to 5.10%. Australian 10-year bond yields are around 5.15% and could move higher from here. Weaker productivity has also worsened the outlook for jobs. We expect the unemployment rate to peak at around 4.8% to 5.0% during the first half of 2027.
Offshore: the US and UK
Offshore, the US midterm elections will dominate attention this week, alongside US jobs data and ISM business surveys. We expect the Democrats to win control of the House of Representatives and possibly the Senate, although what this means for the White House policy agenda remains to be seen. In the UK, the Bank of England also meets this week and is expected to raise rates by 0.25% to 4.0%, with the Iran war and elevated energy prices a key consideration. Euro zone inflation data is also due for release.
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