Market Review & Outlook

Quarterly view: Growth holds up as inflation stays sticky

• Global and Australian economies kept growing through the September quarter, despite higher interest rates and rising energy prices.

• Inflation is proving sticky, and interest rates have gone up again. Higher oil prices pushed headline inflation higher, prompting the RBA and US Federal Reserve to lift interest rates this quarter.

• Bond yields have jumped to multi-decade highs, which saw bond prices fall, with the upside that bonds now offer better income than they have in recent years.

• Share markets have stayed resilient, supported by strong business investment, particularly in AI, even as borrowing costs rise. 

Three risks that could change the outlook

• Oil and the Middle East. A further escalation pushing oil prices even higher would add to inflation and increase the chance of more rate rises. 

• Australia's housing downturn. A deeper fall could weigh on household spending more broadly.

• AI’s longer-term effect on jobs. So far, there's little sign of disruption to hiring in advanced economies, but this could change over time.

What market moves mean across the portfolio

• Bonds: Rising yields meant bond prices fell over the quarter, but bonds now offer their most attractive income levels in many years. That can provide valuable income, particularly for retirees living off their super savings.

• Shares: Resilient economic growth and AI-related spending have supported share markets, especially in the US. Higher interest rates and energy costs remain headwinds.

• Property: Rising rates have put pressure on property values, with residential housing prices falling for five straight months, down more than 5% from their March peak. Impacts vary by sector, which is why we hold a diversified mix of property types. 

A closer look at what’s driving markets

Growth resilient, recovery uneven

The global economy has proven more resilient than expected this quarter. Business surveys and GDP data point to activity accelerating through the September quarter, led by the US.

Australia told a similar story. GDP grew 2.1% over the year to June, ahead of forecasts. But much of that growth came from population growth rather than productivity gains, so the improvement was less broad-based than the headline suggests.

AI-related business investment remains a major growth driver, especially in the US. Australia is seeing its own version through data centre construction, partly offset by the cost of imported equipment needed to run these facilities.

Labour markets are cooling but not cracking. Australia’s unemployment rate rose to a five-year high of 4.6% in August, partly because more people entered the workforce rather than because of job losses. In the US, unemployment remained low at 4.1%, partly because more workers are leaving the workforce.

Oil-driven inflation keeps interest rates higher for longer

Higher energy prices have been the main story behind inflation this quarter. Brent crude oil has climbed from around US$70 a barrel in early July to above US$100, pushing headline inflation higher in Australia and the US. 

The US Federal Reserve raised rates by 0.25% to a range of 3.75-4% in September, its first hike since 2023. The new Federal Reserve Chair Kevin Warsh was clear that the 2% inflation target remains "firm and fixed," signalling the US Federal Reserve’s commitment to bringing inflation back down. Encouragingly, US core inflation (the Fed's preferred gauge) has eased slightly, holding at 3% for the year to August, down from 3.2% in May.

Closer to home, the Reserve Bank of Australia (RBA) lifted the cash rate to 4.6%, its highest level since 2011, and the fourth rate rise this year. 

Australian inflation is proving more stubborn. Monthly CPI ran at 4% for the year to August, with underlying inflation steady at 3.6%, both above the RBA's 2-–-3% target. The RBA has flagged that the risks to inflation still sit to the upside, particularly as temporary fuel excise relief winds back and productivity growth remains weak. Adding to that risk, ongoing tensions between the US and Iran mean energy prices could climb further from here, with no clear resolution in sight.

Higher inflation and rising cash rates have also pushed bond yields to levels not seen in decades. The US 30-year yield is around 5.5% its highest since 2004. While rising bond yields mean lower bond prices, they also offer the potential for higher income. 

Our outlook: Growth slows, rather than stalls

We expect growth to slow gently rather than stall. Higher interest rates and energy costs should weigh on activity in Australia and the US over the remainder of 2026, before conditions normalise from 2027. Business investment should help cushion the slowdown in both economies.

In the US, business investment and strong productivity growth should help cushion any slowdown. In Australia, business investment should similarly provide support as the drag from the softer housing market and elevated inflation starts to fade.

Inflation should keep easing, but gradually. We expect Australian inflation to return to around 2.5%, the middle of the RBA's target band, by mid-2028, although that path depends heavily on where energy prices go from here. 

We expect rates to stay higher for longer. Our base case is that both the RBA and the Fed deliver one more rate rise this year, then hold steady for an extended period. Markets are currently pricing at least one more RBA rise by February 2027. 

Looking beyond the headlines

This quarter is a good example of why it’s important to not over-react to short-term headlines. While we can't predict exactly how events will unfold, diversification, active management and a long-term focus help manage risk through changing market conditions. 

Our focus stays on the structural themes that drive returns over many years, including digitalisation, the energy transition and demographic change, rather than the news cycle of any given quarter. This disciplined, long-term approach is designed to deliver strong risk-adjusted outcomes for members across market cycles.