Weekly Market Update: Growth Slows as Oil Prices Rise (23 October 2026)

“There’s a fine line between fishing and just standing on the shore like an idiot.”

-Steven Wright

Cartoon of the Week

Source: www.hedgeye.com

Funds Snapshot

Movers & Shakers (week ending 16 October):

Stocks (ASX 200 ↓ 0.13%, S&P 500 ↓ 0.47%, NASDAQ ↓ 0.71%)

Bond Yields (ACGB3Y 4.84%, ↓ 1 bp / ACGB10Y 5.16%, ↓ 7 bps)

Bond Curves (A$ 3s10s +32 bps, ↓ 7 bps)

Credit Spreads (Major Bank 5Y Senior +71 bps, ↔ / Tier 2 +134 bps, ↑ 1 bp)

Policy (RBA Cash 4.60%, ↔ / US Fed Funds 3.75–4.00%, ↔)

Oil (Brent US$116.72/bbl, ↑ 6.24%)

Gold (US$3,996/oz, ↓ 4.07%)

Currency (AUD US70.36 cents, ↑ 1.30%)

Market Overview

Market Overview… growth wobbles, oil doesn’t.

• Australian activity stalled, one week after the jobs report cracked.  The S&P Global flash composite PMI fell to 47.7 in October from 51.3, slipping below the 50 line that separates expansion from contraction.  The damage was in services, which fell to 47.8 from 51.9, while manufacturing was broadly steady at 49.7.  Services account for the bulk of output and employment, so a fall of this size, following September’s ↓39,300 drop in employment, strengthens the case that higher interest rates and fuel costs are now weighing on household spending.  Flash surveys are noisy and are revised, and one month does not make a trend.  But the labour market and business activity data are pointing in the same direction.  Long bond yields fell, yet the three-month bank bill rate rose ↑6 bps to 4.82%: the market is not letting go of inflation risk ahead of Wednesday’s CPI.

• In the US, a two-speed economy, with housing in retreat.  Housing data disappointed almost across the board.  Starts fell ↓5.2% in September against an expected ↑1.9% rise, pending home sales fell ↓7.3% (↓0.5% expected), the builders’ confidence index slipped to 29 (31 expected) and mortgage applications fell ↓5.3%.  With ten-year Treasury yields near 5%, mortgage rates are doing some of the Fed’s work in the most rate-sensitive part of the economy.  Elsewhere, activity remains resilient: jobless claims fell to 194,000 (200,000 expected), the flash composite PMI held at 57.6 as expected, and the Kansas City Fed services index jumped to 10 against expectations of 1.  Consumer sentiment improved to 48.0 from 46.3 but remains very weak, while one-year inflation expectations held at 4.7% and five-to-ten-year expectations at 3.5%.  Expectations are not easing, but nor are they spiralling.

• China delivered a firmer headline, but the same structural problem.  Third-quarter GDP grew 4.5% over the year, slightly ahead of the 4.4% expected, with quarterly growth lifting to 1.2%.  Retail sales beat at ↑1.1% (↑0.5% expected) and industrial production was in line at ↑5.5%.  Beneath the headline, property remains a drag: property investment is ↓20.6% year-to-date, residential sales ↓13.7%, new home prices fell again and fixed asset investment is ↓7.2%.  Loan prime rates were left unchanged, so no new monetary support.  Despite the better data, the CSI 300 fell ↓5.79% and the Hang Seng ↓4.52%.  The data provided do not point to a single catalyst, and we would not read too much into one week, but with the CSI 300 ↓13.2% over the quarter, investors remain unconvinced that growth built on exports and industry, rather than household demand, is durable in a world of rising trade friction.

• Europe is losing momentum, while inflation expectations stay sticky.  The ZEW expectations index fell to 18.5 from 25.8, the flash composite PMI eased to 51.9 from 53.1 (52.7 expected) and consumer confidence weakened to −17.9.  At the same time, the ECB’s consumer survey shows households expect inflation of 3.1% over the next year and 2.9% three years out, both above the 2% target.  This is the same tension facing the RBA: softer growth, but inflation expectations that have not yet come back to target.  European equities fell ↓1.39%.

• The dominant narrative: growth is softening while oil keeps rising.  Brent rose ↑6.24% to US$116.72 per barrel, within reach of its twelve-month high of US$118.35, and is now ↑13% over the month and ↑77% over the year.  The supply risk premium we highlighted last week has, if anything, grown.  Markets are therefore weighing a stagflationary mix: weaker activity alongside rising energy costs.  This week, bonds sided with growth.  Long yields fell in Australia and the US, curves flattened, and the VIX eased slightly to 19.45.  Equities fell only modestly in Australia and the US but sharply across Asia.  Sentiment is cautious rather than fearful.  For defensive portfolios, the key observation is that high-quality bonds are again responding to growth risk, even with inflation still elevated, while the front end of the curve remains anchored by the risk of further rate rises.

• Gold slipped below US$4,000, and the Australian dollar rallied.  Gold fell ↓4.07% to US$3,996 per ounce, is ↓6.8% over the month and now sits around 26% below its twelve-month high of US$5,417.  Silver fell ↓5.44% and is ↓16.4% over the month.  Unlike last week, falling US yields should have helped an asset that pays no income, so this looks more like the unwinding of a crowded, momentum-driven trade than a change in fundamentals.  The Australian dollar rose ↑1.30% to US70.36 cents and ↑1.63% against the euro to a twelve-month high, consistent with Australian short-term rates rising while US two-year yields fell.  A stronger currency is a modest offset to the oil shock: in Australian dollar terms, Brent rose around ↑4.9% rather than ↑6.2%.

Equity Markets

A quiet index, loud rotation.

• Australian equities: flat on the surface, a sharp rotation underneath.  The ASX 200 slipped ↓0.13%, leaving it ↑0.34% over the month and ↓2.63% over twelve months.  Eight of eleven sectors rose, but a ↓7.69% fall in heavily weighted Materials was enough to offset them, as gold and silver miners followed precious metals lower and Chinese equities weakened.  Information Technology fell a further ↓5.11%.  Energy fell ↓1.49% despite a 6% rise in oil, a reminder that energy shares price the long-run oil price rather than the spot, and that a stronger dollar reduces the Australian dollar value of US dollar revenue; the data do not offer a single explanation.  The gains were broad and domestically focused: Communication Services (↑4.04%), Financials (↑4.02%), Industrials (↑2.66%), Utilities (↑1.93%), Health Care (↑1.84%), Consumer Staples (↑1.78%) and Consumer Discretionary (↑1.72%).  Lower long yields helped, but Real Estate (↑0.23%) lagged.  This was a rotation out of commodity and momentum exposures into domestic large caps, not a retreat from risk.  The strength in banks sits awkwardly with a contracting PMI, and leaves them exposed if growth deteriorates further.

• Earnings and valuation: prices barely moved, but forward earnings did.  The ASX 200 forward price-to-earnings ratio rose to 18.6x from 18.4x even as the index fell.  That arithmetic implies analysts trimmed forward earnings estimates by roughly 1–1.5% over the week, consistent with lower metals prices feeding into resource company forecasts.  The 5.36% earnings yield now sits 20 bps above the ten-year bond, little changed from 22 bps, with falling bond yields offsetting the earnings downgrade.  The 3.53% dividend yield remains 107 bps below cash before franking.  In short, investors are paying slightly more for slightly less, with a thin margin over risk-free bonds.

• Global equities: the US held up, Asia bore the brunt.  The S&P 500 fell ↓0.47% and the NASDAQ ↓0.71%, a mild follow-through after last week’s AI-led sell-off, leaving them ↓1.07% and ↓3.64% over the month.  Forward price-to-earnings ratios eased slightly as estimates edged up through the third-quarter reporting season.  The S&P 500 earnings yield now sits 23 bps below the ten-year Treasury, narrower than last week’s 36 bps, and the NASDAQ 164 bps below, from 173 bps, improved mainly by falling yields rather than falling prices.  Elsewhere, Europe fell ↓1.39%, Japan’s Nikkei ↓4.03%, the Hang Seng ↓4.52% and the CSI 300 ↓5.79%.  Valuations outside the US look far less demanding, with the Hang Seng on 10.6x, the CSI 300 on 13.3x and Europe on 14.9x against 21.0x for the S&P 500, but this week was a reminder that cheap markets can get cheaper when confidence in growth fades.

Fixed Income & Credit

The long end rallies, the front end waits for CPI.

• Australian government bonds: a flattening rally.  Three-year yields fell ↓1 bp to 4.84%, five-year ↓2 bps to 4.88% and ten-year ↓7 bps to 5.16%, flattening the three-to-ten-year curve by 7 bps to 32 bps.  Swap rates told the same story, with the ten-year ↓5 bps and the three-year ↑1 bp.  The shape of the move is the message: the long end responded to weaker growth and the rally in Treasuries, while the front end was held in place by inflation risk ahead of Wednesday’s CPI.  Three-year yields sit 24 bps above cash and three-month bills 22 bps above, so markets continue to allow for further tightening.  Ten-year yields are still ↑104 bps over the year, which means long bonds now offer a meaningful income buffer against further rises in yields, as well as the potential for capital gains if growth weakens.

• The RBA: Wednesday’s CPI is the deciding vote.  The Board meets on 3 November, six days after the September-quarter CPI.  Consensus expects headline prices to rise ↑1.2% in the quarter (from ↑0.6%) and the trimmed mean, the RBA’s preferred measure of underlying inflation, to rise ↑1.0% (from ↑0.8%), holding annual underlying inflation at 3.6%.  A 1.0% quarterly rise is an annualised pace of around 4%, well above the 2–3% target band.  The monthly indicator is expected to lift to 4.2% from 4.0%.  Against that sits a softening labour market and a contracting PMI.  A pause at 4.60% remains our central case if CPI is in line with expectations.  An upside surprise, particularly in the trimmed mean, would make a further hike a live option, given the Board’s stated tolerance for slower employment growth.  A downside surprise, combined with the weak activity data, would shift the debate toward an extended hold.

• US Treasuries: growth worries in charge, for now.  Two-year yields fell ↓3 bps to 4.68% and ten-year ↓8 bps to 4.99%, slipping back below 5% and flattening the curve to around 31 bps from 36 bps.  Weak housing data drove the move, not inflation relief: inflation expectations were unchanged at elevated levels.  The ten-year is still ↑99 bps over the year.  The Fed meets on 28 October, with consensus expecting rates to be held at 3.75–4.00%, and the week also brings September core PCE inflation (3.1% expected, from 3.0%) and third-quarter GDP (3.2% annualised expected).  If growth data hold up and inflation edges higher, this fortnight’s rally in Treasuries is vulnerable.  Offshore long yields continue to set the tone for Australian ten-year bonds.

• Credit: spreads drifting toward their wides, without stress.  The floating rate credit index widened ↑0.9 bp to 64.9 bps, effectively at its twelve-month wide of 65.0 bps, and the fixed-rate index ↑1.0 bp to 81.7 bps, also at its twelve-month wide.  Major bank senior spreads were unchanged at 71 bps but are ↑4 bps over the month and above their twelve-month average of 69 bps.  Tier 2 widened ↑1 bp to 134 bps, ↑7 bps over the month, sitting above its twelve-month average of 127 bps and only 2 bps from its twelve-month wide.  The widening is gradual and orderly, and the weekly moves are small relative to the income these securities pay.  It is consistent with slower growth and a steady supply of new issues rather than concern about bank credit quality.  The divergence with government bonds, which rallied, is typical when growth softens: credit lags government bonds on a relative basis. 

• For income investors, wider spreads are building future income.  Floating rate credit now yields approximately 5.47% all-in, up from around 5.40% last week as bank bill rates rose and spreads widened.  Major bank senior yields approximately 5.87% and Tier 2 approximately 6.50%.  Floating rate credit pays roughly 87 bps above cash and 194 bps above the ASX 200 dividend yield, with far less price sensitivity than ten-year bonds.  Spread widening is uncomfortable on a mark-to-market basis, but for investors holding to maturity it raises the income on new investments, and floating coupons reset higher automatically if the RBA hikes.  On duration, government bonds again provided ballast this week, but with the curve now flatter there is less reward for extending into long bonds.  We continue to prefer short-to-medium duration, adding to longer maturities on weakness rather than chasing rallies.

Outlook

CPI, the Fed and the RBA in eight days.

• The central case.  Australian growth is slowing, with business activity now following the labour market lower.  The US remains two-speed, with housing weakening while the labour market and business activity hold up.  China’s headline growth has stabilised but property remains a drag, and Europe is losing momentum.  Inflation is still energy-led, with oil near its twelve-month high.  A pause at 4.60% remains the RBA’s most likely path, with a further hike a meaningful minority scenario that hinges on Q3 CPI.  Rate cuts are not a realistic near-term scenario while oil sits above US$115, but each weak activity release brings the 2027 debate a little closer.

• Central banks and the inflation outlook.  The Fed (28 October) and the ECB (29 October) are both expected to hold, with the ECB facing expected third-quarter growth of just 0.2%.  Policy rates look close to their peaks globally, though the RBA retains a hiking bias.  In Australia, pipeline pressures remain firm: import prices rose 5.7% last quarter and the Melbourne Institute inflation gauge was last at 4.8%.  The stronger Australian dollar offers a modest offset.  Long-term yields will be shaped by the contest between slowing growth, which pulls them lower, and government borrowing and term premium, which push them higher.

• Key risks.  First, that a strong Q3 CPI forces the RBA to tighten into a weakening economy, with consequences for house prices, mortgage arrears and bank subordinated debt.  Second, that oil breaks above its recent highs, embedding energy costs further into core inflation.  Third, the stagflationary mix, in which inflation keeps yields high even as growth slows and bonds and equities fall together.  Fourth, that credit spreads, already at their twelve-month wides, continue to widen if growth disappoints, and that weakness in Asian equities spreads to commodity-linked markets including our own.

• Key opportunities.  Floating rate credit at around 5.5% remains the core income opportunity, with built-in protection if rates rise further.  Tier 2 at 134 bps, near its twelve-month wide, offers improved compensation for investors comfortable with subordination, and securitised credit remains part of the income toolkit where pricing confirms value.  Short-to-medium duration offers attractive yields and protection if growth weakens further.  In equities, the rotation toward domestic and defensive sectors is consistent with our preference for quality and resilient earnings, though valuations leave little room for disappointment.

• What would change the narrative?  In Australia, Wednesday’s CPI is the key event, followed by import prices on Thursday, producer prices and private sector credit (↑0.5% expected) on Friday, and the Melbourne Institute inflation gauge, job advertisements and building approvals next Monday, ahead of the RBA on Tuesday.  In the US, the Fed decision, third-quarter GDP, core PCE inflation, the employment cost index and consumer confidence (80.9 expected) will test whether the economy can sustain its momentum without inflation re-accelerating.  China’s official PMIs (manufacturing 50.1 expected) and industrial profits will show whether the recovery is broadening, while European GDP and the ECB decision will gauge the depth of the slowdown there.  A break in oil above its twelve-month high would reinforce the inflation narrative; a credible easing of supply risks would ease it.