Weekly Market Update: Inflation Expectations Rise as Household Confidence Falls (13 October 2026)
“The four most dangerous words in investing are: ‘this time it’s different’.”
- Sir John Templeton
Cartoon of the Week
Source: www.hedgeye.com
Funds Snapshot
Movers & Shakers (week ending 2 October):
Stocks (ASX 200 ↑ 0.40%, S&P 500 ↑ 1.15%, NASDAQ ↑ 0.64%)
Bond Yields (ACGB3Y 4.90%, ↑ 1 bp / ACGB10Y 5.34%, ↔)
Bond Curves (A$ 3s10s +44 bps, ↓ 1 bp)
Credit Spreads (Major Bank 5Y Senior +69 bps, ↔ / Tier 2 +133 bps, ↑ 3 bps)
Policy (RBA Cash 4.60%, ↔ / US Fed Funds 3.75–4.00%, ↔)
Oil (Brent US$104.72/bbl, ↑ 2.42%)
Gold (US$4,194/oz, ↑ 1.28%)
Market Overview
The warning light flickers, and markets look past it.
Australian inflation expectations jumped, and the risk we flagged last week arrived. Consumer inflation expectations rose to 5.3% in October from 4.9%, precisely the measure we identified last week as the main reason the RBA may not be able to stop at 4.60%. The Melbourne Institute gauge was steadier at 4.8%, with the monthly pace easing to 0.3% from 0.5%. Expectations matter because they feed wage claims and price-setting: a household that expects 5% inflation bargains for it. Yet three-year bond yields rose by less than a basis point. The market heard the warning but weighed it against an equally clear signal from the other side of the household ledger.
That signal was confidence, which fell sharply after the hike. Westpac consumer confidence fell ↓4.7% to 80.4, the first reading since the RBA’s decision and well below the neutral level of 100. Cotality data showed national dwelling values ↓1.1% in September and ↓3.7% over the quarter, with Sydney ↓4.9%. Business was firmer: the composite PMI rose to 51.3 from 50.8 and job advertisements rose ↑2.2%. The picture is an economy still expanding, households under visible strain, and inflation psychology deteriorating — a difficult mix for a central bank whose main tool works by slowing demand.
The same pattern is emerging in the US. New York Fed one-year inflation expectations rose to 3.90% from 3.58%, well above the 3.64% expected, and the University of Michigan survey put one-year expectations at 4.7% and five-to-ten-year at 3.5%, both up a tenth, while sentiment slipped to 46.3. The ISM services index held at 54.9, but prices paid rose to 74.0. Minutes of the Fed’s September meeting showed all 19 officials supported that hike, and Governor Waller said further increases will likely be needed, though not necessarily at consecutive meetings. Money markets see a high chance of another hike before year-end.
Europe supplied the fiscal anxiety. Political and budget turmoil in France pushed the euro to its weakest since May 2025, and UK ten-year gilt yields climbed to around 5.48%, a one-year high. Euro area producer prices rose ↑8.2% over the year to August, from 5.8% and above the 7.6% expected — cost pressure that typically reaches consumers with a lag. As ANZ observed, near-term tightening expectations retreated over the week, yet long yields kept climbing. That points to structural forces rather than doubts about any one central bank: quantitative tightening, heavy government borrowing, and competition for capital, including corporate borrowing to fund the AI build-out.
The dominant narrative: inflation psychology versus earnings optimism. The VIX eased to 14.84 and the S&P 500 set its first record since August. Equity investors are focused on an expected ~25% rise in US third-quarter profits; bond investors on rising inflation expectations and government debt. Both cannot be right for long. In Australia the tension is sharper: expectations are rising while confidence and house prices fall, leaving the RBA to balance a deteriorating inflation mindset against a weakening consumer.
Oil rose despite more supply, because the market doubts it will last. Brent rose ↑2.42% to US$104.72 per barrel, ↑61% over twelve months. The G7 agreed to release up to 100 million barrels of emergency oil and diesel over four months, and Middle Eastern exports have recovered to around pre-war levels, briefly taking Brent to about US$100. Prices recovered as Iranian attacks on vessels in the Strait of Hormuz resumed and the US deployed another aircraft carrier to the region. With inventories estimated at five-year lows, there is little buffer against another disruption, so a risk premium is rational. Energy remains the dominant driver of headline inflation, and its persistence is now visible in household expectations.
Equity Markets
Records offshore, a thinner cushion at home.
Australian equities edged higher, but the valuation cushion thinned again. The ASX 200 rose ↑0.40%, leaving it ↓2.19% over the month and ↓2.82% over twelve months. The weakest session was Thursday (↓0.76%), led by Materials (↓2.03%) and Financials (↓0.99%), while Staples (↑1.42%) and Energy (↑1.36%) rose; full weekly sector data were unavailable. On 18.2x forward earnings, the 5.50% earnings yield sits just 16 bps above the ten-year bond, down from 21 bps — this time squeezed by rising prices rather than rising yields. The 3.57% dividend yield remains 103 bps below cash before franking. With expectations rising and confidence falling, consumer-facing earnings face pressure that valuations leave little room to absorb.
US equities reached new highs on earnings, not on bonds. The S&P 500 rose ↑1.15% and the NASDAQ ↑0.64%, led early by technology and AI-related names ahead of a reporting season expected to show profits ~25% above a year ago. The rally faded as elevated oil revived inflation concerns and chipmakers sold off on doubts that AI spending can be justified by revenue as borrowing costs rise. At 21.6x, the S&P 500 earnings yield sits about 61 bps below the ten-year Treasury, the NASDAQ about 201 bps below. Some strategists argue the combined pressure of US$100 oil, 5% yields and a firm dollar is consistent with a 20–25% fall. We’re not necessarily forecasting that, but when bonds and equities disagree this sharply, bonds have more often been right.
Elsewhere, cheapness is still not a catalyst. Europe’s STOXX was flat (↑0.03%) despite a 6.71% earnings yield, held back by French political risk and surging producer prices. Japan’s Nikkei rose ↑1.06% (↑42% over twelve months), while China’s CSI 300 fell ↓0.93% and is ↓11.5% over the quarter. Regional valuation gaps are wide, but cheap markets need a reason to re-rate, and Europe does not yet have one.
Fixed Income & Credit
A quiet curve, a louder question.
Australian government bonds barely moved despite the jump in expectations. Three-year yields rose ↑1 bp to 4.90%, five-year ↑1 bp to 4.98% and ten-year were unchanged at 5.34%, flattening the three-to-ten-year curve by 1 bp to 44 bps. The ten-year traded near 5.40% on Tuesday, close to a 15-year high, before global yields eased. The three-year sits 30 bps above cash and three-month BBSW 17 bps above at 4.77%, consistent with some chance of further tightening rather than a firm expectation. Calm in the face of a 40 bp jump in expectations suggests investors believe falling confidence and house prices will do part of the RBA’s work.
The RBA: caught between expectations and confidence. The risk we flagged materialised, but so did the cost of tightening. Tuesday’s minutes will show how the Board weighs inflation psychology against household strain. Thursday’s labour force survey (consensus +20,000 jobs, unemployment steady at 4.6%) will show whether the labour market — the channel through which expectations become wages — is still tight. A firm report alongside 5.3% expectations would make a second hike much harder to rule out; a soft one would support a longer pause.
US Treasuries eased after touching multi-decade highs. Long-dated yields hit multi-decade highs early in the week before easing as risk appetite cooled. Two-year yields fell ↓4 bps to 4.79% and ten-year ↓3 bps to 5.24%, leaving the curve near 45 bps. The rally came despite hawkish minutes and higher expectations, a reminder that weekly moves are noise around a rising trend: the ten-year is still ↑40 bps over the month and ↑110 bps over the year. A Fed pause may not bring long yields down if term premium stays elevated, and offshore long yields are setting a floor under Australian ten-year yields regardless of domestic weakness.
Credit: senior steady, subordinated debt softening. Major bank senior spreads were unchanged at 69 bps, below their 73 bp one-year average, but Tier 2 widened ↑3 bps to 133 bps, with some dealer quotes at 134–136 bps. Tier 2 is ↑6 bps wider over the month though still inside its 137 bp average. The floating rate credit index widened ↑0.3 bps to 63.9. Investors are asking more to sit lower in the capital structure as the domestic outlook softens — gradual repricing, not stress. RMBS / ABS deal flow has been heavy, with demand strong down the stack.
For income investors, the hike is now fully in the coupon. Floating rate credit yields approximately 5.41% all-in, major bank senior approximately 5.95% and Tier 2 approximately 6.59%. Floating rate credit pays roughly 81 bps above cash and 184 bps above the ASX 200 dividend yield, ranking ahead of equity, and slightly more than ten-year government bonds with far less price sensitivity. This week reinforced our preference for floating rate credit as the core income engine: if rising expectations force another hike, coupons reset higher; if weak confidence brings a long pause, short-to-medium duration benefits. Long bonds remain hostage to global term premium. In Tier 2, the 64 bp pick-up over senior is reasonable today, but selectivity matters and better entry levels may emerge if the slowdown deepens.
Outlook
The data that decides the pause.
The central case. Growth is slowing unevenly rather than collapsing: Australian business surveys and job advertisements are holding up while household confidence and house prices fall. Inflation is still energy-led, but its spread into expectations in Australia, the US and Europe mean it is becoming more than a headline story. A pause at 4.60% remains the RBA’s most likely path, but we now regard a second hike as a meaningful minority scenario rather than a tail risk. Rate cuts are not a realistic near-term scenario while expectations are rising.
Central banks. The Fed appears set on further tightening; Waller’s flexibility on timing makes Wednesday night’s September CPI (consensus 3.6% headline, up from 3.4%, and 2.5% core) especially important. The ECB faces producer prices above 8% and a French fiscal problem that could test its willingness to support bond markets. Policy rates are close to their peaks, but long-dated yields are increasingly set by government borrowing and inflation risk.
Key risks. First, that rising expectations become self-reinforcing through wages, forcing the RBA to tighten into a weak household sector, with consequences for house prices, mortgage arrears and bank subordinated debt. Second, that US and UK long yields break higher, pressuring equities already carrying negative risk premia and lifting Australian long yields. Third, that US earnings disappoint against ~25% growth expectations, or AI doubts broaden in a highly concentrated market. Fourth, a renewed disruption to Middle East oil flows with inventories at five-year lows.
Key opportunities. Floating rate credit at around 5.4% remains the core income opportunity, with built-in protection if rates rise further. Short-to-medium duration offers asymmetric value if weak confidence forces a long pause. Wider Tier 2 spreads are beginning to offer better entry points for investors comfortable with subordination. Ten-year government bonds near 5.34% will become attractive once global term premium stabilises, a condition still not met.
What would change the narrative? In Australia, a strong labour force survey alongside 5.3% expectations would revive hike pricing, while a weak one would strengthen the case for a long pause and for adding duration; NAB’s business survey (confidence previously −8) will show whether firms share households’ gloom. In the US, a hot CPI with rising expectations would make another Fed hike close to certain, while a soft core reading and weaker retail sales (consensus +0.3% after +1.1%) would ease the pressure. China’s producer prices, expected to rise to 4.5% from 3.8%, will show whether China is adding to global goods inflation. Beyond the data, oil and the first major US earnings reports will decide whether equity optimism or bond-market caution proves correct.
