Weekly Market Update: The RBA Hikes, But Markets Start Pricing the Peak (05 October 2026)
“It takes only one drink to get me drunk. The trouble is, I can't remember if it's the thirteenth or the fourteenth.”
- George Burns
Cartoon of the Week
Source: www.heraldsun.com.au
Funds Snapshot
Movers & Shakers (week ending 2 October):
Stocks (ASX 200 ↑ 0.20%, S&P 500 ↓ 0.27%, NASDAQ ↑ 0.45%)
Bond Yields (ACGB3Y 4.89%, ↓ 12 bps / ACGB10Y 5.34%, ↓ 3 bps)
Bond Curves (A$ 3s10s +45 bps, ↑ 9 bps)
Credit Spreads (Major Bank 5Y Senior +69 bps, ↓ 1 bp / Tier 2 +130 bps, ↔)
Policy (RBA Cash 4.60%, ↑ 25 bps / US Fed Funds 3.75–4.00%, ↔)
Oil (Brent US$102.25/bbl, ↓ 1.98%)
Gold (US$4,141/oz, ↓ 3.35%)
Market Overview
The RBA hikes, and the bond market exhales.
The RBA raised the cash rate to 4.60%, a 15-year high and short-dated bonds rallied. The 25 bp increase was exactly what consensus expected, and three-month BBSW had already embedded it. Three-year yields nonetheless fell ↓12 bps to 4.89%. That is not a contradiction. Markets price the path of policy rather than the decision itself, and once a well-telegraphed hike is delivered the question becomes how much further the Bank needs to go. The week’s data gave investors reason to think the answer may be “not much”.
Inflation was high, but not quite as high as feared. The August monthly indicator rose to ↑4.0% from ↑3.5%, below the ↑4.1% expected, while the trimmed mean held at ↑3.6% and rose only ↑0.2% in the month against ↑0.3% forecast. A headline rate 40 bps above the trimmed mean says the acceleration is concentrated in volatile items — consistent with energy — rather than spreading through the broad basket (yet). Underlying inflation well above the 2–3% target band justifies the hike; its failure to accelerate is what allowed markets to price less beyond it.
The domestic consumer paused. Household spending was flat in August against a 0.4% rise expected, following 1.1% in July. Building approvals fell ↓6.1% against ↓1.0% expected, job vacancies fell ↓0.9% over the quarter, and the final manufacturing PMI of 49.6 remains in contraction. The trade surplus narrowed to A$495m, well short of the A$2.0bn expected. Private sector credit still grew ↑0.6% in the month, so borrowing has not slowed. One flat month is not a trend, but it sits alongside last week’s weak PMIs, and the RBA has now tightened into it.
The US delivered softer jobs and firmer prices. September payrolls rose only 29,000 against 90,000 expected, with a net 60,000 revised away from prior months, and unemployment ticked up to 4.2%. Consumer confidence fell to 81.9 against 89.0 expected. Yet the ISM manufacturing prices index jumped to 77.9 from 71.1, and annual revisions lifted second-quarter growth to 2.2% from 1.5%. Core PCE of ↑3.0% looked soft against ↑3.3% expected, but the prior month was revised down by the same amount, so the apparent miss reflects revisions rather than genuine cooling. In Europe, headline inflation rose to ↑3.8% from ↑3.2% with core steady at ↑2.5%. The synchronised inflation problem we described last week was confirmed, and its energy-led character is clearest there.
The dominant narrative has moved from “how high” to “how long”. Sentiment stayed calm, the VIX edging up to 15.31. The revealing signal was the shape of bond markets: short-dated yields fell in Australia and the US as less tightening was priced, while the US ten-year rose to within 2 bps of its one-year high. Markets are increasingly confident policy rates are near their peak, and increasingly unsure how long inflation will hold them there.
Brent eased ↓1.98% to US$102.25 per barrel, a fourth week without a decisive move, leaving prices ↑6.9% over the month and ↑59.5% over twelve months. For inflation the level matters more than the weekly change: with crude roughly 60% above a year ago, energy will keep lifting headline inflation for some months even if prices drift lower. Europe’s 130 bp gap between headline and core inflation, and the jump in US manufacturers’ prices paid, show that transmission is still under way.
Equity Markets
A quieter week that settled very little.
Australian equities steadied as the bond market gave a little back. The ASX 200 recovered ↑0.20% after the prior week’s ↓0.76% fall, though it remains ↓3.30% over the month. On 18.0x forward earnings the index yields 5.54% against a ten-year bond at 5.34%, an equity risk premium of roughly 21 bps. The eight-week sequence reads 33, 27, 18, 16, 10, 19, 16 and now 21 — every move driven by bonds, none by earnings. The hike sharpened the comparison with cash, which now pays roughly 103 bps more than the market’s 3.57% dividend yield before franking. Over twelve months the index has returned ↓2.95% in price terms, or roughly ↑0.6% with dividends. Franking narrows the gap, but shareholders are still accepting full equity risk for less than a term deposit.
Offshore valuations are under growing pressure from long-dated yields. US equities were broadly flat while the ten-year Treasury yield rose ↑11 bps to 5.27%. The S&P 500 at 21.4x yields 4.67%, a risk premium of roughly negative 60 bps from negative 52 bps; the NASDAQ at 31.0x sits some 204 bps below the risk-free rate. Weak payrolls would ordinarily help equities through lower rate expectations, but the long end — which matters most for valuing growth earnings — moved the other way. Europe is the contrast: the STOXX on 15.1x offers an earnings yield of 6.64% yet fell as regional inflation rose. Cheapness is not a catalyst while headline inflation is still climbing.
Fixed Income & Credit
The front-end rallies on the hike, the long end does not.
Australian government bonds rallied, led by shorter maturities. Three-year yields fell ↓12 bps to 4.89%, five-year ↓7 bps to 4.97% and ten-year ↓3 bps to 5.34%, steepening the three-to-ten-year curve by 9 bps to 45 bps. This says near-term policy is credible and the peak close, while investors still demand a premium to lend for ten years. The three-year now sits 29 bps above the new cash rate, against 66 bps above the old rate a week ago, and three-month BBSW was unchanged at 4.76%, just 16 bps above cash. The tightening that was priced has been delivered, and markets have scaled back how much more they expect.
The RBA decision: the right instrument for half the problem. A week ago we argued that the Bank’s tool works on domestic demand, while much of the inflation is imported. This week’s data sharpened both halves: spending was flat and approvals fell, while the gap between headline and trimmed mean inflation points to energy. Underlying inflation at 3.6% justifies the move; whether it justifies another depends on whether that figure rises. The next signals are the Melbourne Institute gauge (4.8% previously) and consumer inflation expectations (4.9% previously). Elevated expectations are how a temporary energy shock becomes a persistent wage problem, and the main reason the Bank may not be able to stop here.
US Treasuries steepened again, this time against the data. Two-year yields fell ↓2.7 bps to 4.82% while ten-year yields rose ↑11 bps to 5.27%, steepening the curve to 45 bps from 31 bps. The front end responded to softer jobs data; the long end rose on upward growth revisions, rising input prices and, in our view, higher compensation demanded for holding long bonds through an inflationary period. When long yields rise on bad news, term premium rather than the next Fed decision is setting the price. A 14 bp gap opened between the US and Australian ten-year moves in a single week, with local long bonds anchored by soft domestic data.
Bank credit held steady while the broader market softened slightly. Major bank senior spreads were recorded at 69 bps, ↓1 bp, and Tier 2 unchanged at 130 bps, while the floating rate credit index widened ↑1.2 bps to 63.6 and fixed rate ↑1.1 bps to 80.0. The floating index is now around 5 bps wider than three months ago and marginally above its one-year average. Stable bank spreads alongside a softer broad index is consistent with modest weakness among non-major issuers, though our data does not break this down. It is orderly rather than stressed — investors asking slightly more as growth softens, not doubting repayment. We have no RMBS or ABS spread data this week; flat household spending under a higher cash rate is the combination we will watch through mortgage arrears.
For income investors, the hike was already in the price — and that is the point. Floating rate credit yields approximately 5.39% all-in, broadly unchanged, because BBSW moved ahead of the RBA rather than after it; floating rate investors captured the hike in preceding weeks without bearing capital risk. Major bank senior yields approximately 5.96% and Tier 2 approximately 6.57%. Floating rate credit pays roughly 79 bps above cash and 182 bps above the ASX 200 dividend yield and ranks ahead of equity. Last week we said duration had cost investors’ money; this week some was returned, but almost entirely at the three-to-five-year part of the curve. Short maturities respond to domestic policy, long maturities to global term premium, which is still rising. For defensive portfolios that argues for floating rate credit as the core income engine, complemented by moderate duration at the shorter end rather than long bonds.
Outlook
From pricing the hike to pricing the peak.
The central case. Headline inflation remains elevated across Australia, Europe and the US, driven substantially by energy, while underlying inflation is high but no longer accelerating. Growth is slowing unevenly: the Australian consumer has paused, US hiring is fading even as surveys stay firm, and China is stabilising. We now attach a higher probability to the RBA holding at 4.60% for a period, with further tightening contingent on underlying rather than headline inflation — and a lower but meaningful probability to a second hike if inflation expectations keep drifting up.
Central banks. The RBA has acted and markets expect a pause. The Fed faces a labour market losing momentum and input prices rising sharply; the minutes of its September meeting, due this week, will show how it is weighing them. The ECB confronts headline inflation of 3.8% and producer prices expected to jump to 7.9% from 5.8%, a pipeline pointing to further pressure. Central banks can steer the front end of their curves, but long-dated yields are increasingly set by global inflation risk.
Key risks. First, that US ten-year yields break decisively above their one-year high, pressuring equities already carrying a negative risk premium and pulling Australian long yields with them. Second, that consumer inflation expectations, already around 4.9%, continue rising and convert an energy shock into a wage problem requiring more tightening than a paused consumer can absorb. Third, that the gradual widening in broad credit spreads accelerates if domestic growth weakens further.
Key opportunities. Floating rate income at around 5.4% remains the clearest, with the hike already captured and spreads close to average rather than stretched. Short-to-medium duration has begun to work and should continue to if the RBA is near its peak. Ten-year government bonds at 5.34%, within 8 bps of their one-year high, offer an attractive entry once global term premium stabilises — a condition not yet met.
What would change the narrative? Most immediately, this week’s Australian inflation expectations and Melbourne Institute gauge: a further rise would revive hike pricing and reverse much of this week’s front-end rally, while a decline would strengthen the case for a pause and for adding duration. Westpac consumer confidence will show whether August’s flat spending was a pause or a retreat. In the US, the services ISM prices component and the Fed minutes will show whether cost pressure is spreading beyond manufacturing. Beyond that, a decisive move in crude, or a US ten-year that settles back below 5%, would resolve much of what neither markets nor central banks can yet answer.
