Weekly Market Update: Rising Inflation and Rate Hike Risks Weigh on Markets (28 September 2026)
“Political language is designed to make lies sound truthful and murder respectable.”
- George Orwell (1946)
Cartoon of the Week
Source: www.heraldsun.com.au
Funds Snapshot
Movers & Shakers (week ending 25 September):
Stocks (ASX 200 ↓ 0.76%, S&P 500 ↑ 1.21%, NASDAQ ↑ 2.06%)
Bond Yields (ACGB3Y 5.01%, ↑ 8 bps / ACGB10Y 5.37%, ↑ 10 bps)
Bond Curves (A$ 3s10s +36 bps, ↑ 3 bps)
Credit Spreads (Major Bank 5Y Senior +68 bps, ↓ 2 bps / Tier 2 +129 bps, ↓ 1 bp)
Policy (RBA Cash 4.35%, ↔ — consensus 4.60% at Tuesday’s meeting / US Fed Funds 3.75–4.00%, ↔)
Oil (Brent US$104.32/bbl, ↑ 0.43%)
Gold (US$4,285/oz, ↓ 2.14%)
Market Overview… the RBA prepares to tighten into a slowing economy.
The Australian labour market delivered a strong headline and a weak report. August employment rose ↑39,500 against ↑20,000 expected, reversing July’s revised fall of 15,900. Beneath it, full-time employment fell ↓6,300 while part-time rose ↑45,800, and unemployment rose to 4.6% from 4.5% as participation lifted to 67.1%. More people found work and more looked for it, but the jobs created were the less secure kind. An unemployment rate rising on participation is not the same as one rising on redundancies, but nor is this the robust print the headline suggests. The business surveys, released a day earlier, were unambiguous and poor: the September composite PMI fell to 50.8 from 52.7, services to 51.4 from 53.2, and manufacturing to 49.3 from 52.0 — below the line separating expansion from contraction. Surveys lead where employment data lags, and the surveys point down.
Markets nonetheless moved to price a rate rise. Consensus expects the RBA to lift the cash rate to 4.60% on Tuesday, and the August monthly headline inflation indicator due the following day is expected to jump to ↑4.1% year-on-year from ↑3.5%, with the trimmed mean steady at ↑3.6%. That combination explains the week: an inflation print the RBA cannot ignore, arriving as forward-looking activity data weakens. We flagged this configuration three weeks ago; it is now the base case rather than a risk.
We should be plain about last week’s call. We described the decoupling as the week’s most important development, while listing as our first key risk that it might prove a positioning unwind that reversed on a firm employment print. That is precisely what happened. The lesson is not that the domestic weakness was imaginary — the PMIs confirm it — but that weak growth does not protect a bond market when inflation is the binding constraint on policy.
The US gave the clearest growth signal of the cycle. The September composite PMI jumped to 58.4 against 55.3 expected, with manufacturing at 57.0 and services at 58.7, while core capital goods orders rose ↑1.6% and jobless claims fell again to 197,000. Against that, the regional Federal Reserve surveys were weak — Philadelphia non-manufacturing at -22, Richmond manufacturing at -2 — and consumer sentiment remains depressed at 48.1. Households feel poor and spend anyway; we treat the aggregate as strong but the dispersion as a caution. Europe improved too, its composite PMI beating at 53.1, while this week’s flash CPI is forecast to jump to ↑3.7% from ↑3.2%. If delivered, the inflation problem is synchronised rather than domestic.
The dominant narrative is a central bank cornered by inflation. Sentiment showed no stress — the VIX was unchanged at 14.87 — but the composition of returns tells the story: bond yields rose globally, the US long end led, gold fell sharply and the Australian dollar weakened against every major currency. Markets are pricing more inflation and more tightening without pricing a growth accident. That is coherent, and demanding.
Equity Markets… a widening gap between Australia and everywhere else.
Direction, not just dispersion, separated markets this week. The Nikkei rose ↑2.07%, NASDAQ ↑2.06%, S&P 500 ↑1.21% and STOXX ↑0.50%, while the ASX 200 fell ↓0.76%, the Hang Seng ↓0.97% and the CSI 300 ↓1.51%. Australia and China fell; the rest of the developed world rallied, leaving the ASX ↓5.45% over the month.
Australian equities fell for an explicable reason. A market with no valuation cushion cannot absorb a 10 bps rise in the discount rate, and a market facing a central bank expected to raise rates next week has a second problem on top of the first. The ASX 200 now trades on 18.1x forward earnings for an earnings yield of 5.53% against a ten-year bond at 5.37%, an equity risk premium of roughly 16 bps. The seven-week sequence reads 33, 27, 18, 16, 10, 19 and now 16. The prior week’s improvement, handed over by the bond market rather than earned by the equity market, was taken back by the same bond market within seven days. Over twelve months the index has returned -1.23% in price terms and roughly ↑2.4% including dividends before franking, against a cash rate of 4.35% that carried no volatility and a floating rate credit yield now above 5.3%. Franking narrows that gap for domestic investors, but full equity risk continues to be paid less than cash and materially less than senior credit.
American equities did something harder to explain. The S&P 500 rose ↑1.21% and the NASDAQ ↑2.06% in a week when the US ten-year yield rose ↑16.4 bps to 5.16%. The S&P now yields 4.64% on forward earnings against that 5.16% bond, a risk premium of roughly negative 52 bps from negative 30 bps a week ago; the NASDAQ at 31.1x yields 3.22%, some 195 bps below the risk-free rate. Equity and bond investors are reading the same PMI data differently — equities as earnings strength, bonds as inflation. Both cannot be right, and equity holders are accepting no compensation for being wrong.
Brent rose ↑0.43% to US$104.32 per barrel, a third consecutive week without a material move, leaving prices ↑17.8% over the month and ↑50.3% over twelve months. Energy has stopped rising but has not started falling, which means it continues to feed through into headline inflation — including, most likely, the Australian print expected this week.
The Australian dollar fell against every major currency — ↓1.47% against the US dollar to 0.7016, ↓0.64% against the euro, ↓0.30% against sterling and ↓1.19% against the yen. This is materially different from the prior week, when the AUD fell against the dollar alone and rose against everything else. Broad-based weakness in the week a domestic rate rise was priced in is a meaningful signal: currency markets are treating Australia as a growth problem rather than a yield opportunity. A weaker currency also raises the price of imported goods, which is unhelpful for the inflation problem the RBA is responding to.
Fixed Income & Credit… the front end prices a hike, credit ignores it.
Australian government bonds sold off across the curve, three-year yields rising ↑7.8 bps to 5.01%, five-year ↑8.3 bps to 5.04% and ten-year ↑10.3 bps to 5.37%. The curve bear-steepened to 36 bps from 33 bps, the long end leading, which points to inflation and term premium rather than near-term policy. Three-month BBSW rose ↑7.0 bps to 4.76%, a one-year high and 41 bps above the cash rate — a full hike and then some is now embedded in the very front end. The three-year sits 66 bps above cash, back to its level of a fortnight ago.
The RBA meets on Tuesday and consensus expects 4.60% (↑25 bps). We expect the board will hike as the Bank confronts an inflation indicator expected at ↑4.1%. Clouding the decision, they’re confronted by a labour market adding only part-time jobs while unemployment rises, and manufacturing in contraction. Its instrument works on domestic demand, which the PMIs say is already slowing, while much of the inflation is imported through energy and traded goods. Raising rates addresses the part of the problem the Bank can reach, not the part driving the print — which argues against positioning aggressively for either outcome.
US Treasuries sold off harder, and the shape changed. Two-year yields rose ↑10.8 bps to 4.85% while ten-year yields rose ↑16.4 bps to 5.16%, steepening the two-to-ten-year curve to 31 bps from 25 bps and reversing the prior week’s flattening. Last week the front end led as the revised dots were absorbed; this week the long end did. A bear steepening says the market is repricing inflation and the term premium on long-dated risk rather than the next meeting. A US ten-year decisively through 5% is the highest funding cost this cycle has produced, and the single most important number for valuing every other asset.
Credit went the other way — and tightened. Major bank five-year senior narrowed ↓2 bps to 68 and Tier 2 ↓1 bp to 129, while the broad floating rate credit index widened ↑0.63 bps to 62.4 and fixed rate credit was unchanged at 78.9. This is the third consecutive week in which Australian spreads have been indifferent to substantial moves in government yields, and this week they improved outright. A spread compensates for the risk a borrower fails to repay, and nothing suggested that risk rose. Senior at 68 bps sits just 5 bps above its one-year tight, so we would call it well priced rather than cheap.
For income investors this was a good week, and for the right reason. Floating rate credit now yields approximately 5.38% all-in, up ↑8 bps, driven entirely by BBSW reaching a one-year high rather than by any widening in spreads — investors were paid more without taking more credit risk. Major bank senior is approximately 5.97% and Tier 2 approximately 6.58%, both marginally higher. It pays roughly 179 bps more than the ASX 200 dividend yield, ranks ahead of equity, and moved less than a basis point while the local share market fell and bond yields rose 10 bps. If the RBA tightens on Tuesday, the outlook for floating rate coupons improves while fixed rate holdings absorb the capital loss. We said last week that duration had earned a place in defensive portfolios; this week it cost investors money, and we should own that directly. A ten-year ACGB at 5.37% is within 5 bps of its one-year high, so the eventual entry point is attractive — but the case for adding rests on inflation peaking, and this week’s prints will test that first.
Outlook… the stagflationary configuration is now the base case.
The central case. Inflation is proving broader and more persistent than the growth data justifies. We attach the highest probability to headline inflation rising further in Australia and Europe, policy rates moving to or remaining at restrictive levels, and growth slowing unevenly — robust in the US, weakening in Australia, mixed in Europe and China. This is the configuration we described three weeks ago and withdrew twice; the domestic evidence now supports it more clearly than at any prior point.
Central banks. The RBA is the immediate question, with consensus at 4.60% on Tuesday. The Fed has already moved and given guidance for a higher path and a higher long-run neutral estimate, with last week’s PMIs supporting it. The ECB has moved and faces a September inflation print expected at ↑3.7%. The direction of travel across all three is the same, which removes a diversification investors have relied on: when policy rates move together, so do bond markets, and the offshore hedge against domestic tightening becomes less reliable.
Key risks. First, that the RBA tightens into a slowing economy and the PMIs prove the better guide — a genuine policy error risk, though we would not weight it above a reasonable probability given how little visibility anyone has. Second, that a US ten-year sustainably above 5% forces a repricing of equities already carrying a negative risk premium. Third, that the Australian dollar’s broad weakness compounds imported inflation, requiring more tightening than growth can bear.
Key opportunities. Floating rate income is the clearest, improving again through a higher base rate rather than deteriorating credit. Bank spreads tightened in a difficult week, evidence of underlying demand rather than complacency. And government bonds now offer starting yields near one-year highs — not yet a signal to extend duration, but a materially better entry point than three months ago.
What would change the narrative? Most immediately, Tuesday’s RBA decision and Wednesday’s inflation indicator. An inflation print materially below the ↑4.1% expected would remove the justification for further tightening and reward duration sharply from a high starting yield. A hold from the RBA alongside a high print would tell us the Bank is weighting the PMIs over the inflation data, which would be significant information about its reaction function. Beyond that, a US ten-year that stabilises below 5% would relieve pressure on global valuations, and a decisive move in crude either way would resolve much of the inflation question neither we nor the central banks can currently answer.
