Market Performance
The Australian share market (S&P/ASX 200) declined by 0.8% in September, while global equities posted gains. International shares, measured by the MSCI Index, rose 1.99%, and emerging market shares increased 5.82%, led by strong performance in China. U.S. equities experienced their strongest September in more than a decade following the Federal Reserve’s first rate cut of the year, aimed at supporting a cooling labour market.
Bonds and Interest Rates
Inflation concerns kept bond markets volatile. Australian bonds underperformed cash over the month but returned around 4% for the year. Global bonds outperformed Australian bonds in September thanks to weaker U.S. employment data, though they continue to lag over the longer term. The outlook suggests further rate cuts are likely, but the pace of easing may slow as inflation remains persistent.
United States
Consumer confidence and spending in the U.S. have softened due to inflationary pressures, concerns about incomes, and a cooling housing market. Employment growth weakened, with non-farm payrolls falling short of expectations, reinforcing expectations of additional rate cuts. Inflation, however, remains elevated. Valuations are stretched, with the S&P 500 trading at 22.7 times forward earnings, similar to 2021 levels. The combination of slowing growth and sticky inflation has raised fears of a potential stagflationary environment in 2026.
Australia
The Reserve Bank of Australia held the cash rate steady at 3.6%, adopting a cautious tone on inflation. Rental costs remain high, supported by strong population growth and limited housing supply, while construction costs continue to rise. Inflation for the third quarter is expected to be around 3.0% headline and 2.7% trimmed mean. Consumer spending has been resilient, aided by temporary factors such as insurance payouts and discounting. The federal budget deficit for 2024/25 came in at $10 billion, helped by elevated commodity prices and strong tax revenues. However, public spending is expected to keep the budget in deficit over the next decade. Housing prices rose 0.9% in September, reducing the likelihood of a series of rate cuts.
China
China’s economy continues to struggle with deflationary pressures, weak exports, and a sluggish property market. Residential floor space supply has fallen 72% since 2021, and job growth remains weak. The government has responded with rate cuts, lower reserve requirements, and measures to boost financial market confidence. The Shanghai Index has risen 40% over the past year, supported by optimism around fiscal stimulus and artificial intelligence, though the broader economy has yet to show a meaningful recovery.
Outlook
Global markets remain supported by monetary easing and investor optimism, but valuations are elevated, and the economic backdrop is mixed. In both Australia and the U.S., inflation remains high even as growth slows, posing challenges for policymakers. The risk of slower growth combined with persistent inflation continues to weigh on the medium-term market outlook.
