The Australian sharemarket fell last week, as the ASX 200 lost 1.5% as risk sentiment deteriorated and the latest inflation reading weighed on markets. Losses were broad-based, as the Information Technology (-5.4%), Health Care (-8.3%), and Consumer Discretionary (-4.8%) sectors weighed on the indices. Conversely, the Energy (+1.6%) and Consumer Staples (+1.4%) outperformed. Annual headline inflation accelerated to 3.2% in the September quarter, up from 2.1% in June, its largest quarterly increase since March 2023, and signalled renewed price pressures. As a result, this has all but quashed the chance of a rate cut this week, with the RBA’s next interest rate decision to come on 4 November.
US sharemarkets were mostly higher last week, as the S&P 500 (+0.7%) and NASDAQ (+2.2%) logged a third straight weekly gain, supported by strong earnings from the Information Technology sector and renewed AI optimism. Elsewhere, the Consumer Discretionary (+2.8%) rose, while Materials (-3.7%), Consumer Staples (-3.6%), and Financials (-1.5%) all lost ground. Earnings results from Amazon, Alphabet and NVIDIA reinforced momentum around AI growth, and helped to offset Meta’s post-earnings decline. Treasury yields rose modestly, which reflected reduced rate cut expectations after the October FOMC meeting and subsequent hawkish comments from Federal Reserve officials. Commodity markets were softer, as gold and oil lost ground.
European sharemarkets finished lower last week, as the STOXX Europe 600 dropped 0.7% to pullback from midweek record highs. Sentiment weakened as a hawkish tone from the Federal Reserve overshadowed easing US-China trade tensions and a solid European earnings season. The ECB kept rates unchanged at 2%, noting inflation is near target, while Eurozone GDP rose 0.2% in Q3. Cyclical sectors including Banks (+3.7%), Utilities (+1.1%) and Information Technology (+0.2%) outperformed, supported by upbeat earnings. In the UK, fiscal uncertainty ahead of the upcoming budget weighed on sentiment as investors priced in potential tax rises and rate cuts.
No More Cuts? Markets Rethink the Monetary Policy Path
Just over a week ago, financial markets were confidently pricing in accelerated interest rate cuts, both in Australia and the US. That confidence has now seemingly evaporated, really depicting the precarious nature of economic forecasts.
Two events turned sentiment: a hotter-than-expected inflation print here in Australia and a mixed tone from the US Federal Reserve despite its recent interest rate cut.
US
It’s true that last week the US Federal Reserve met and as widely expected, reduced its cash rate target by 0.25% to 3.75%-4.00%. The move came amid mounting economic uncertainty, a cooling labour market and protracted government shutdown that halted official jobs data. The Fed’s Chair Jerome Powell acknowledged the challenges of navigating through what he called a “no risk-free path”. It felt like an insurance cut to us. Job creation has slowed, yet inflation remains stubbornly above target. The most recent US CPI print showed prices rose 3.0% over the past year, the highest since January.
Despite the interest rate cut, divisions within the Fed are widening. Some committee members argued for a larger cut, while others for none at all. Powell himself sought to temper expectations for another move in December, highlighting a “growing chorus” of officials advocating caution. This contradicts what financial markets had hoped prior to the meeting, forcing them to reconsider the pace of rate reductions.
Australia
At home, the all-important official quarterly inflation print was released. While price growth was already expected to be higher due to things like expiring electricity rebates, it even topped those elevated estimates. Headline inflation for the September 2025 quarter came in at +1.3%, versus the prior +0.7% and expected +1.0%.
Electricity costs and rising labour costs are filtering into prices. The services sector, particularly vulnerable to wage pressures, is now showing persistent inflationary trends.
The result is a clear red flag for the RBA. Governor Michele Bullock had warned that a trimmed mean CPI print of +0.9% would be a “material miss” for the central bank’s modelling. That specific measure came in at +1.0% for the September quarter.
As a result, any hope for a Melbourne Cup Day interest rate cut (when the RBA meets next) has been dashed. The odds of a February 2027 cut are also fading. Some economists are even going further, suggesting the RBA may hold interest rates steady through 2026.
What does this mean for investors
Last week’s developments really continued to prove to us why you cannot rely on economic forecasts. Even the best policymakers and economists in the world can’t forecast reliably, changing their stance frequently.
We’re not out of the woods yet and it’s clear that stubborn inflation still poses a risk for investors. It would be unwise to rely on central banks to come to the rescue with cheap money.
This reinforces the importance of building diversified portfolios that can weather interest rate volatility and sustained inflation. While we do continue to expect monetary policy to loosen over time in both Australia and the US, the journey may be longer and bumpier than markets were hoping just a fortnight ago.
In Australia this week, all eyes will be on the Reserve Bank's interest rate decision, where no change to the cash rate is expected.
Overseas, a relatively quiet week will see the latest interest rate decision from the Bank of England. Additionally, non-farm payroll data will be released in the US.