The Australian sharemarket continued to bounce back last week, closing 0.8% higher in the four day trading week, however, trading was choppy, with volatility still at all-time highs. Volatility continued to be driven by the Iran/US conflict, energy markets and any headlines that pointed to a de-escalation. President Trump reignited concerns around escalation, which pushed the market to move sharply lower, later in the week. Seven of the eleven sectors ended in positive territory, led by the Materials (3.4%), Utilities and Consumer Stapes, which both added 1.6%. Stock specific beneficiaries included Newmont and Capstone Copper, which both increased 8.5%, while Rio Tinto rose 5.5%.
US sharemarkets rebounded last week, snapping a five week losing streak, with the S&P 500 advancing 3.4%. Investor sentiment improved early in the week on hopes the Iran conflict could be resolved sooner than feared, easing concerns around a prolonged energy shock. The price of oil continued to rise, surging a further 10.1%, while gold also rallied, up 4.1%. All eleven industry sectors rose last week, as technology and momentum stocks led the gains, with Alphabet (7.6%) and Meta (7.1%) among the standout performers. In company news, Eli Lily advanced 6.5%, after the FDA approved its oral weight loss pill Foundayo.
European sharemarkets also closed the week higher, despite the ongoing volatility. As fears began to settle around a prolonged energy crisis, investors wasted no time buying back into equities. The Basic Resources (6.1%) and Utilities (7.0%) sectors outperformed, benefitting from higher commodity process and safe haven demand. In economic news, inflation rose across the European Union, driven by higher energy costs, which prompted central banks to strike a more cautious tone. Additionally, economic growth forecasts were downgraded and business confidence weakened further.
Stock & sector movements
What caught our eye
Australia’s May Budget: Crunch Time for Tough Choices
Ahead of the May 2026 Budget, Australia’s economic backdrop is not especially friendly. Inflation is sticky and petrol prices are high, which has the RBA worried enough to hike interest rates twice back-to-back to 4.10%. Households and businesses will certainly feel that. When you factor in sluggish productivity, it’s clear why Treasurer Jim Chalmers’ Budget arrives at both an awkward and pivotal moment.
The Government does not have a lot of room to be generous without making the job harder elsewhere. As a politician, Chalmers wants to keep helping households. Particularly as the Labor Party won the election all the way back in 2022 on the basis of helping with the cost-of-living crisis. It will be interesting to see if the Albanese Government is finally prepared to make some hard choices.
The productivity problem
The other issue sitting underneath all of this is productivity, which is not a new problem but is becoming harder to ignore. Recall Chalmers’ Economic Round Table late last year. Australia has created plenty of jobs, particularly in government-funded areas like health, aged care and disability services. Those sectors are important to a well-functioning society, no argument there. But from an economic point of view, they have not delivered the sort of productivity lift the country needs to support the level of inflation we’ve seen. We are adding more labour without getting enough extra output. The result being stagnant living standards, as measured by GDP per capita.
Government spending under scrutiny
Productivity matters for the budget because it helps understand the broader problem in the economy. Growth is softer, inflation is still uncomfortable. Plus, the public sector has become a much bigger part of the picture. Government consumption of goods and services now sits at around 23% of GDP, well above the historical average. Meanwhile, total government payments, which also includes transfer payments like the age pension and jobseeker, make it closer to 27% of GDP.
This budget needs to show austerity and be more believable. Another round of broad giveaways might sound good for those struggling, but it does not really solve the underlying issues. Further, taking from one hand, just to give to another, is not genuine “savings”, as Finance Minister Katy Gallagher was criticised about in February. The Federal Government’s recent claims of delivering more than $100 billion in savings relied on a gross figure that included reallocations within the budget, not just genuine net reductions in spending.
The source of inflation and what it means for policy
We think that sticky inflation has just as much to do with supply than demand. The oil shock is clearly more supply driven and likely to unwind. But limited housing is clearly structural and housing costs make up the largest part of the inflation numbers. The RBA is squarely focused on demand and will raise interest rates indiscriminately to smother it. That leaves representatives in government to put forward targeted policies to help supply and address the housing imbalance. And no, the expansion of the Australian Government 5% Deposit Scheme didn’t help.
What this means for investors
For investors, this is a reminder that Australia’s economy is not falling over, but it is not in great shape either. Chalmers’ May 2026 budget probably will not change that overnight. But it should give us a better sense of whether the government is prepared to deal with the problem as it is, rather than pretend the hard part can wait until after the next election.
Locally, this week we will get a look into the latest inflation date from the Melbourne Institute’s inflation gauge. In addition, household spending is expected to increase by 4.6%, year on year in January.
Overseas, the US has a number of key economic indicators set to be released. The focus will be on the US Federal Reserve’s latest meeting minutes, along with final GDP for the fourth quarter. While China’s latest inflation data is expected to increase 1.3% year on year in February.