The Australian sharemarket finished the week lower, with the ASX 200 declining 0.4%, as rising bond yields and stronger-than-expected economic data increased concerns that interest rates may remain higher for longer. The Financials Sector (+2.1%) was the strongest performer, supported by higher bond yields and strength across banks and insurers, while the Consumer Staples Sector (+2.0%) also performed well as investors favoured more defensive areas of the market. In contrast, the Information Technology Sector (-5.2%) was the weakest performer, pressured by higher bond yields and weakness in growth stocks. The Materials Sector (-3.6%) also underperformed as softer gold and copper prices weighed on mining and precious metals companies.
US sharemarkets finished the week relatively flat, with the S&P 500 gaining 0.1%, as gains were constrained by rising bond yields and shifting expectations for Federal Reserve interest rates following stronger-than-expected labour market data. The Energy Sector (+2.3%) was the strongest performer, supported by a sharp rise in oil prices amid ongoing geopolitical tensions in the Middle East. The Information Technology Sector (+1.1%) also advanced, driven by positive artificial intelligence developments and strong earnings from several technology companies. In contrast, the Consumer Discretionary Sector (-2.1%) lagged as higher bond yields weighed on consumer-facing stocks, while the Materials Sector (-1.4%) underperformed amid softer sentiment towards commodities and cyclical sectors.
European sharemarkets finished the week lower, with the STOXX Europe 600 declining 0.8% as higher energy prices, rising bond yields and concerns about the inflationary impact of increased energy costs weighed on investor sentiment. The Banks Sector (+1.8%) was among the strongest performers, benefiting from higher yields and expectations that interest rates could remain elevated for longer. The Energy Sector (+0.7%) also advanced, supported by stronger oil prices amid ongoing geopolitical tensions and concerns over energy supply. In contrast, the Utilities Sector (-2.4%) and Technology Sector (-1.9%) underperformed as rising yields pressured more rate-sensitive parts of the market.
Stock & sector movements
What caught our eye
A Correction, Not a Crash, and the Reserve Bank Is Not Done Yet
Home prices fell again in August, the fifth monthly decline in a row, and two of the most closely followed forecasters in the country cut their outlook this week. At the same time the economy grew faster than expected in the June quarter.
Our view is that the housing market is going through a correction rather than anything more serious. National prices are now 3.6% below their peak, with Sydney down 7.1% from its February high and Melbourne down 6.5%. Brisbane, Perth and Adelaide have joined the decline after a very strong start to the year.
Commonwealth Bank now expects a national fall of around 9% from top to bottom and AMP has landed at around 10%, with both expecting prices to stabilise and begin recovering through 2027.
That would make this one of the deeper downturns of the past 40 years, but it follows a rise of roughly 50% since the pandemic. A genuine crash of 20% or more would require widespread forced selling. With unemployment at 4.5%, rental vacancy at a historically low 1.8% and new housing supply still constrained, it’s hard to see the conditions for that.
The complication is that the rest of the economy has not slowed the way property has. June quarter GDP came in at 0.4%, lifting annual growth to 2.1% against forecasts of 1.8%. That is above the pace the Reserve Bank believes the economy can sustain without adding to inflation and the July inflation figures were already running hotter than the bank wanted.
While the Reserve Bank is unlikely to be swayed by falling house prices alone, the housing downturn will act as a drag on spending over time. The central bank has previously estimated that a 10% fall in house prices trims consumer spending by close to 1% within two quarters. That effect will eventually help bring inflation down, but it will take time.
Both CBA and AMP expect one more increase in the cash rate by November 2026, taking it to 4.60%. The timing is the open question. CBA has pencilled in the November meeting, but AMP sees a real chance the move comes as early as the September meeting, and the stronger than expected growth figures just released only add to that case.
For investors, this suggests two things. First, headlines about falling property prices are likely to continue. That is consistent with an orderly adjustment rather than a reason for alarm. Second, anyone planning around rate relief in the near term should reset that expectation. Borrowing costs are likely to remain elevated well into 2027.
We are watching the September and November Reserve Bank meetings, the unemployment rate and consumer activity most closely, because those are the variables that would change our view in either direction.
The week ahead
Locally, investors will be watching comments from RBA officials Sarah Hunter and Andrew Hauser for further clues on the interest rate outlook, while business confidence, consumer sentiment and inflation expectations data will provide insight into economic conditions and inflation pressures.
Overseas, US inflation data will take centre stage, with Producer Price Index (PPI) and Consumer Price Index (CPI) figures due later in the week. Investors will be looking for signs of whether price pressures are easing, as the results may influence expectations for future Federal Reserve interest rate decisions.