Economic Update October 2026
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
Long dated Government Bond yields surge higher.
Higher oil prices resulting from Iran war leading to higher inflation globally.
Federal Reserve reacts to higher oil prices and stronger economic data, increasing interest rates by 0.25%.
The RBA similarly increased the Official Cash Rate by 0.25%, but our economy is weaker.
The Big Picture
Long bond yields – like those of 10-year and 30-year US Treasury bond yields – surged at the end of September. One can never be certain why markets do what they do but related yields around the world surged on about the same day!
The US Federal Reserve had already raised its ‘Federal funds (cash) rate’ in the middle of the month to mixed response. Two of the men reportedly shortlisted for the position of Federal Reserve Chairman in May this year, David Zevros and Rick Reider, in a CNBC interview in the run-up to the Fed decision each said the Fed would raise interest rates (and they did) but that they shouldn’t! Zervos doubled down on his view in an interview at the end of the month.
We were of the same view as Zervos and Reider and not the new Fed chairman, Kevin Warsh. All the assembled experts on CNBC before and after the Fed announcement said that a rate increase would have no major impact on inflation as the troublesome components – particularly oil and insurance – are not interest-rate sensitive.
The new chairman gave an insight into his thinking in an otherwise bland, abrupt and short media conference. He said the rate increase would remove ‘some accommodation in interest rates’. Accommodation is the term used to convey that monetary policy is ‘easing’ (interest rates declining) in the sense of helping promote economic growth. The converse is tightening. The rate that divides these two policy stances is known as ‘the neutral rate’.
Warsh has previously stated that the neutral rate is an academic construct that has no real value in policy making. When he raised the Fed rate from a range 3.50% to 3.75% to a range 3.75% to 4.00% (a 25 bps or 0.25% pts increase) he implicitly stated that his view of the neutral rate must be the new Fed funds interest rate or higher. Otherwise, he would have been tightening and not removing presumably unnecessary accommodation. That is a very important distinction for following the Fed thinking over the coming months!
Before the pandemic, there seemed to be some sort of consensus that the neutral rate in the US and Australia was about 2.5% to 3%. No one can accurately measure it and maybe it changes over time – hence the ’academic construct’ reference.
When the US Purchasing Managers Index (PMI) data were released a week after the Fed decision – and were quite ‘strong’ – long dated government bond (Treasury) yields surged, possibly because of the expected response to that data by the Fed at future Federal Open Market Committees (FOMC) meetings.
The Atlanta branch of the Federal Reserve publishes an unofficial ‘GDP NOW’ estimate. Instead of waiting until the following quarter to get the data and calculate actual growth, the Atlanta Fed tries to give real time snapshots which it updates on a daily basis if relevant new data are released. The current estimate for the September quarter was over 5% until the last day of September when it fell to 3.7%. Official estimated growth rates for March and June quarters were 2.1% and 2.6%, respectively. Year-on-year growth rates have not been less than 2% for any quarter since 2022. This is an average to above-average set of growth rates.
Perhaps Warsh is really trying to put a cap on parts of economic growth and not inflation. Higher interest rates would not likely increase inflation, but they might dampen future excess demand. Even the most recent jobs data from the first Friday in September were a big upward surprise. Maybe it was a statistical blip, but the Fed may be trying to get ahead of possible future demand-side inflation which Warsh has sworn to do. The privately compiled ADP jobs data at the end of the month also beat expectations with 90,000 new jobs against an expected 68,000 and 36,000 new jobs announced the month before.
Most analysts also think recent bond yields have risen because of oil price increases due to the war with Iran. That too is a reasonable assertion. The consequences of higher yields are significant for households and businesses in the US and elsewhere.
Most US home-owners use 30-year fixed-term loans to finance their mortgages which they can refinance at minimal cost if interest rates go down. That means that, as 30-year interest rates rise, homeowners are less likely to move home as the new loan would be more expensive. First time homeowners might still be tempted to buy at high mortgage interest rates if they expect those interest rates to fall soon enough to make homeownership still desirable especially if there would be savings relative to renting an equivalent property.
The ‘Mortgage News Daily’ 30-year fixed term US mortgage rate was 7.54% at the end of September. It was 6.0% just before the war with Iran that broke out at the end of February 2026. It was about 6.5% a year ago. The current interest rate is the highest in around three years.
During the period since February, the Fed only increased interest rates once – by 25 bps – on September 16th yet mortgage rates surged by nearly 1.5% points during that time! This market reaction could have a major impact on the housing sector and households in general.
Before the Fed decision, the CME FedWatch tool had priced the chance of an October interest rate increase as small – because of the proximity of the mid-term elections (3 November). It is common for central banks to try to steer clear of appearing politically aligned or motivated. After the Fed’s September interest rate decision to increase interest rates, the prospect that they would go again in October became very high until a lower-than expected inflation number was reported on September 30th (if the updated FedWatch tool is to be believed). And another increase by December is more likely than not, according the FedWatch. Over this period, the odds of the interest rate being 25 or 50 bps higher by the end of the year has been reasonably steady at around 90%.
The Australian economy is unquestionably weaker than that of the US. And the Reserve Bank of Australia (RBA) frequently states that its three interest rate increases this year before the Fed increased in this cycle, were to get ahead of inflation caused by the oil price surge. This statement is at odds with opinions overseas. Since we do not have a strong economy, the RBA is in danger of causing damage to the economy in the not too distant future.
The RBA governor, Michele Bulllock, stated after the February interest rate increase that there would be no noticeable impact of the increase on the economy for at least six months, such are monetary policy lags. General opinion, shared by the RBA, is that it takes about 12-18 months for the full effect of an increase to work its way through the economy.
These time lags mean that the economic impact of the first interest rate increase in February might only be seen in August data (and that which follows) – usually published in the following month. The latest August unemployment rate published in September saw a jump up to 4.65% from a low of 3.4% in October 2022. The July unemployment rate was 4.48%, 2 pts lower than the latest rate as described in the Australian Bureau of Statistics (ABS) report.
Bullock has frequently said that our current unemployment rate is low by historical standards. That is true, but the world has moved on. Participation data shows both males and females in the workforce as a percentage of the relevant population. There have been big swings in their recent trends.
Historically, the participation rate for males exceeded that for females by a wide margin. One obvious explanation is due to changes in ‘homemaking’ arrangements. Since the pandemic, working-from-home and flexible working have become commonplace. In the last four years there has been a marked upward trend in the female participation rate while that for males has been flat.
We think it reasonable to conjecture part of the increase in female participation is due to women, possibly with young children, now being more able to join the workforce. In turn, that might mean previous unemployment rates are less relevant now.
Before the pandemic, 4.0% was the lowest recorded unemployment rate since the ABS started publishing these data – in February 1978. That 3.4% became the new low after the pandemic might well mean that the current 4.65% is a ‘worse number’ compared to before – if benchmark full-employment has shifted – maybe by around 0.6% points (the difference between the two low numbers, 4.0% – 3.4%). If so, we should think, or at least consider, 4.65% being more like a 5.25% would have been before the pandemic. Applying that logic, the current unemployment rate is indicating a poorer economic environment than we may appreciate.
The 4.0% low occurred in February and August 2008, just as the GFC was arriving. The unemployment rate went from 4.0% to 5.3% in February 2009 (just six months later) and hit 5.9% four months after that.
Most economists and the government were then predicting a recession during this run-up in the unemployment rate. The unemployment rate peaked at 6.4% in October 2014. Unfortunately, there is often a lot of upward momentum in unemployment rates after they have started a run. Most economists argued it was exports to China that saved Australia from a recession in the GFC. Most other Western economies experienced serious recessions.
We have concerns that the RBA’s changes to monetary policy this year could unduly and negatively impact economic growth in to 2027. We believe this is a strong case to cease increasing interest rates and let the four interest rate rises implemented so far this year take effect, and be ready to reduce rates if and when it becomes apparent that the economy is falling into trouble.
Michele Bullock said only days before the latest unemployment reading of 4.65% that we might need 4.5% to 5.0% unemployment rates to cure inflation. We don’t agree that an unemployment rate in that range (or any other) would cure the supply-side inflation we are experiencing at the moment, but we are almost in the middle of Bullock’s stated range and more impact from that February increase will follow. Of course, the next two increases in the first half of the year will compound the problem into 2027. And we won’t start to notice the September increase effect on the economy until the June quarter of 2027. The 12-18-month lags would imply we will still be feeling the impact of this interest rate hiking cycle well into 2028 even if the RBA starts cutting interest rates long before. This scenario highlights the short comings of data dependency.
So, what does this mixed picture imply for us as investors? Company earnings in the US are strong. The LSEG survey data collected from brokers who analyse the individual companies remain strong for at least a 12-month horizon. The S&P 500 index is dominated by big tech companies and the like. The danger with deviating too far from the index weights to chase that narrowness is that the trend in AI could change abruptly. The new strength seen in the broader US economy could enhance the view some exposure to a large part of the broader index might be beneficial for some investors.
The ASX 200 also has strong LSEG earnings’ expectations but less strong than for the S&P 500. Our economic predictions expressed here could come to lower these LSEG expectations in due course as the impact of past interest rate increases become clearer.
Our housing sector is certainly more problematic now. Auction clearance rates and some house price data are showing distinct weakness. Some of this weakness would have come from the earlier RBA interest rate increases and their effects on mortgage interest rates. Almost certainly, there has also been an impact on this sector from expected changes announced in the budget: to negative gearing and capital gains tax.
With long bond yields being far more attractive than in recent years, bonds might play a more useful part of a diversified portfolio at this time.
Part of any reasonable investment plan acknowledges that the unexpected will happen from time to time. Therefore, constant monitoring of economies and markets by professionals is essential.
The mid-term elections in the US will be held at the start of November. President Trump, who has just over two years to run, in an unprecedented move, is trying to ‘bribe’ voters with a $5,000 ‘Trump dividend’ if the Republicans retain control of the house of Representatives and the Senate. Many think that the House of Representatives might (otherwise) change to a Democratic majority, but it would take a lot more change to swing the Senate to a Democratic majority.
Given the eclectic style of Trump’s presidential decision making, it is very hard to predict how he would react to ‘losing the House’. Increased volatility cannot be ruled out.
Some advances in talks with Iran have been reported at the United Nations (UN) in late September and in talks between China’s President Xi and President Trump at the White House following the New York UN General Assembly. Trump rejected the latest Iran offer to ceasefire and open the Straits of Hormuz to shipping.
Trump’s banning of some media outlets from the ‘inner circle’, including CNN, backfired on him during this Xi visit. In a televised ceremony, he cut the ribbon to open his new helipad in the White House gardens but there was no sound on TV. Apparently, in solidarity with CNN and the First Amendment, no TV outlet allowed sound to be recorded so there was only vision.
Asset Classes
Australian Shares
Australian equities (ASX 200) had a poor month losing ‑3.2% in capital gains. IT (‑10.6%) was the worst performing of the 11 sectors. Losses were also large in the Materials sector (‑7.3%), Utilities (‑4.3%) and Consumer Discretionary (‑3.9%). Telcos (+2.5%) and Healthcare (+3.4%) were the only sectors posting gains.
International Shares
The S&P 500 (‑0.5%) sustained only a modest loss over September. Losses were much greater in Germany’s DAX (‑4.0%), China’s Shanghai Composite (‑3.6%) and the UK’s FTSE (‑2.0%). Japan’s Nikkei posted a gain of +0.7% and Emerging Markets a modest loss of ‑0.7%.
Bonds and Interest Rates
The Fed, at its September FOMC meeting, made its first interest rate increase since the last change, an interest rate cut in December 2025. It moved the Fed funds rate up by 25 bps to the range 3.75% to 4.00%. Assembled experts on CNBC all said the increase would not do anything for oil-related price inflation. The increase was more likely justified by some growing evidence of a stronger US economy.
Fed chair Warsh claimed that the increase would reduce “accommodation in monetary policy”. That must mean that he thinks the neutral rate must be the new interest rate or higher. That was not a view generally expressed by analysts and commentators before the decision. Warsh was unusually brusque in his answers to questions, not allowing the customary follow-up questions and terminating the conference early.
Long dated US Treasury yields had been elevated in recent times and surged a week later after a collection of hot Purchasing Managers’ Indexes (PMIs) for manufacturing and other sectors were posted. Some of this optimism, since the PMIs are based on expectations, might be due to the prodigious growth in data centres and the AI sector in general. The Atlanta Fed GDP NOW estimate for the September quarter is 3.7% after official March and June quarter readings of 2.1% and 2.6%, respectively.
Popular expert opinion before the rate rise was that the Fed would not increase again in October because of the proximity of the mid-term elections. Central banks in the Western world typically try to avoid being seen to make moves that might be seen as being, or at least partially, politically motivated.
The odds for an October 25 bps increase surged to 50% with a 90% chance of the rate being 25 or 50 bps higher at the end of the year. However, the good news on inflation at the end of September trimmed the October interest rate increase probability to 35% but left the odds of two increases by year end more or less unchanged.
The Fed’s Personal Consumption Expenditure (PCE) core inflation reading was released at the end of September. The Fed-preferred core reading was 3.0% for the third month in a row. The headline rate fell from 3.7% to 3.4%. The market responded very positively to this news but then sold off to finish slightly negative for the quarter.
Long dated US Treasury yields have risen sharply. The 10-year yield is at a level not seen since 2007 and the 30-year since 2004. The 30-year fixed-term mortgage rate, sourced from MND, ended September on 7.54% or 1% pts above where it was a year ago and 1.5% above the pre-war rate in February 2026.
The RBA, in September, also increased the official cash rate by 25 bps– to 4.6% – but it is difficult to mount an argument that the Australian economy is strong, let alone too strong. Headline CPI inflation did jump up to 4.0% from 3.5%, but automotive fuel inflation jumped up to +14.9% from +7.5% following three previous monthly negative values. The removal of excise tax on fuel would have something to do with the jump but the spike in global oil prices is also a big factor.
Electricity price inflation (with the ABS rebate correction) jumped to +13.2% from +6.1% the month before. The ABS commented that this jump was probably due to the ending of rebates. Electricity consumption resides in the Housing sector which had the highest inflation (+5.7%) of the major sectors. The ABS no longer provides uncorrected electricity price inflation.
The Bank of England and the People’s Bank of China both held their interest rates ‘on hold’ at their September meetings while the Bank of Japan raised its rate by 25 bps to 1.25%. Japan of course, is coming at the neutral rate from the ‘other side’ to most nations, following a multi-decade period of extremely low rates.
Other Assets
Brent Crude (+9.4%) and West Texas Intermediate WTI (+5.4%) oil prices surged on conflict between Iran and the US. The VIX US share market volatility index (16.3) rose to just above normal levels.
The prices of gold (‑6.2%) and iron ore (‑‑5.0%) fell sharply. The price of copper was flat (+0.2%).
The Australian dollar depreciated by ‑2.6% against the greenback over September as US long dated bond yields rose. The US 10-yr Government bond yield closed the month at 5.29% and the 30-yr at 5.63%. In the tariff turmoil of 2025, yields for these two assets of 4.5% and 5.0% caused a big reaction in markets. The newer highs are less problematic because economic conditions are considered to be much stronger than in 2025.
Regional Review
Australia
The Australian economy while experiencing some softness, is not yet in the realms of being near a recession – partly because of population growth. However, the renewed tightening of monetary policy could take the economy there.
The latest GDP growth rate was +0.4% for the June quarter and +2.1% for the year. However, the per capita GDP growth estimate was 0.0% for the quarter and +0.7% for the year.
The unemployment rate jumped by 2 pts to 4.65%, and full-time employment was down by ‑6,300 jobs for August, or only +1.3% for the last 12 months. Job growth is not keeping pace with population growth. It is not a surprise that consumer confidence slipped again.
Inflation did come in higher than expected by the market at 4.0% but oil prices and electricity price adjustments by the ABS probably accounted for much of the surprise. Without either, we conjecture that inflation would have been at the top of the target range and no tightening of monetary policy is warranted.
China
After two months below the critical 50 level, the official China PMI for manufacturing came in at 50.1.
Exports were up +25% over the year and imports by +28.2%.
President Xi had an important meeting with President Trump in Washington, DC. No major announcements were made but it was reported that the increase in contact between the two countries will help trade relations. Some changes to tariff policy timings and rare earth shipments were reportedly discussed. Ordinarily, one such meeting a year would be seen as normal. There will be four such meetings in 2026.
United States
Jobs growth jumped sharply by +162,000 and the prior month’s jobs loss of ‑23,000 was revised to +21,000. The unemployment rate was steady at 4.1%. It is too soon to say whether these results marked the end of a mediocre run of jobs data or just a statistical blip.
The final June quarter reading for GDP growth was +2.6%, up from the previous second estimate of +1.5%. The Atlanta Fed ‘GDP NOW’ reading was revised down from +5.0% to +3.7% on the last day of September.
Headline CPI inflation came in at 3.4% with the core variant being 3.1%. Retail sales grew rapidly in August – by +1.2% and at +6.0% for the year.
Headline PCE core inflation – the Fed’s preferred variant – came in at 3.0% and the headline at 3.4% which was well below the previous reading of 3.7%. The probability of an October interest rate increase fell on this news from 50.9% to 34.9% in one day.
This month’s set of macro data was unequivocally better than was expected a month ago.
There was a lot of discussion over the safety of AI. Trump held a meeting at the White House with industry leaders. They agreed on self-regulation as the way forward. The dangers are real because problems have already arisen around the world including in Australia.
Trump has renamed AI as super intelligence or SI. After renaming the Gulf of Mexico but failing to rename the Kennedy Centre, naming rights seem to appeal to him but lack any substance in solving any real-world problems. It is difficult to see the global scientific community adopting Trump’s naming convention.
Europe
UK productivity jumped to +1.4% from +0.2%. This jump marked the first turn-around since 2008! Again, it is not clear if the result is due to AI or a statistical aberration. Only time will tell.
UK inflation was 3.1% in August measured over the year which was the highest for five months.
Rest of the World
Trump rejected Iran’s solution to opening the Strait of Hormuz. China is only getting a limited supply of oil from Iran, so China needs a solution too. Reserves of oil in China and the US are falling to critically low levels.
Have more questions? Reach out to our knowledgeable team today.
We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.
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