Economic update: September 2026

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

• Geopolitics and macroeconomics remain captive of the Iran war and restricted crude oil supplies
• Inflation, due to higher oil prices, is not falling as quickly as many would like
• Expectations of higher inflation are keeping upward pressure on central banks to hold or raise rates

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

The Iran conflict and oil prices

The US-Iran conflict is still causing economic disruptions six months after it started. There have been frequent skirmishes in the Strait of Hormuz. The US is getting very frustrated, while Iran seems prepared to tough it out. As a result, oil prices remain elevated, but below their peaks earlier in the year.

Trump claims he has negotiated a deal with Venezuela that gives the US access to a reserve of 65 billion barrels of oil. However, no details have been released yet.

CNBC reported that it would take years to build the infrastructure needed to export that oil from Venezuela. As a result, Trump’s declaration that oil prices would soon fall is questionable.

The Fed under Kevin Warsh

The new US Federal Reserve (Fed) chair, Kevin Warsh, has received some criticism for not clarifying his view of the economy. Warsh did state earlier that he is against forward guidance. However, that hasn’t placated the bond market.

US 10-year and 30-year Treasury yields are elevated. In a sense, those higher yields are doing some of the work for the Fed.

At the annual Jackson Hole central bank summit, Warsh gave a speech that some saw as a sign he is willing to raise interest rates. He commented on how stubbornly the Fed’s preferred inflation measure has failed to fall to the 2% target.

That measure, core Personal Consumption Expenditure (PCE), was 3.3% for four of the last five months. Two months ago, it was 3.5%.

An alternative measure of inflation, derived from the Consumer Price Index (CPI), was also 3.3%. However, its core variant was only 2.5%. The last three core readings were 2.8%, 2.6% and 2.5%. Meanwhile, the headline CPI inflation readings, which don’t strip out volatile items, were 4.2%, 3.5% and 3.3%, respectively.

Oil prices cause much of the inflation we see, including indirectly through other goods and services. For this reason, we see the last three months of US inflation data as promising.

Should the Fed choose to raise rates, many analysts would argue it would take six or more months for any effect to show up in the inflation data.

Is the US jobs market slowing?

The Fed, like our RBA and other central banks, has a dual mandate: to maintain stable prices and full employment. The latest labour force data gave us enough reason to worry about the state of the US labour market.

The 12-month average number of US jobs created fell from over 350,000 per month at the start of 2023 to around 13,000 in February 2026. However, that average has since stabilised at just under 30,000 per month.

Monthly jobs data are notoriously difficult to interpret, particularly as revisions to previous data are often large. We do not think there is enough in the data to cause panic. However, we do think increasing interest rates from here would be unnecessary.

The Fed’s interest rate has little effect on oil prices. So, we think it would be wiser for the Fed to keep its rate at the current range of 3.50% to 3.75%. It should also be ready to start cutting its rate quickly if the labour force data deteriorates further.

Official data confirmed US growth of 1.5% annualised for the June quarter, down from 2.1% annualised for the March quarter.

Australia’s interest rate settings

We believe the situation in Australia is somewhat worse than in the US. The RBA’s official cash rate (OCR) is 4.35%. We also think our neutral rate would be in the range of 2.5% to 3.0%. In other words, the RBA has 1.35 to 1.85 percentage points of interest rate tightening baked in.

The ABS’ attempt to include government subsidies on electricity consumption as a price effect has corrupted our inflation data. As the rebates become a thing of the past, the ABS’s estimate for electricity price inflation is well above what it would be without the correction.

The ABS did publish electricity price inflation with and without a rebate correction. However, it stopped doing so a couple of months ago.

Headline CPI inflation for Australia was 3.5%. We have previously posted calculations showing that the rebate effect adds an upward bias of about 50 bps to this statistic. In other words, the uncorrected headline CPI rate is likely about 3.0%, which is in the target range of 2% to 3%.

Housing rents in Australia, as in many countries, have been rising at an uncomfortable rate. We think an increase in the RBA OCR would likely worsen rent inflation, as landlords seek to pass on cost increases.

We have adjusted the CPI reading to remove the component. Unlike in the US, the ABS does not officially post such a number. By our calculations, that measure currently also stands at 3.0%, up from 2.9% in the prior month (June). We believe the RBA needs to focus on its full-employment target.

Australia’s jobs market

The Australian unemployment rate rose to 4.5% in July, the latest month of published data. Compared to rates from before the pandemic, 4.5% might not seem high. However, we think the RBA needs to address the jobs problem.

The Australian unemployment rate has trended up from 3.5% in mid-2022. As a result, we see the current 4.5% as a strong signal that the RBA needs to cut interest rates.

At the beginning of the year, Governor Bullock stated clearly that she believes interest rate changes take at least six months to impact the wider economy. That means none of this year’s three rate hikes have shown up in jobs or inflation data yet.

Therefore, if the RBA does nothing, the three 2026 interest rate hikes will soon start to impact the jobs data.

It is not just the unemployment rate that troubles us. Over the past 12 months, total employment has only grown by +1.3%, and full-time employment by +1.1%. Both of these growth rates are well below what we think is long-run population growth.

Wages and the cost of living

The wages data released in August does not paint an optimistic picture. The Australian wage price index (WPI) grew by +0.8% for the quarter and +3.2% for the year. Private sector WPI growth was +0.7%, compared to +0.9% for the public sector.

When we adjust the WPI for price inflation, so-called real wages growth over the last 12 months was -0.7%. This reading marks the third consecutive quarter of negative growth.

Real wages are -6.6% below where they stood in mid-2020, and they have broadly tracked sideways since mid-2024. The cost-of-living crisis continues to plague Australian households.

Meanwhile, the S&P 500 and the ASX 200 both reached new highs during August 2026. Company earnings data in the US and Australia continue to impress. After all, markets look forward when pricing stocks.

Asset Classes

Australian Shares

Australian equities (ASX 200) rose by +1.1% during August. The Health sector gained +18.7% and Materials +12.0% during the month. Four sectors lost more than -6%: Discretionary, Financials, Property, and Telcos.

International Shares

The S&P 500 gained +2.6% in August. The German DAX, Japan’s Nikkei and China’s Shanghai Composite each improved by more than +2.5%. Broader emerging markets gained +1.7%.

Bonds and Interest Rates

The RBA kept the OCR on hold at 4.35% at its August 11th meeting. This is 60 to 85 bps above the Fed funds rate.

Australian inflation has been falling in recent months. However, RBA action is not behind these falls, as there is a delay between monetary policy changes and their economic impact. The market is not pricing any change to the OCR at the 29th September RBA meeting.

The Fed has not changed its interest rate since it cut it in December 2025. However, the market now expects the Fed to move on rates. In fact, it is more likely than not that the Fed will increase its rate at the next meeting.

The Fed chair, Kevin Warsh, is not giving strong hints about his thinking on interest rates or the economy. Longer-term yields have been rising in recent months. However, US President Trump is no longer openly demanding the Fed reduce its interest rate.

Other Assets

Brent Crude (-0.9%) and West Texas Intermediate (WTI) (+1.3%) oil prices were volatile during August. Talk of yet another solution to free passage of shipping through the Strait of Hormuz came to light. Then, the US and Iran renewed hostilities for the first time in a month.

The price of copper was up +4.4% and iron ore prices were up +4.1%. The price of gold was up sharply in August at +9.6%.

The S&P 500 share market VIX volatility index ended August in the ‘normal range’ at 14.9, with an intra-month peak of 16.5.

The Australian dollar appreciated by +1.9% against the US dollar over August.

Regional Review

Australia

The Australian economy is weak, but it is not yet near a recession. However, the three RBA interest rate hikes in the first half of 2026 have not yet taken effect.

The Westpac consumer sentiment index moved higher in August to 88.9 from 83.0. The NAB business indexes for conditions and confidence were largely unchanged.

The jobs market lost -15,800 positions, but full-time jobs were up by +16,300. There was a sharp loss of -32,200 part-time jobs.

China

China exports rose by more than expected in July, growing by +23.0% over 12 months. Imports also grew strongly at +27.5%.

Retail sales disappointed at only +0.6%, against an expected +1.5%. Industrial output also missed expectations at +4.5%, compared to the expected +4.8%.

The China official PMI (purchasing managers’ index) for manufacturing rose to 49.8 from 49.2. It is heading in the right direction, but still below the key 50 mark that separates contraction from growth.

United States

Jobs growth went unexpectedly backwards last month at -23,000, compared to the expected +83,000. The previous month’s estimate of +57,000 was revised downwards to +20,000. The month before that (May) was also revised down by -66,000 to 63,000. As noted previously, monthly data points can be quite volatile.

Interestingly, the government workforce shed -53,000 jobs. Hourly average wages grew by 3.2% over a 12-month period. This was the lowest reading since May 2022.

In yet another attempt to use tariffs as a bargaining tool, Trump said he would increase tariffs on Canada to 50%. Canada retaliated.

The University of Michigan consumer sentiment index fell from 55.2 to 51.0 in August. At the end of 2024, just before Trump’s inauguration for his second term as President, this index stood at 74.0.

Current forecasts for the US mid-term elections in November have the Democrats retaking the balance of power (majority) in the House of Representatives.

Europe

UK growth cooled from the March quarter to the June quarter. However, survey data showed a pick-up in growth over August. Inflation stood at 2.9%.

European Union (EU) inflation remains above target. However, the European Central Bank (ECB) claims that the economy is showing more resilience than it previously expected.

Rest of the World

Japan growth was +0.3% for the June quarter (annualised to +1.1%). CPI headline inflation stood at 3.1%.