Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

WHILE the cancelled Firmus IPO dominated local headlines, an easing of bond market concerns helped equities in what was otherwise a quiet week.

There was limited economic data, although purchasing managers indices (PMIs), an indicator of the outlook, continue to suggest the underlying global economy remains firmer than expected.

In the US, the S&P 500 gained 1.2% while locally the S&P/ASX 300 was up 0.4%.

Equity markets saw rotation away from AI/semiconductor sectors, partly due to some noise around OpenAI’s revenue run rate, however there were some issues with the accuracy of these claims.

The market for US Q3 earnings season to kick off for a lead on the latest AI capex updates and insight on the revenue benefits from that investment.

It is interesting to note that any expectation of slowing AI spend is now seen as bond friendly, due to less crowding out, and would lead to less monetary tightening which in turn would support the financial, consumer discretionary and REIT sectors.

In Australia the cancelled Firmus IPO was the main event. It was thwarted by an interplay of valuation, funding and execution concerns as well as a potential stock overhang.

This does not derail the company’s prospects, in our view, but we suspect we will see them undertake another private funding round and any future IPO to be in a different market.

Energy

Somewhat paradoxically, the oil price remains high (brent crude $104/bbl) while the flows through the Strait of Hormuz have returned to pre-war levels.

Around US$20 of the current price is estimated to be risk premium, reflecting the ongoing attacks on tankers going through the strait and fears of an escalation in the conflict either ahead of the US election by Iran – or after it by the US.

There is a significant additional issue with freight, as the movement of oil is relying on using smaller shuttle carriers through the strait, which then do ship-to-ship transfers which can tie up very large crude carriers (VLCCs) for up to 10 days.

In addition, 126 Iranian VLCCs are off the market (~13% of the global fleet) and a number of the tankers are taking longer routes.

All this means there is almost no spare capacity in freight, leading to transit costs rising to ~US$30/bbl and beyond, versus around US$2 to US$5 pre-crisis.

A buyer in China is now effectively paying close to US$140/bbl for oil from the Middle East, which is seeing them bid up for oil from other regions.

The likely outcome is that this will force European hydroskimming refiners (which produce lower-margin fuel oil) to curb production and reduce oil demand to alleviate the pressure, but this will add to the supply pressures on refined products.

There were attempts to alleviate the diesel shortage with the G7 announcing 100 million barrels to be released from emergency stocks over four months.

A portion of this had previously been announced, so it is not necessarily going to shift balances meaningfully, although there will be a greater focus on diesel releases over crude.

The release of Russian diesel announced by US President Donald Trump is also relatively small and likely to have limited impact.

This gets to the core challenge for markets; diesel is very expensive.

The price in AUD has doubled this year and this is an input into a broad range of sectors including mining, goods freight, agriculture, and building materials. We are beginning to hear about surcharges being reintroduced, all of which will continue to put pressure on inflation.

Global macro

There was limited data last week outside of the global manufacturing and services PMIs.

The latter signalled the global economy is getting stronger, despite all the issues with fuel prices.

This is good for equities and earnings but continues to put pressure on central banks to contain inflation.

Regionally the US is strong and in Europe, Germany is picking up.

The Fed and outlook for rates

The Federal Open Market Committee (FOMC) minutes provided the forward guidance that Chair Kevin Warsh is so reluctant to give, essentially signalling a pause in October but another hike before the year’s end and the need for at least two more hikes this cycle.

In addition, Fed Governor Christopher Waller, speaking at a central bank forum in Turkey, noted the reasons why he has pivoted from a previously more doveish perspective. The key factors were:

1. The persistence of disruption from the Iran conflict and the flow on effect to diesel prices,
2. The apparent flow on effect of the AI boom on other prices, and
3. The emergence of new potential tariff pressures (e.g. Canada).

Given inflation has exceeded the Fed’s target for five-and-a-half years, these new pressures may lead to a shift in expectations of inflation.

Markets

Bond markets were calm last week, with US 10-year yields ending down 4 basis points (bps) at 5.24%.

This Wednesday’s (US time) release of September consumer price index (CPI) data will be the next test.

Yields have backed up a lot recently, with the move exacerbated by market positioning and the need to hedge positions.

It appears this pressure has eased and the 10-year yield has found some resistance at 5.35%

The global AI/semiconductor sector was weaker last week, on not a lot of news flow.

Some noise around OpenAI’s revenue run rate may have been a factor, with reports that the end September number was US$50 billion versus previous reports of US$70 billion.

However there appear to be issues around the basis of this measure and accuracy of some of the statements.

Regardless, this does highlight the issue that the AI trade currently relies on Anthropic and OpenAI to underpin compute demand.

Both these companies are private, so don’t provide audited financial numbers and we don’t know how sustainable these revenues are.

For example, there is a view that Anthropic revenue is currently inflated by other companies using their models in the intensive phase of developing their own products but once completed, the likes of Microsoft and Meta may migrate to cheaper, open-weight models.

Overall, the tech sector retains good technical support going into US quarterly reporting season.

What saw a bounce in some of the rate sensitive sectors (REITs, consumer discretionary, utilities) last week, partly on the stabilisation in bonds which reduced the probability of a spike towards 6% yields, helped with the rating on these sectors.

It is also becoming apparent that the rate trade is negatively correlated to the AI trade on the view that the stronger the AI investment cycle, the higher rates will have to go and the more that will impact on rate sensitives.

The key sector to watch is financials, particularly banks, which have struggled since Warsh’s Jackson Hole speech on concerns high rates will negatively affect the economy.

The US financial sector appears technically oversold in a long run uptrend going into results, which start this week.

Australia saw a similar theme with REITs (+3.5%), utilities (+3.6%) and discretionary (+2.5%) performing the best last week.

The rally in rate-sensitive stocks reflects recent economic data showing weakening momentum across housing (building approvals down), manufacturing (PMI back in contraction), broader activity (composite PMI slowing), and consumer sentiment (falling to a six-month low).

If growth slows, this may limit the hikes required by the RBA.

There is risk to this view given the inflationary pressures we are seeing globally and the need for the Fed to continue to raise rates.

Australia is one of the most sensitive economies to rising fuel prices given its diesel usage, which may lead to ongoing inflation pressures even with lower growth.

When it comes to rate sensitives we believe we should distinguish between longer-duration bond sensitive stocks and those with economic risk (e.g. consumer discretionary) as the only reason for the RBA to stop hiking is a weak consumer, which would impact that sector’s earnings.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s flagship Pendal Focus Australian Share Fund is a high-conviction equity fund with a two-decade track record across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Data centres have moved from a niche property segment to essential infrastructure, fuelled by cloud computing and a continued rise in AI-related demand. Pendal’s PETE DAVIDSON provides more insight

• Where investors can find data centre returns
• Why power, scale and valuations matter
• Learn more about Pendal Property Securities Fund

IN THIS video podcast, Pendal head of listed property Peter Davidson explains the scale and economics of the build-out, where property investors can potentially capture returns, and why access to power, capital and suitable sites matters.

He also examines the growing role of data centres in Australian listed property and the risks investors should weigh when assessing developers and valuations.

Here’s an excerpt from the video podcast:

“Of AI capex, about a quarter of it is data centres.”

“The pure juice in data centres, from a property investor’s point of view—the great returns at the moment—is really to be had in development.”

“The biggest constraint by far is the power—having the power and the power availability.”

“Data centres just become another sleeve of the opportunity set.”

Watch the full video interview

Listen to the audio version

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About Peter Davidson and Pendal listed property strategies

Peter Davidson is Pendal’s head of listed property.

Peter has held financial markets roles spanning portfolio management, advisory and treasury markets over more than three decades.

Specialising in the Property, Retail, Insurance and Infrastructure sectors, he has previously held roles with Midland Montagu Australia, Daiwa Securities and has served as the non-executive director of the Industry Superannuation Property Trust.

Pendal is an Australian investment management business focused on delivering superior investment returns for our clients through active management.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

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About Pendal Group

Pendal is an Australian investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE MCKAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Horizon Sustainable Australian Share Fund

THE bond market remains at the centre of discussions. 

The US 10-year bond closed last week at 5.28% after touching 5.34%, the highest since 2002, despite a soft payrolls print that effectively took an October US Federal Reserve hike off the table. 

The takeaway is that the long end of the yield curve is no longer pricing the policy path, but it is pricing term premium – compensation for uncertainty over the Fed policy direction, the Iran conflict and energy.  

On the latter, Brent crude held above US$100/bbl despite flows recovering and a further release of strategic reserves, with tightness migrating to refined products and a geopolitical premium that physical supply alone cannot unwind. 

In contrast, iron ore hit 52-week lows. 

In Australia, the RBA delivered its fourth hike of the year to 4.6% (the highest since 2011) but a softer inflation print has reduced the odds of another rate hike in November, and the consumer is visibly slowing. 

Equities have so far looked through all this on the strength of corporate earnings; the upcoming US reporting season will test whether this holds. 

The S&P 500 was off slightly (-0.3%), the Nasdaq gained 0.5% and the S&P/ASX 300 finished +0.1%.

Investors in Australia were quick to buy consumer discretionary on a potential pause in the rates hiking cycle. 

Tech also had its best week since August (+6.8%) driven by stock specific upgrades. 

US bond yields

US 10-year bond yields last week hit their highest point since 2002, piercing through both the 2007 and 2023 peaks.

We touched on the key drivers last week – the shift in Fed rhetoric, the energy shock, strong nominal economic growth and competition for capital from AI-related issuance.

There are two additional points to highlight this week:

First, the composition of the move:

• Friday’s softer payrolls report effectively removed the prospect of an October Fed hike, yet the 10-year yield still rose.
• This suggests long-end yields are no longer rising because investors expect the Fed to do more, but rather despite expectations that the Fed will do less.
• This means the market is increasingly demanding additional compensation for holding duration, reflecting uncertainty around inflation, energy prices, fiscal deficits, geopolitical risks and the future path of monetary policy.

Second, the shape of the curve is notable:

• During previous periods when the US 10-year traded around 5%, the Fed funds rate sat above the 10-year yield and the yield curve was inverted.
• Today, the Fed funds rate (3.75-4%) remains below long-dated Treasury yields, with the curve positively sloped and the 30-year Treasury yielding around 5.6%.
• This means the market is repricing long-term risks independently of the Federal Reserve, with investors demanding higher yields to hold long-duration assets.

Investor demand for duration remains another important question. For example, Goldman Sachs is posing the view that the buyer base for long-dated bonds may have structurally changed over the past decade.

Historically, higher yields would typically attract demand from relatively price-insensitive buyers, including insurers matching long-dated liabilities, sovereign reserve managers recycling trade surpluses into Treasuries and leveraged investors able to earn the carry trade through repo markets.

Goldman argues each of these buyer cohorts may be less important today.

Ageing populations are moving from accumulation to drawdown, reserve managers have increasingly diversified into assets such as gold, while leveraged investors have little incentive to add duration with carry compressed and recent bond-market losses still fresh.

If that assessment is correct, the marginal buyer increasingly becomes the unlevered household sector, which may require materially higher yields before stepping in.

While difficult to quantify, it provides one explanation for why yields have continued to rise despite reaching levels that historically would have attracted stronger demand.

The consequence is that bonds are increasingly behaving like a momentum asset rather than a traditional safe haven, in that rising yields are triggering further selling from systematic investors, hedge adjustment activity and reduced duration across portfolios.

While this dynamic can reverse sharply once buyers return, the catalyst remains unclear.

A meaningful de-escalation in the Middle East, a sustained decline in energy prices or greater certainty around the Fed’s reaction function could all provide relief, but none appear imminent.

For equities, higher yields have so far been offset by resilient earnings and ongoing economic growth.

The key issue from here is not simply the level of yields but the reason they are rising; equity markets can generally tolerate higher rates when they reflect stronger growth expectations, but they struggle more when yields continue rising despite evidence that growth is slowing.

With US reporting season commencing shortly, investors will be watching closely to see whether earnings remain strong enough to justify current valuations against an increasingly challenging bond market backdrop.

Positioning remains surprisingly cautious – Goldman Sachs estimates US hedge fund net exposure has fallen to its lowest level since April 2025 and is close to five-year lows, despite major equity indices trading near record highs.

Investor reluctance to add risk reflects ongoing concerns around oil, interest rates and geopolitics.

Notably, Russell 2000 positioning remains extremely depressed, with systematic exposure near the 7th percentile and leveraged funds carrying record short exposure, suggesting significant short-covering potential should yields stabilise.

Conversely, healthcare experienced significant short covering during the week, while energy remains heavily under-owned despite oil prices remaining above US$100/bbl. 

US macro and policy

Data released on Friday suggests a labour market which is stable with softer payrolls, a slightly higher unemployment rate (+3 basis points to 4.18%) and muted wages (average hourly earnings +0.1% month/month and +3% year/year) not indicative of an economy which is overheating. 

Payrolls increased by 29,000 in September (versus consensus at +90,000) with -60,000 revisions to the prior two months. 

As a result, monthly gains averaged just 51,000 in Q3, down from 81,000 in Q2.

A pause at the Fed’s October meeting, signalled by Federal Reserve Vice Chair Philip Jefferson and New York Fed President John Williams before the employment report, looks very likely with the market only pricing a 22% chance of a hike.

Beyond payrolls, other US data was broadly consistent with a gradual cooling rather than a sharp slowdown.

• Weekly jobless claims remained near cycle lows, suggesting employers continue to hoard labour despite tighter financial conditions.
• Personal consumption expenditures (PCE) inflation was broadly in line with expectations and revisions were marginally dovish.
• Manufacturing surveys continued to point to ongoing cost pressures, reinforcing the view that while the labour market is easing, inflation risks have not fully disappeared.

This combination helped remove expectations of an October Fed hike, although longer-dated Treasury yields continued to rise as investors focused on inflation, fiscal and geopolitical risks rather than near-term monetary policy.

Oil

Brent crude finished the week at $102/bbl despite data showing Middle Eastern crude exports recovering to ~95-98% of pre-war levels, in addition to the US announcing a 40 million barrel strategic reserve release. 

The resilience in prices suggests factors beyond physical crude availability are driving the market. 

First, markets continue to assign a significant geopolitical risk premium to oil.

• While flows through the Strait of Hormuz have largely normalised, investors remain concerned that if Iran cannot materially disrupt tanker traffic it could instead target ports, pipelines or energy infrastructure, leading to a more severe supply shock.
• This risk premium was reinforced during the week by reports the US was considering deploying additional naval assets and troops to the region.

Second, investors increasingly view energy as an inflation hedge as bond yields continue to move higher.

• Higher oil prices contribute to inflation concerns, while inflation concerns support demand for energy exposure, creating a somewhat self-reinforcing dynamic.

The market’s focus has also shifted from crude to refined products. While crude exports have largely recovered, diesel and other product markets remain tight due to ongoing logistical disruption, constrained Middle Eastern product exports, Russian export restrictions and lower Chinese product exports.

As a result, refining margins remain elevated even as crude flows improve. 

The release of 100 million barrels from G7 strategic reserves (split between half crude and half diesel) helps – as well as confirmation by Trump that a US export ban is off the table – but does not fully address the issue. 

For context, a 50 million barrel release over four months is roughly equivalent to 416,000 barrels per day – versus a ~1.6 million barrel/day disruption to diesel from disruption in the Middle East and Russia, in a 30 million barrel/day diesel market. 

The key question from here is what breaks the cycle.

A return to negotiations and continued recovery in Middle Eastern exports could gradually unwind the geopolitical premium and allow inventories to rebuild at lower prices.

Conversely, any escalation in the conflict or disruption to infrastructure could see the current risk premium persist, with inventories needing to be rebuilt at materially higher prices.

Iron ore

Iron ore fell to a 52-week low of US$92.1/t, with Chinese demand seasonally soft during the Golden Week holiday period (through to 7th October).

Free on board (FOB) prices – which reflect production, shipping to port and loading onto the ship – have declined to approximately US$75/t in Australia (-16% since February) and US$48/t in Brazil (-35% since February), while freight costs briefly reached US$43/t last week.

Early signs of supply discipline are beginning to emerge, with three Brazilian producers announcing output curtailments over the past month.

Given the steep and highly elastic iron ore cost curve, lower prices are likely to drive a market rebalancing over time.

Australian producers remain among the lowest-cost suppliers globally, but investor sentiment has deteriorated, with short interest in both Fortescue (FMG) and Rio Tinto (RIO) reaching one-year highs as the earnings impact of lower prices is yet to fully flow through.

Ongoing discussions with China’s centralised unit buying on behalf of steel mills – China Mineral Resources Group (CMRG) – add to uncertainty by creating product placement and demand risks across the sector.e “AI as a tailwind to software” pivot is supportive for Xero, Technology One and Wisetech. But it remains important that these companies deliver positive earnings with any misses potentially interpreted as supporting the AI disruption thesis. 

Australia macro and policy

The RBA raised the cash rate by 25bps to 4.60%, marking its fourth rate increase of 2026 and taking the cash rate to its highest level since 2011.

The decision was unanimous and reflected the Board’s continued concern that inflation remains above target despite signs that household demand is slowing.

Consumer spending softened further through September as households continued to reallocate spending away from discretionary categories and toward essentials.

Higher fuel prices, rising utility bills and elevated mortgage repayments are increasingly absorbing household budgets, with spending holding up in fuel, pharmacy, groceries and travel, while household goods, fashion, dining out and recreation remain softer.

The latest rate increase is likely to reinforce these trends heading into the important Christmas trading period.

Inflation data released during the week was modestly softer than expected, with August trimmed mean CPI rising 0.24% month/month versus market expectations of 0.3%.

The result provided the RBA with some breathing room and saw markets significantly reduce expectations of a follow-up rate hike at the November meeting.

Despite the softer inflation print, several near-term inflation risks remain.

Rising oil and diesel prices continue to place upward pressure on transport, logistics and household fuel costs, while the removal of payment surcharges from 1^st October has prompted a wave of announced price increases across parts of the consumer and service sectors as businesses seek to recover those costs through headline pricing.

As a result, while demand conditions are weakening, inflation is likely to remain uneven across the economy.

The key question for markets is whether slowing consumption and a weaker consumer ultimately outweigh these cost pressures – if spending continues to deteriorate and inflation moderates further, the RBA may be able to leave rates unchanged.

However, sustained energy price inflation and ongoing cost pass-through from businesses could slow the disinflation process and delay any future policy easing.

Markets

In Australia we saw strength in technology (+3.5%), consumer discretionary (+2.6%) and communication services (+1.8%), while healthcare (-1.4%) and energy (-1.1%) underperformed.

Stocks were driven by changing expectations for the rate hiking cycle, M&A activity and the occasional upgrade last week.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

MARKETS are focused on the global rise in bond yields which pushed US 10-year yields up 15bps last week – or more than 40bps for the month.

The yield hit 5.16% on Friday and by Monday had passed 5.2%.

This has been driven by a shift in Fed rhetoric earlier this month, as well as high fuel prices, strong economic growth and a high degree of debt issuance.

This has not yet affected US equity markets. The S&P 500 gained 1.2% last week and the Nasdaq rose 2.1%.

This is because economic growth remains supportive, while the debt supply issue relates to AI investment – which is also helping drive earnings.

Energy markets were flat-to-down last week, on evidence of more oil getting through the Strait of Hormuz. Overall, oil flows from the Persian Gulf could be only 3-to-5 million barrels per day below pre-conflict levels.

However, refined product and LNG flows remain more constricted and prices remain very elevated. There is an increasing probability (albeit still well below 50% in our view) of some form of US diesel export restriction, which would be bad for the rest of the world.

Brent crude finished up 0.4% at US$104.3/bbl, while NYMEX Crude fell 7.9%.

The US-China summit was largely uneventful unless you’re a panda enthusiast. But two more meetings are planned this year and dialogue reduces the risk of a renewed escalation in tensions.

Australia saw a slight easing in employment tightness, but nothing of substance to shift expectations of an RBA rate hike this week (currently priced at 90% probability).

The S&P/ASX 300 shed 0.8% for the week.

On the stock front, the launch of Meta’s Muse AI assistant product ignited renewed concerns over companies that rely on consumer inertia in terms of pricing and margin (such as travel, insurers and subscription-related businesses).

Bonds

Markets remain focused on rising bond yields, although the impact on equities has been muted so far.

Yields are rising due to a combination of:

1. The Fed striking a hawkish tone. On September 16 the Fed unanimously voted to raise rates, and language such as “removing accommodation” suggests they are not seeing one hike as enough. They are framing the context as an inflation rate that has been above target for five years, while unemployment rates remain low. The signal is that they are catching up to a sustained problem – rather than reacting to recently inflation data – which suggests more resolve for further tightening.
2. The energy shock. With inflation now above target for five years, the Fed believes it has no buffer to allow another supply shock without a policy response if it wants to maintain inflation expectations and credibility.
3. A strong economy. USD GDP is growing at a nominal 5-6% and we saw very strong global purchasing managers indices (PMIs) last week.
4. Competition for capital. The Fed is focusing on the short end of the yield curve and is letting the market set the 10-year yield. Here, at the long end, yields are not just about inflation and real yields – supply of and demand for debt are also a factor. There were two poorly supported auctions of five-year and 20-year auctions last week, highlighting weaker demand to step in and buy yields at these levels. This reflects concerns about increasing supply as even while the government is shortening its issuance the private sector (driven by AI capex) is adding to supply at longer durations. 

The supply issue is exacerbated by expectations of rising demand for private funding – also mainly driven by AI capex.

Traditional buyers at the long end of the yield curve – such as pension funds and insurers – are understandably wary of stepping in given supply, geopolitical uncertainty, inflation and growth.

This means yields have been pushing higher. While there is an argument they may look cheap, we note they can remain cheap for an extended period.

The other related issue is why this has not weighed on equities. The reasons are:

1. The pace of the rise in yields has been relatively moderate. 10-year yields had held their 4.8% level until this month. The spike to 5.15% in the last two weeks is the first time we have a more material step higher in a short space of time.
2. The rise in yields reflects good economic growth. At the same time debt supply relates to the need for AI investment, which is also broadly positive for equities and for pricing power in certain industries. Therefore the market is not yet viewing rising yields as de-railing the outlook for growth. This can be seen in credit spreads (excluding technology, where supply is an issue) remaining low.
3. Earnings growth remains strong. This has allowed equities to de-rate as well as rise, consistent with the rise in real yields. S&P 500 return on equity (ROE) has also risen materially, supporting the market rating.

In terms of earnings, we are two weeks away from the first third-quarter results.

The market expects a deceleration from last quarter’s 50% year/year S&P 500 EPS growth – but a still-strong level in the high 20%-30% range.

Macro

The September US S&P Global Composite PMI – a leading indicator of economic activity – hit the survey’s highest point since early 2022.

The Composite measure came in at 58.4 versus 56 in August and 53.7 expected.

The Services PMI was 58.7, versus 55.8 forecast, while the Manufacturing PMI was 57 versus consensus at 55.3.

The implied growth in GDP is around 4% for the quarter – well above consensus expectations – while the employment component was at a four-year high.

Most analysis downplayed the survey’s strength as it was not consistent with other manufacturing and services surveys – such as those from the Philiadelphia and Richmond Federal Reserves – which indicate more moderate growth.

This does highlight that the US economy has a very different feel to other parts of the world. A lot of capital is being deployed there due to cheaper energy, a lighter regulatory environment and the tail wind of AI.

It also indicates that US growth remains well supported despite the rise in yields and energy costs.

This can be seen in the Goldman Sachs current activity indicator – a “real-time” measure of growth – which has been rising in recent months and is seeing tailwinds from the manufacturing sector.

This differential is helping support the US dollar.

Energy markets

Global refining capacity is under pressure from closures and disruption in both the Middle East and Russia.

As a result, jet fuel, diesel and LNG have all seen far greater moves in price relative to oil.

In the US, for example, diesel has risen to US$6.50/gallon, up from around US$3.50 before the attack on Iran and well in excess of the previous highs reached in the wake of Russia’s invasion of Ukraine.

Diesel is key input for agricultural industries. As we head into US midterm elections this could affect some key Senate and state contests.

As a result there has seen speculation around some form of diesel export restriction from the US.

This is almost universally seen as bad policy that could potentially create chaos in global refined product markets. The US is a key supplier to the rest of the world and restrictions could trigger a scramble for product.

It could also potentially lead to a cut in supply in the US if it led to a rebuild of inventory to the point where storage costs rose too high and refiner margins fell.

There is a view that any restriction may be only partial and for a limited-time period, which may limit some of the effects.

But there is risk of a further 10-15% increase in refined product prices outside of the US. This would be material for large diesel-consuming countries including Australia.

In terms of oil, there appears to be enough flowing through the Strait of Hormuz to check prices moving meaningfully above US$100/bbl.

The East-West Pipeline in Saudi Arabia is resuming operations. Overall there seems to be a shortfall of about 3-to-5 million barrels per day in terms of oil flows from the Persian Gulf, versus pre-conflict (ie we are at 70-80% of pre-war levels).

This continues to be mitigated by lower demand from China and release of strategic petroleum reserves.

US-China Summit

There were no specific measurable outcomes from talks between Presidents Trump and Xi.

There was a two-month extension to the current tariff waiver (to January 10); additional summits pencilled in for November and December; and the loan of giant pandas Ping Ping and Fu Shuang to the Atlanta Zoo.

That said, it is important that dialogue is ongoing despite issues with AI, trade, Taiwan and Iran.

Beijing eased its Taiwan rhetoric as the US delayed arms sales, though on Iran there was little comment of substance.

Neither side can afford to be more aggressive on trade.

The US remains reliant on critical commodities from China while China relies on imported microchips. Beijing did agree to buy 10 million tonnes of coal in 2027 and 2028.

On AI, China said it “respects” the Trump Administration’s push to rebrand AI as “super intelligence”.  Both countries agreed to a bilateral communication channel, though there was no action on slowing AI development.

Australia

August employment data indicated that tight labour markets have eased somewhat. The unemployment rate rose from 4.5% to 4.6% – the highest in five years.

This was driven by higher participation while labour supply grew – probably as people feel compelled to re-join the workforce for cost-of-living reasons.

Employment rose by 40,000 in the month – more than expected, but all driven by part-time work.

Hours-worked picked up marginally, but was still lower over the last three months versus the prior half-year, which suggest demand is softening.

Overall there was nothing to stop the RBA from hiking this week.

The RBA’s challenge is it needs GDP growth to fall to below 1.5%. Given population growth, government spending and corporate investment, this indicates the consumer has to be slowed, probably to 1% growth or below.

This factor will drive the number of rate hikes.

The only issue that could prevent rates going up more than once more is the housing slowdown or the impact of fuel prices hitting the economy harder.

Either way, we remain wary of consumer discretionary stocks.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s flagship Pendal Focus Australian Share Fund is a high-conviction equity fund with a two-decade track record across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Rising bond yields have weighed on markets globally, but emerging markets have been more resilient than expected, argues Pendal’s emerging markets team

Key points:

• Emerging market currencies supported by strong real rates
• Environment remains supportive for selected emerging market equities
• Learn more about Pendal Global Emerging Markets Opportunities Fund

EMERGING markets have held up better than expected during the 2026 bond sell-off because their fundamentals are stronger this cycle: high real interest rates, improved government budget management and a weaker US dollar have lifted emerging market currencies and returns — leaving them less exposed to the fiscal fears hitting developed markets.

Higher interest rates, better government budget management and a weaker US dollar have lifted currencies and returns in emerging markets in recent times.

That’s been particularly the case in higher-yielding countries such as Brazil, Mexico and South Africa.

But how will the current global bond sell-off affect emerging market investors? Where are the opportunities and risks?

As most investors know, emerging market equities are highly influenced by global financial and economic conditions, including moves in global bond and currency markets.

Weaker bond markets and higher yields in developed markets – especially the US – can be a drag on the emerging market world due to higher global funding costs.

Meanwhile a stronger US dollar can tighten domestic liquidity, weaken currencies and force central banks to maintain higher interest rates.

But the current global bond sell-off may be developing differently.

Long-term yields have risen sharply across developed markets, with US Treasury yields close to three-year highs.

Japanese and UK yields have reached levels not seen for decades, as a combination of higher energy prices and inflationary pressures meet structural pressures from ageing populations and voters’ choices.

Different emerging markets, different outlook

Importantly, the pressure has not been transmitted uniformly across emerging markets.

Long-term yields in emerging markets have risen less than in developed markets and have shown a degree of resilience that exceeds what historical sensitivity to higher US yields would typically imply.

This is largely the legacy of more orthodox fiscal and monetary policy in emerging markets. The median emerging market now has a better medium-term fiscal outlook than the median developed economy.

Currency markets provide further evidence of this divergence.

US dollar-funded emerging market carry trades have generated positive returns for seven consecutive quarters, their longest run since 2008.

Returns have been strong from classic emerging markets carry trades such as Brazil, Mexico and South Africa, while US dollar weakness has more recently spread into Asian currencies, and the MSCI emerging market currency index is at a record high level.

Consequently, we are not convinced that higher global interest rates will mean tighter financial conditions in emerging markets.

With higher developed market yields reflecting fiscal risk, rising capital demand and increased term premia, we see a growing likelihood of weaker developed market currencies and capital outflows from developed markets into emerging ones.

Dollar matters more than rates for emerging markets

We continue to believe the direction of the US dollar matters more than the direction of US bond yields for emerging markets.

The Pendal Global Emerging Markets Opportunities Fund maintains significant exposure to Brazil, Mexico and South Africa, where high real interest rates and attractive carry have supported currencies and financial markets.

We also have meaningful exposure to liquidity-sensitive sectors across emerging markets, including investment real estate, investment banks, brokers and exchanges, alongside positions in gold miners within the materials sector.

Since the US dollar’s recent peak in January 2025, the MSCI Emerging Markets Index has substantially outperformed the developed market MSCI World Index, the S&P 500 Index and the NASDAQ Composite Index.

In our view, investors may want to consider remaining bullish on emerging markets, with a focus on carry trade economies and liquidity plays.

Frequently asked questions

Why have emerging markets held up better during the 2026 bond-sell off?

Emerging markets have been more resilient than expected because their fundamentals are stronger this cycle. High real interest rates, better government budget management and a weaker US dollar have supported currencies and returns — leaving emerging markets less exposed to the debt and deficit fears driving developed-market yields higher.

How do rising bond yields affect emerging markets?

Rising bond yields usually raise borrowing costs and pull capital toward developed markets. But strong real rates, better budget management and a weaker US dollar have helped emerging markets stay resilient through the 2026 sell-off.

Why do emerging markets perform well when the US dollar weakens?  

A weaker US dollar is one of the biggest tailwinds for emerging markets. Local currencies rise, equities lift, and US dollar-denominated debt becomes cheaper to repay. It also lowers import costs, helping to keep inflation and interest rates lower.

What is the outlook for emerging markets in 2026 and beyond?

The outlook for emerging markets is supported by China’s manufacturing strength and a weaker US dollar over the next few years. The main note of caution is around stretched valuations in AI chip stocks in markets such as Korea and Taiwan.

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Australian mid-caps may sit between the market’s giants and emerging small companies — but BRENTON SAUNDERS argues that is exactly where some of the most interesting opportunities can appear

In this video podcast, Brenton Saunders, portfolio manager of Pendal MidCap Fund, explains how the mid-cap universe differs from the broader Australian share market, with fewer dominant stocks and a broader spread of sector exposures.

He also discusses the major shifts reshaping the benchmark, from gold and lithium to infrastructure, AI-driven data centre demand and the rise of private superannuation platforms.

While opportunity is broadening, portfolio balance and disciplined stock selection remain critical.

Here is an excerpt from the video podcast:

“There’s a bunch of first order and then second order kind of ways you can do that. In the first order ways are most obviously the companies that are being asked to deploy this capital, namely contractors.

“We’re well represented in the contractor space in midcaps, generally always have been, but if you think about companies like Ventia, Downer, Worley Parsons are in the space, but we’ve had some great new additions more recently.

“Some of the second order ways of doing it is just upstream of that in some of the basic materials, again, that are being used to populate a lot of this infrastructure, and I guess I’m referring more specifically to the data centres.

“Copper plays a big role in that. Lithium will play a big role in storage for those kind of things. So there’s a bunch of first and second order ways to play that.”

Watch the video interview

Listen to the audio version

Here are the main factors driving the ASX this week according to Pendal investment analyst GRAEME PETRONI. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

RISING oil and bond yields gathered pace last week.

Brent crude rose 9%, bond yields increased 20-25 basis points (bps) and equities responded, falling 1-2% across most markets.

The key economic focus was the US consumer price index (CPI) where core inflation surprised to the upside and bond markets responded by increasing the odds of a rate hike at this week’s Federal Open Market Committee (FOMC) meeting.

But offshore equity markets reacted more positively on Friday night (Australian time) because the CPI detail left room for debate on whether it will be a prolonged hiking cycle.

The Australian market (S&P/ASX 300 -2.8%) underperformed the S&P 500 (-0.8%) and most other major European and Asian markets.

Domestically, RBA speakers focused attention on the need for local rate rises to contain inflation.

This brings renewed risk for a household sector already struggling with weak sentiment post-budget.

Oil

There is renewed concern at the prospect of persistently higher oil prices. Key issues are:

• Flows through the strait have improved but remain constrained.
• Renewed conflict brings risk, with news of an attack on the Saudi East West Crude Oil pipeline.
• China is back in the market buying crude.
• There is continued focus on falling reserves.

Looking first at flows through the strait, US Energy Secretary Chris Wright made comments suggesting a return to 17 million barrels per day (mb/d), which is on par with pre-conflict levels.

The US has been providing safe passage, clearing mines, and widening sea lanes – all of which is improving flows, but not back to pre-conflict levels. Market estimates are in the range of 7-10 mb/d, based on satellite analysis of ship-to-ship transfers.

In the near term, there is a risk that progress slows.

There have been press reports suggesting the US is now asking tankers to restrict passage to two time slots per day, which will vary by day, saying safety was no longer assured during nighttime passage.

The latest hope for easing tensions has shifted to a deal between Iran and Oman, who will meet members of the Gulf Cooperation Council to try and build support. The key issue is that the US has said it will not tolerate tolls.

There were also some negative developments outside the strait late last week.

First, Saudi Arabia officially confirmed temporary closure of its East-West pipeline, which typically facilitates the transit of ~5 mb/d, following a drone attack.

The extent of damage remains unclear, with Saudi Arabia not confirming fires that have been reportedly detected by satellite and instead describing the shutdown as precautionary.

It is therefore unclear whether the shutdown will last days, weeks or longer.

Second, Houthis have also seized control of the port city of Mocha and three islands in the Red Sea, giving them control over the Bab al-Mandeb, with a military spokesperson claiming the strait was safe for everyone except Saudi ships.

Even before tensions resurfaced in the Middle East, the oil price was rising with renewed purchases by China.

A sharp decline in its crude imports has been a key factor in helping contain the oil price response to the conflict-related disruption.

However, since June its crude imports have lifted from 7 mb/d to 9 mb/d in August, with the market watching whether this returns to pre-conflict levels of 10-12 mb/d.

Reserves have also been cited as a contributing factor for oil price moves, although they do not appear to be an imminent risk.

Over the past six months, US strategic petroleum reserves (SPR) have reduced from 413 million to 285 million barrels, which is a drawdown of 21 million barrels per month.

If that continued, there would only be 1.5 months before reaching the congressional minimum of 252 million barrels.

However, on a weekly basis the drawdown has started to slow significantly, from 7 million to 3 million barrels, with the latest read just 1.2 million.

While the SPR is in focus, it doesn’t appear likely to be a hard stop.

While oil prices dominate headlines, the move in refined products is equally stark with US diesel spreads (the difference between the price of a barrel of crude oil and that of an equivalent barrel of diesel) at all-time highs – from a range of US$30-40 for 2024-25, to over US$100 today.

During the week, there were comments from the CEO of Vitol (the world’s largest independent energy and commodity trading company) that only 1 mb/d of shipments through the strait relate to refined products.

He suggested the market was missing 2 mb/d day from each of the Middle East and Russia and highlighted that refined stockpiles were “pretty much at the bottom”.

Pressure on oil and refined product spreads is showing up in inflation prints. There has been little flow through to other prices. But further pressure will add to central bank concerns.

Bond yields

The oil price was fuel to the fire in bond markets, adding to concerns over persistent inflation, fiscal sustainability and AI investment.

The US Treasury tried to lean against what it viewed as liquidity issues at the long end, with a buyback program of US$5.19 billion during the week, up from an initially flagged US$2 billion.

But this wasn’t the shock and awe US$10 billion program that some had expected, and ultimately fundamentals dominated.

US two-year yields rose 26bps and 10-year yields were up by 19bps, to 4.97%.

US economic data

Kevin Warsh made some hawkish comments a couple of weeks ago at Jackson Hole.

He said he wasn’t worried about the labour market; inflation was the bigger concern, the personal consumption expenditures deflator (PCE) remained the preferred measure and underlying inflation needed to move towards 2% at sufficient speed.

However subsequent Fed speakers have been more cautious, so the data was always going to be crucial.

The producer price index (PPI) came out first showing the impact of energy prices with headline inflation 0.4% month/month versus consensus at 0.3%.

Core PPI ex food, energy and trade was in-line with expectations at 0.3%, although there was pressure in components relevant to the PCE like airfares and hospital services.

This placed some small upward pressure on PCE forecasts.

CPI was more relevant as it accounts for a larger proportion of PCE components.

Heading in, the market view was that a core CPI (ex food and energy) of 0.3% month/month would force the Fed to hike – and core did indeed print stronger at 0.29% month/month (versus consensus at 0.2%) and 2.45% year/year.

This prompted the market to lift the odds of a September hike to 85-90%, after dipping as low as 51% following Fed Governor Christopher Waller’s comments a week earlier.

However, the equity market responded positively, perhaps because the detail left room for debate on whether it will be a prolonged hiking cycle, as is currently priced into bond markets.

One category – communication services – added ~0.1% to core CPI, with a one-off boost from AT&T repricing legacy plans. If not for that, CPI would have been 0.2%.

Core goods inflation was contained at 0.1%, which is important as it suggests no flow-through of higher oil prices.

Having said that, if energy prices are elevated, there will be renewed pressure on headline inflation.

EU economic data

The ECB delivered an expected 25bp hike to 2.50%. This is the upper end of the neutral range but revised economic forecasts suggest more work is required.

Inflation is expected to remain elevated through 2027 and 2028, even under the ECB’s baseline scenario which had been based on inputs in mid-August – current energy markets are closer to the “adverse” scenario.

The result was an increased likelihood of a further hike, with the market now pricing a 50% chance of a hike in October and 90% by December.

China economic data

China CPI and PPI data was released.

CPI picked up modestly to 0.8% year/year reflecting higher energy prices.

The 3.8% year/year lift in PPI was more notable, affected by energy and semiconductor prices.

The contrast between CPI and PPI highlights China’s K-shaped economy with weak domestic demand and continued strength in exports.

Trade data released during the week remained strong, with August exports +25% year/year, supported by AI and green technology (including EVs/hybrids, batteries, solar).

Australian economic data

Westpac’s consumer sentiment survey dropped 5% to 84.4, versus a long-term average of 100.

This unwound gains from a month earlier, reflecting the renewed outlook for rate rises.

The survey highlighted weakness in family finances versus a year ago, with more negative responses from homeowners, particularly those with a mortgage.

The latest house price data from Cotality has Sydney house prices down 7.5% from the peak six months ago.

The deterioration in NAB’s business survey was even more stark, with conditions down 5 points to a reading of -1, the lowest level since August 2020.

The survey had previously remained relatively robust despite higher oil prices and interest rates, but there are now more signs of margin being squeezed by input costs.

Conditions deteriorated for six of eight industries and for almost all states, with trends most negative for retail, manufacturing and Victoria.

Despite weak surveys, RBA speakers quickly returned the focus to inflation and suggested further tightening might be needed.

Chief Economist Sarah Hunter gave a fireside chat at a property conference and Deputy Governor Andrew Hauser appeared on the 7:30 Report.

Both talked about inflationary pressure from the Middle East and about demand running above a supply constrained economy, with Hauser also referencing pressure from the AI build out.

Hauser was particularly vocal when talking about people across the country being furious about persistent inflation and said the Board was alive to the risk of inflation taking too long to return to target.

Declining house prices were referenced by both but viewed as a partial offset to inflationary pressures.

The market is now pricing a 76% chance of rate rise in September and a 77% chance of a further rise over the next six months.

Australian markets

Macro dominated market moves. Energy (+2.3%) was strong on oil prices, while insurers were strong on higher bond yields.

Gold and lithium stocks came under commodity pressure plus some stock specifics, while software and platforms came under pressure following OpenAI’s launch of GPT-6 Astra.

Merger and acquisition activity is returning to the smaller end of the Australian share market, as buyers look through short-term uncertainty and focus on mispriced assets. Pendal’s LEWIS EDGLEY explains

• Small-cap M&A is accelerating amid mispricing
• Buyers see value in quality industrials
• Find out about the Pendal Smaller Companies Fund

AFTER several years in which small caps have lagged their larger peers, valuation gaps have become hard to ignore — and strategic buyers and private equity appear increasingly willing to act.

Lewis Edgley, co-portfolio manager of Pendal’s MicroCap Opportunities and Smaller Companies funds, says the recent pickup has been striking.

“We observed around 15 small cap bids or approaches in the eight weeks to the end of August,” he says. “This was a huge pickup compared to this level of M&A activity we’ve seen in the preceding year.”

The activity has been broad but not evenly spread.

Edgley notes that 10 of the 15 approaches were for industrial companies, the remainder were in resources.

That split reflects where buyers are finding value: in quality industrial businesses that have been de-rated, and in resource names benefitting from stronger commodity momentum.

Where bidders see hidden value

Among the industrial names attracting interest, FleetPartners has been one of the clearest examples, according to Edgley.

The fleet leasing business received an initial proposal at $3.60 a share, representing a 27 per cent premium to its last traded price, before the situation developed into what Edgley describes as “a four-party bidding war with subsequent bids as high as $4”.

While the stock is trading around $4.20, above the initial bids, he says the small caps team sees meaningful further upside from here.

“Our view of value sits in excess of the current share price, but the ultimate price will be a function of where the current bidders see value. We expect this to become evident in coming weeks.”

Other companies that have caught buyer interest include Peet, which received a cash-and-scrip proposal from Ingenia; Austal, where an offer for its US business highlighted significant value in the remaining Australian operations; and SkyCity, which disclosed approaches it considered too low and opportunistic.

Edgley also points to AUB Group and Iress as businesses where potential M&A optionality remains, while stressing that the investment case for both does not rely on a takeover.

“We think that M&A is not over, there’ll be continued activity,” he says.

“When we look at our own fund, we think about where we are likely to see bids come from. We think both Iress and AUB Group for us are obvious candidates for future M&A.”

Both businesses have been approached previously, but a takeover didn’t progress for one reason or another.

However, Edgley says the potential for another takeover approach is strong given the strategic nature of the assets as well as a “significant amount of valuation upside”.  

“AUB is now the sole listed insurance broking business on the ASX. There were three, but over the last two years Steadfast and PSC Insurance have been taken out.

“It is important to note, our thesis on both AUB and Iress does not rely on M&A and a takeover – we just see this as upside optionality.”

Pendal holds investments in FleetPartners, Austal, SkyCity, AUB Group and Iress.

Why small caps look ripe for re-rating

The backdrop is a market where small caps have materially underperformed large caps.

“We’ve seen small caps underperform significantly for the last couple of years versus large caps,” Edgley says. “The valuation divergence has become even more significant.”

He adds that small caps are trading close to one standard deviation cheap relative to their long-term average, and a full standard deviation below large caps on a relative basis.

“When there is mispricing of stocks in public markets, eventually there’s always another buyer out there that will look to take advantage of that,” Edgley says.

Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by investment specialist Chris Adams

• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

EQUITY markets are holding up despite higher bond yields and a resurgence in the US-Iran conflict, which pushed up energy prices (Brent crude +7.8%).

Last week was relatively quiet for US data after a very strong earnings season.

Strong manufacturing and jobs numbers, along with broad growth in corporate profits, indicates that the US economic growth continues to be robust despite numerous headwinds.

The S&P 500 was largely flat for the week (+0.1%).

In Australia, the release of credit and quarterly GDP figures showed that while the economy has been travelling okay, there are signs of slowing in areas such as housing.

Weak productivity growth means the economy is operating close to its speed limit and presents the RBA with a dilemma in deciding whether to raise rates again.

The S&P/ASX 300 fell 0.4%, however we saw dispersion in the performance of various market components.

Large caps held up (S&P/ASX 20 -0.2%) while midcaps and small caps were weaker (S&P/ASX Midcap and S&P/ASX Small Ordinaries both -0.9%).

At the sector level Materials (-3.6%) and Technology (-5.1%) were weak while there was rotation into other sectors such as Financials (+2.0%) and Consumer Staples (+2.1%).

Macro and policy US

Statements from Federal Open Market Committee (FOMC) members John Williams and Christopher Waller were scrutinised to give an indication of the central bank’s next move.

Williams stated that there is evidence inflation continues to ease as the tariff impact fades, with higher energy prices not spreading into other services, while Waller said he would support holding rates steady if price pressures keep easing.

The Fed’s decision is likely to be heavily influenced by August inflation data which is due on Friday this week.

It is worth noting that despite the rise in two-year yields, the spread of this to the Fed Funds rate has moved higher – but is not significantly more than previous periods.

This can be seen with the market now only pricing one hike this year and another by early 2027.

In other US releases, the August ISM Manufacturing PMI slipped to 54.6 from 55.6 (consensus 55.2), however this comes after the recent reading in July which was the highest index level since May 2022.

As activity continues to expand, these numbers suggest that the manufacturing sector in the US is running quite strong.

The BLS employment report was also strong, with nonfarm payrolls up 162,000 month/month in August and upward revisions of +55,000 to prior months.

Job gains were broad-based with healthcare continuing to be a key contributor to US job growth but there were also increases in the construction, manufacturing, and leisure and hospitality sectors.

US payrolls have clearly moved past the trough of late 2025 and led to a decreasing unemployment rate this year

Macro and policy Australia

The Private Sector Credit statistics from APRA unsurprisingly reflected a slowdown in credit growth, given recent changes to the housing sector.

Overall credit still grew a healthy 0.4% in July (+8.4% year/year) with continued strong business growth of 0.6% (+10.0% year/year) offsetting slowing housing growth of 0.2% (+6.7% year/year).

Within housing, Investor mortgages slowed down to only +0.1% in July, while Owner Occupier grew 0.3%.

Major bank economists are now forecasting mortgage growth to slow to between 2.5% and 5.0% per annum, with recent updates shifting towards the lower end of the range as the housing downturn continues.

Elsewhere, the National Accounts from the ABS showed real GDP grew a modest 0.4% in the June quarter, which was a touch above consensus.

Annual growth was a solid 2.1% which was notably above both consensus and RBA expectations (+1.8% and +1.9% respectively).

However, there was evidence that the economy is slowing with the last two quarters annualising to just over a 1% growth rate.

Despite the negativity around the Middle East conflict, houses and inflation, households did not curb consumption – including discretionary spending which rose 1.4% in the June quarter. A key component of this household expenditure growth was a lift in vehicle purchases by 10.3%.

Private business investment continues to be strong, and this component alone added 1.2% – or just over half – of overall annual growth. This is being driven largely by data centres and related energy investment.

A more concerning aspect was that while income for wage and salaries is solid +6.2% (and so supporting the previously mentioned household consumption), productivity continues to be weak. This actually was negative for the quarter, continuing its anaemic pattern of previous periods.

Overall, commentators saw this as evidence that the economy is operating near its potential speed limit and this, with the weak productivity outcome, supports the case that the economy needs to slow for CPI to return to the RBA’s target.

The upshot is that the market is now pricing roughly a 60% chance of a rate hike at the September meeting and a rate hike is fully priced in by November.

Speeches from the RBA’s Deputy Chair Andrew Hauser and Chief Economist Sarah Hunter next week could provide an indication of the RBA’s thinking.

Elsewhere, it was interesting to note the VFACTS report on new car sales for August 2026.

New vehicle sales grew 4.9% year/year in August 2026, with Chinese and Electric cars strong as light commercial vehicle/four wheels drive sales remained weak.

The headline grabber was that EVs outsold petrol cars for the first time with more than 27,000 EVs sold over the month compared to 25,000 petrol cars.

The record 24.9% for EV share of sales is up from around 8% in 2025 and just 1.9% in 2022.

Government subsidies, a sustained rise in fuel prices and a lift in cheap Chinese imports continue to transform the country’s car market.

Macro and policy global

Last week China’s official manufacturing PMI rose 0.6 to 49.8, above consensus expectations at 49.5.

Meanwhile, the non-manufacturing PMI was steady at 49.0.

Overall, this led to a slight increase in the composite PMI to a neutral 49.5.

In comparison, Japan’s July monthly data was largely encouraging with both industrial production and retail sales exceeding expectations. Industrial production rose 4.1% year/year, supporting a robust pick-up in the economy.

Markets

It is worth recognising the remarkable results of the recently concluded US reporting season.

Over 86% of S&P 500 companies beat earnings expectations, with strength broad-based across sectors, though tech and energy led.

The overall quarterly EPS surprise was 24% in aggregate – a result not seen since the recovery from the Covid-induced recession. 

Earnings expectations are typically revised downwards through the year – however expectations for both 2026 and 2027 continue to inflect upward.

When looking at the underlying components of earnings, estimates for the median stock have risen across top-line revenue growth, bottom-line earnings, as well as for free cash flow, highlighting the underlying strength of earnings growth.

September is typically seen as a weak month seasonally for US stock returns. However, whenever there has been a strong eight-month YTD performance in August (and the market is +13% thus far in 2026), the final four months tend to finish quite strong.

The US market continues to be quite rotational in terms of the best performing sectors.

In particular, we have seen the most recent relative highs coming in the healthcare and resource sectors.

Fixed income

Despite concerns the funding requirements for AI are driving up global interest rate costs, there has been very little move in the more sensitive corporate spreads – for example BofA BB US High Yield Spread

In terms of the fear that the world is reluctant to finance the US deficits, it is worth noting that foreign holdings of US treasuries have actually continued to increase, with sharp increases from 2020 onwards from places such as the UK, Belgium and Canada.

However, the mix has changed; there has been a shift from public holders to the private sector, as well as the reduction in Chinese holdings being offset by an increase in European holdings. 

Australian equities

July monthly activity for the banks showed the start of a slowdown in mortgage credit – particularly investor loans, which dropped from 10% to 6% on a one-month annualised basis.

However, July is seasonally weak. The bigger test will come in August, given the two-to-three-month lag between lower applications post-budget and borrower drawdowns.

Through reporting season, major banks highlighted a 15-20% reduction in mortgage applications. NAB suggested this would translate into mortgage credit growth of 2.5%.

CBA was more hopeful of ~5% but its economics team has since downgraded the outlook for house prices and is due to update its mortgage growth forecast.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience. Rajinder manages Pendal’s sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Sustainable Australian Share Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Australia’s latest national accounts paint a mixed picture of the economy. Pendal head of government bond strategies TIM HEXT highlights the five key takeaways — and what they could mean for markets and interest rates

• Mining states are outperforming, consumer spending is holding up and private investment should recover
• The data reinforces the case for a near-term RBA rate hike
• Find out about Pendal Government Bond Fund
• Browse Pendal’s fixed interest funds

1. Mining states are doing well, non-mining states are not.

Queensland (+1.1%) and Western Australia (+1%) continue to benefit from healthy commodity prices.

NSW (flat) and Victoria (-0.3%) remained weighed down by cautious consumers and falling public investment as governments look to tighten their belts.

Source: Australian Bureau of Statistics

2. Consumers are doing OK overall (led by buying of EVs).

Final consumption expenditure grew 0.5% overall (government 0.6% and private 0.4%).

Record growth in EV sales was half of the private consumption growth. A mild winter held back energy spending and Middle East worries meant fewer overseas trips.

3. Private investment was flat after a massive Q1, but will pick up ahead.

The theme of massive data centre investment remains in place but took a breather in these accounts.

We expect it to pick up again in the second half of the year although dwelling investment will remain under downward pressure, especially if the RBA hikes rates.

Source: Australian Bureau of Statistics

4. Income growth remains too high for RBA comfort.

Compensation of employees, a wider measure than the Wage Price Index (WPI), grew by 1.5% in the quarter. Private sector growth was 1.4% and Public 1.8%. Health led the way as large-scale pay rises hit in NSW, Victoria and Queensland.

Unit Labour costs, stripping out the extra hours worked, increased by 1.2% and 3.6% annually, higher than the WPI suggests.

5. Trade was a positive contribution for the first time in two years but will continue to drag going forward.

GDP measures net trade, or volume of exports minus imports. Less overseas trips (an import) and reduced imports of AI related products meant a positive contribution this quarter.

Unless things worsen in the Middle East these should prove temporary.

In fact, Australia has regressed back to business as usual as the current account deficit is again 3% of GDP. Our net foreign debt position means higher interest servicing costs as rates rise globally.

The brief COVID induced (2020 to 2023) balance of payments surpluses are receding into the sands of time.

Even our balance of trade is now in deficit for the first time in a decade (this is revenue based, not volume based as per GDP so is impacted by terms of trade).

What the National Accounts mean for markets

While only slightly higher than RBA expectations, today’s national accounts will do nothing to stop the likely rate hike from a recent uptick in inflation.

The RBA narrative of tight supply means that 2% annual GDP, a modest number historically, is now seen as a stronger not weaker number.

Markets will remain buffeted by oil price moves but the Q3 trimmed mean CPI number in late October, likely to be 1% versus 0.8% RBA expectations a month ago, is likely to bring a November RBA rate hike, which is now fully priced.

Even September is now above 50/50 expectations, and the debate at the September RBA meeting should be very robust.

If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through our accounts team

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager