Higher inflation numbers could see the Reserve Bank of Australia commit to yet another rate hike by May, according to Pendal head of government bond strategies TIM HEXT.   

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THE Australian Bureau of Statistics (ABS) now has a complete monthly series whereby all items are measured every month (although 10% of the index only changes annually). Previously only 60% of items were updated every month.

The first month in a quarter therefore is now a far better guide to what the quarterly outcome will be.

Inflation numbers showed a monthly rise of 0.4% with prices 3.8% higher than January last year.

The trimmed mean for the month rose by 0.3%, leaving it 3.4% higher than January last year.

“These numbers were 0.1% higher than consensus and are likely to see early predictions for the all-important Q1 CPI trimmed mean (out on April 29^th) to come out at between 0.8 and 0.9%,” explains Hext.

The RBA is predicting 1.8% of CPI growth in the first half of 2026, so these forecasts would be at or slightly below the RBA forecast.

Where does this all leave the RBA? 

“Well, there is not enough here for a March hike, but a May hike looks very likely,” says Hext.  

Markets agree, pricing a 90% chance of a hike.

“Before today we thought the inflation pulse would moderate slightly in Q1 taking pressure off the RBA, meaning a hike was closer to a 50/50 prospect,” notes Hext.

“That view is no longer backed by the data.”

The slight moderating trend of late last year has ended, as seen below:

The monthly data in more detail

The strong

Electricity (+18% on the month)

This is mainly from removal of subsidies. Actual prices ex-subsidy are up 4.5% on the year, still higher than the RBA would like.

Health (+2.7%)

Pharmaceutical products led the way, but medical and hospital services were also strong. Recently announced annual health insurance premium increases of 4% to 5%, starting April, will keep health above 4% annual inflation

Clothing and Footwear (+2.9%)

Not often this category gets a mention as strong, but discounting has reduced from previous years keeping prices unusually elevated.

The weak

Transport ( -0.7%)

Lower fuel prices and public transport fares have helped lower this measure.

Recreation and Culture (-3.4%)

The ABS is still grappling with seasonality across the board, but international travel is proving very hard to quantify and reversed the sharp rises in December.

The trend

Other areas did not see much change to the recent pulse of higher than target inflation. Rents (0.3%) and New Dwellings (0.4%) will need to show some moderation in the months ahead to make the RBA more confident that inflation is under control.

“We still expect some moderation in inflation through the year but it won’t come soon enough for the RBA,” says Hext.

“Bond markets will struggle to maintain any decent rallies, unless global risk off events spread their wings.

“We still believe bonds up towards 5% represent good medium-term value, but the urgency to buy has eased for now.”

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

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

Crispin Murray in attendance.

Global equity markets are taking the US Supreme Court’s ruling on tariffs and rising tension between US and Iran in their stride, for now.

The S&P 500 rose 1.1% last week. US equities have remained range bound in the last four months, but breadth is improving. They have lagged other markets – such as European, Japanese, UK and Australian equities – over the year to date.

Commodities were generally flat, with the exception of oil, as Brent crude rose 5.9% on concerns over potential supply disruption.

The Australian market outperformed the US last week, with the S&P/ASX 300 +2.0%. It was a busy week for earnings results, which were generally positive – particularly in the larger index names.

The gain was led by a bounce in Technology (+6.3%) and Energy (+4.9%) and continued good performance from Banks (+3.3%).

Companies appear to be adapting to the world of higher stock price volatility driven by quant-based signals, with better control over their guidance leading to less downside surprises.

FX has emerged as a headwind for some offshore companies still reporting in Australian dollars, while the underlying economy has been supportive for earnings, so far.

Tariffs

The US Supreme Court (SCOTUS) ruled 6-3 that the IEEPA (International Emergency Economic Powers Act) does not authorise tariffs, thereby forcing their removal.

This had been widely anticipated, with the bond and FX markets not moving in response to the announcements.

The Trump administration has had time to prepare a contingency plan and stated they will respond in a way that achieves the same level of revenue as under the IEEPA regime.

The President’s first step has been the immediate application of a new tariff under Section 122 of the 1974 Trade Act (used to address a large current account deficit). This was initially a headline rate of 10% and now appears to have increased to 15%.

A 15% rate is about in-line with the average of the tariffs its replaced, though some countries (eg Australia, Mexico, Canada) may get an increase while others – notably Asian countries in US supply chains – may get a small drop.

Section 122 tariffs can be in place for 150 days.

Where we stand today is that the overall effective tariff rate was at ~10%, with IEEPA comprising ~7%. Under the Section 122 tariffs, that effective rate looks largely unchanged.

Looking forward, the Administration may also impose new Section 232 tariffs which are focused on issues of national security eg the steel and aluminium sectors.

They may also instigate investigations under Section 301, which can allow tariffs in response to unfair / discriminatory trade policies.

It is expected that this review will be expedited by bundling countries together. There is an existing investigation underway into China’s trade policies under this section. Section 301s are likely to be the main long-term tool.

It is expected well over 90% of tariff revenue lost due to the SCOTUS ruling will ultimately be recouped.

SCOTUS did not make a ruling on the refund of the ~US$150bn collected under IEEPA. This has been pushed back to lower courts, creating a lot of uncertainties and an expectation this could 3-12 months to resolve.

One potential impact of this ruling is it may limit the bargaining power the US has in tariff negotiations, and we may see a more subdued trade environment this year.

Iran

Brent crude oil rose 5.9% last week on heightened tensions between the US and Iran.

Iranian rhetoric has risen as a response to the substantial shift in US military assets into the region.

Specifically the USS Gerald R Ford, the world’s most powerful aircraft carrier, and its support fleet have moved into the Mediterranean Sea. They are expected to move within striking distance of Iran between Sunday and Tuesday.

This is joining the USS Abraham Lincoln, which is already in the Gulf of Oman. Overall, this is the highest level of US military hardware they have had in region since the Iraq War.

Experts suggests a window for strike action from this Sunday, for around two weeks.

The goal is clearly to maximise pressure on the Iranians to do a deal. So far, the US view seems to be that Tehran is not meeting their expectations with regard to ballistic missiles and support of proxies in the region.

The issue is Iran’s response. The regime is threatening to target oil assets in the region – although this is seen as possible but unlikely, given it would invite retaliation against their own assets which would compound their economic malaise.

A more likely response would be directed against US bases in the region, to shore up internal support.

Fear of this is likely to underpin the oil price in the near term.

Private credit

US-listed and headquartered alternative asset manager Blue Owl’s (NYSE:OWL) stock price continued to fall last week on concerns over one of its unlisted private credit vehicles, OBDC II.

OWL announced they were no longer accepting redemption applications; previously investors could redeem 5% in a quarter. The fund has moved to ‘return of capital’ model where they make periodic distributions as they sell assets. 

They also announced a secondary sale of US$1.4bn of assets across three private credit vehicles (including OBDC II), at 99.7% of par value. It is unclear if these have been cherry-picked assets.

Blue Owl’s funds have significant exposure to the technology sector and their technology-focused fund has around 70% of its loans in the software sector.

The market is concerned that this may be the conduit by which AI concerns morph into the financial sector.

Context needs to be put on this in terms of scale; their two key unlisted funds are ~U$4.5b.

The much bigger listed vehicle, OBDC, is ~US$17bn and here investors can access liquidity by selling units. It is trading at 0.78x NAV.

Activist investors Saba Capital Management and Cox Capital Partners offered to buy shares from investors in three of the unlisted funds, but at a 20-35% discount.

There were also reports that OWL had tried to sell U$4bn of Core Weave debt relating to a specific data centre and found no takers.

OWL denied this and said their exposure is only for $500m bridge financing.

The conclusion is ambiguous. It does highlight the potential risk of private credit in the retail market. However the size of this particular issue does not appear to be systemic and there does appear to be liquidity to monetise these assets, albeit at a discount.

We do not see this as destabilising the broader market.

Other macro news

The headline December US personal consumption expenditures (PCE) came in higher than forecast at +0.4% month/month and 2.9% year/year.

The Core PCE measure was also higher at +0.4% month/month – versus 0.3% expected – and is at 3.0% year/year.

There is a very mild sign of inflation reaccelerating; tariffs are elevating core goods inflation and core services ex-housing does not appear to be falling, which is required to get to the 2% overall target.

This will add some caution to the Fed’s plans for rates – as the growth rate the economy can absorb may be lower than previously thought.

It was very interesting to note that Governor Stephen Miran – President Trump’s temporary pick for the Fed and previously an uber-dove – said given better employment data he believes the Fed do not need to be as aggressive in their rate cutting. He said he would take out the last two cuts from his forward projections.

The market is currently pricing in one US rate cut by the July 29^th meeting and a second come October. The probability of rate cuts fell 5-10% through the week.

US Q4 GDP data also came in lower than expected, at 1.4% versus 2.8% forecast, driven by lower federal government spending and a fall in exports.

The government shutdown was estimated to have taken 1% off the number, which should now boost Q1 GDP.

Markets

The US market continues to consolidate, absorbing the headwind of an underperforming tech sector.

It has been supported by strong earnings, with this being offset by i) the de-rate of sectors deemed vulnerable to AI and ii) the hyperscalers (eg Microsoft, Amazon, Google) as their cash flow comes under pressure by the continued upward revision in capex.

The positive signal is that liquidity continues to be supportive and, unlike this time last year, breadth is improving which reflects the positive momentum in the economy.

Software remains a key sector to watch, it has now dropped to key technical support levels and is heavily oversold. Whether it takes a further leg down or rebound from here remains to be seen.

Australia

The domestic market looks to have recovered off technical support levels and continues its uptrend.

The two largest sectors have been supportive;

• Banks have had positive earnings revisions as margins hold up better, bad debts remain subdued and credit growth firms.
• Resources have been helped by higher gold and base metal prices and better capital discipline.

An additional 92 companies have reported last week taking the total to 140, representing 78% of the market cap. Another 130 (skewed to the small end of market caps) are set to report this week.

Overall, earnings season to date has been constructive.

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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 Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), 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

Here are the main factors driving the ASX this week according to Pendal portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

BY AND large things in the US remain on track.

American consumers are about to feel the fiscal boost from tax cuts, their labour market is solid, bond and credit markets are well behaved, earnings are very strong, inflation is flattish and expectations remain anchored.

This is translating into the equal-weighted S&P500 reaching a record high and a broadening of sector leadership with historically low levels of stock correlations, albeit with elevated levels of volatility.

The software space, however, continues to see heavy selling pressure on the AI disruption theme. As a result the S&P 500 shed 1.4% last week.

Market concerns that AI could become a broader market overhang drove contagion last week into insurance brokers, asset managers, trucking, logistics and commercial real estate.

About three-quarters of the US reporting season is done and the results are solid at a revenue and EPS level.

Positive labour data and a benign January CPI print didn’t materially move expectations on the timing of expected rate cuts in the US.

Meanwhile ASX reporting season has thrown up an assortment of hits and misses. An increase in result-day volatility – which we have seen over the past few halves – seems likely to continue.

The S&P/ASX 300 was up 2.3% last week. Bank reporting has provided some reassurance that earnings risk is low and the market remains positively predisposed to resource stocks.

Macro and policy US

Retail sales

Headline retail sales and sales ex-autos were both flat in December, well below the consensus expectations of 0.4% growth for both categories.

The strong growth in spending in 2H 2025 looks unsustainable as real income growth has slowed and spending rates were sustained by a drawdown in savings.

The current savings rate of 3.5% is well below the longer term average of about 6%

A more sustainable spending growth is more like 1.5%.

Labour markets

Despite growing rhetoric, at this point there is little sign of a spike in job losses as a result of AI. The tech/AI sector is losing 5-6k jobs a month on average, but this trend has been in train from early 2023 and remained largely constant over the course of 2025.

The US Bureau of Labor Statistics has done work on the sectors they feel are to job erosion from AI such as business support services, credit intermediation, legal services and insurance and claims adjusting. Here, job losses actually improved from circa 8-10k/month during 2024 to 3-5k per month over the course of 2025.

The employment cost index (ECI) rose by 0.7% in Q4, slightly below the consensus, 0.8%.

This increase was the smallest since Q2 2021 and saw the year-over-year rate at 3.4%, which is also the lowest rate in a four-and-a-half years.

In combination with productivity growing at 2%, unit labour costs are rising at 1.5%. This is low enough to return core personal consumption expenditures (PCE) inflation – the Fed’s preferred measure – to the 2% target.

At this point there is no real sign that reduced immigration is driving sector-specific wage pressures.

For example, wages and salaries in construction rose by 0.7% in Q4, which was in-line with the broader average. Wages in the accommodation and food services sector increased by 0.8%.

Education and – to a lesser extent – healthcare are the only sectors still seeing solid wage growth.

Payrolls rose by 130K in January, which was well above the 65K consensus, while the two-month net revision was -17K.

After a string of weaker payrolls prints this number has come as something of a positive surprise.

The key strength is in Health with 124k jobs for the month versus a monthly average of around 58K jobs in 2025.

The unemployment rate dipped to 4.3% in January, from 4.4% previously. Consensus was also at 4.4%.

Average hourly earnings rose by 0.4% in January, a touch above the 0.3% expected by consensus while year-on-year growth is at 3.7%. This is slightly higher than the 3.4% reflected in the ECI, however the market – and the Fed – probably take the ECI as the truer read on labour cost movements.

Initial jobless claims dropped to 227K in the week ending February 7, from 232K, above consensus of 223K.

Continuing claims increased to 1,862K in the week ending January 31, from 1,841K, above the consensus of 1,850K.

Inflation

The US five-year forward breakeven rate – a indicator of inflation expectations, has moved up recently but still remains with in range of the last 3-4 years.

The consumer price index (CPI) rose 0.2% month/month in January, versus 0.3% expected, taking the year/year rate to 2.4% versus the 2.5% expected by consensus and 2.7% in December.

The core CPI increased by 0.3%, in-line with consensus, to be up 2.5% year/year which is the lowest since April 2021. Food, shelter and petrol prices are all trending in the right direction.

Fedspeak

Chicago Fed President Goolsbee noted that services inflation remains problematic and “worrisome”, it is “not tame” and “pretty high” in the latest CPI figures. He also expressed scepticism that the U.S. economy is on track to reach the Fed’s 2% inflation target. Instead, he thinks it appears “stuck around 3%.”

Despite this, he maintained that interest rates “can still go down,” but further progress is required on inflation.

He sees the labour market as steady and US consumers as the economy’s key strength at the moment, expecting this to persist if the job market remains stable and inflation eases.

Macro and policy Australia

RBA Governor Bullock told the Federal senate the RBA will raise rates again if inflation becomes entrenched.

These remarks echoed Deputy Governor Hauser, who said earlier in the week that inflation is too high.

The RBA now expects both headline and core inflation to overshoot the upper end of its 2-3% target range this year.

Bullock added that it is not clear if more rate hikes will be needed given uncertainties with forecasting. She emphasised that they will remain data-dependent and continually reassess forecasts going forward.

Cash rate futures continue to price in a further 25 bp rate increase by August.

She hosed down the notion of government spending driving inflation, noting that it is not fiscal policy which has driven the increase in inflation expectations from November.

She also pointed out strength in the labour market remarking that “everyone’s been focusing on the negatives, but we’re in this position because the economy is actually doing okay.”

The Westpac-Melbourne Institute consumer sentiment index fell -2.6% month/month in February. This is the third consecutive month of falling confidence.

It was driven by a broad-based softening across most major sub-indexes with views on current conditions weak.

Housing sentiment was mixed; the proportion of respondents thinking it is the right time to buy fell -6.3%, whilst house price expectations reached a new 15-year high.

Interest rates clearly continue to be a driver of the month-to-month move, with 80% of respondents expecting rates to go up – and 30% expecting rates to be up by 100bps over the year.

The January NAB Business Survey also showed some softening in conditions. Capacity utilisation (a focus of the RBA) fell to lowest level since July 25.

Overall, the soft outcomes are largely as expected given the more hawkish RBA expectations around these surveys.

How sentiment evolves from here will be a key domestic driver.

The value of new dwelling finance commitments increased by 9.5% quarter/quarter in 4Q2025, above the 6% expected by consensus.

The increase was broad-based across investors (+7.9% q/q) and owner-occupiers (+10.6% q/q). Within owner-occupiers, new commitments for first home buyers rose at their fastest pace since 4Q 2020 following the expansion of the 5% Deposit and ‘Help to Buy’ schemes.

The number of new dwelling finance commitments increased by 5.1% q/q in the quarter.

All-in-all, this is all supportive of the outlook for banks.

Markets

US reporting season

The blended earnings growth rate for Q4 S&P 500 EPS currently stands at 13.2% – above the 8.3% expected at the end of the quarter. The blended revenue growth rate is 9.0%.

Of the S&P 500 companies that have reported for Q4, 74% have beaten consensus EPS expectations. This is below the 79% one-year average and the five-year average of 78%.

In terms of sales, 73% have beaten expectations, above the 71% one-year average and the five-year average of 70%.

In aggregate, earnings are 7.2% above expectations, below the 7.4% one-year average positive surprise rate and the five-year average of 7.7%. Sales are 1.6% above expectations, above the 1.3% one-year positive surprise rate but below the five-year average of 2.0%.

Australia

Week two of reporting season saw net EPS surprises of +8% (with season-to-date +3%).

Given the early skew to positive results there is a risk we end up negative on this front.

From a price reaction perspective it feels like the results are much worse than they actually are, with the median stock down 2-3%.

“Old economy” and value stocks like Banks, Utilities and Materials have had a strong season versus Growth and Technology stocks. The technology sector was down -4.7% and the selling from last year’s peak has been largely indiscriminate across both profitable and unprofitable companies.

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. 

Find out more about Pendal Focus Australian Share Fund here.

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

Gold and silver have done very well over the last 12 months – even with the recent pullback, but Pendal portfolio manager BRENTON SAUNDERS says investors still haven’t missed their chance

• The ‘scepticism gap’ weighing on gold miners’ valuations
• ‘Bonanza’ prices support earnings upgrades and sector strength
• Find out more about the Pendal MidCap fund

GOLD and silver prices have been riding a rollercoaster since the start of the year, but Pendal portfolio manager Brenton Saunders — who has worked as a geologist — argues there are still plenty of opportunities in midcap equities exposed to these metals.

Total gold demand in 2025, including over-the-counter sales, exceeded 5,000 tonnes for the first time, according to the World Gold Council (WGC).

Last year, the safe-haven metal set 53 new all-time price highs which yielded an “unprecedented value” of US$555 billion – a 45 per cent year over year increase, WGC data shows.

The reason: heightened investment activity driven by safe-haven and diversification moves that culminated in the second strongest year on record for exchange traded fund-inflows and elevated central bank buying.

Although central bank purchases slowed from their recent pace, they hit the upper end of the WGC’s forecast, totalling 863 tonnes for the year. Bar and coin buying also reached a 12-year high.

This led to the gold price marking its highest annual average at US$3,431 an ounce – a 44% spike year over year.

“Central banks have been buying it hand over fist; retail investors have been buying it hand over fist, the dollar has been weakening, and geopolitics have been pretty elevated,” explains Saunders, who manages Pendal’s MidCap Fund.

“If you go back to the late 90s/early 2000s central banks were all selling gold. It was an old asset. Nobody needed it anymore. It was defunct,” explains Saunders.  

“Most of the OECD countries sold most of their gold reserves. The US was probably the only one that didn’t.

“But now you’ve seen a very broad-based and especially emerging market purchase of gold. So it’s re-legitimised gold in a major way in terms of its role as a reserve asset the world over.”

Silver, meanwhile, is also a beneficiary of the market ructions, hitting its highest point on record in late January when it rose above US$120 an ounce.  

An additional key driver of the recent price surge in gold’s poorer cousin is the high demand for silver as an industrial metal input for solar panels.

“We now use a lot of it, especially in solar panels,” says Saunders. “That’s probably the biggest industrial use for silver now, but it’s always been a second-tier reserve currency investment product that has done the rounds.

“So it’s move more recently is obviously being helped by the fact that solar manufacturing is still elevated and now we’ve seen some investment demand come to the fore.”

But while gold and silver prices have run hard, this hasn’t necessarily been reflected in the share prices of gold and silver stocks.

‘Scepticism gap’

Saunders points to the ‘scepticism gap’ between the price of the physical metals versus the equities exposed to them.

“Because the move in the gold price has been so rapid the market has been highly sceptical of pricing in that scenario because they’re constantly questioning what will happen if the gold price comes back.

“So the equities, not just gold equities but especially in gold, have been quite reticent to reflect in their share prices the full move in the gold price.”

However, Saunders argues that the price could drop by US$1,000 and still be at a “bonanza level”, meaning gold-exposed companies “could weather quite a big correction in the gold price without much impact to the value of the company’s operational considerations”.

A “bonanza-level” gold price affords operations more flexibility, allowing them to mine areas that historically were not economic to consider. This increases reserves and profitability.

“That is the one thing that gives me a bit of comfort, and I think investors ultimately a bit of comfort,” says Saunders.

“If I look at consensus earnings for gold companies, they’re still reflecting a significantly lower gold price than prevails today.

“So that should mean if the gold price stays at the current level, we’ll continue to see earnings upgrades and that normally underpins share prices.

“Those are the things that make me hopeful that it should still be a fairly constructive sector from an investment perspective.”

Worried about rising prices? For the first time in years, Aussie government bonds are yielding enough lock in above-inflation returns for the next decade. TIM HEXT explains.

• RBA hike likely a one-off, not a new cycle
• Australian bonds offering attractive real returns
• Browse Pendal’s fixed interest funds

AUSTRALIAN government bonds are offering their best value in years as markets adjust to the Reserve Bank’s February rate hike, says Pendal’s Tim Hext.

Australian 10-year government bonds now yield around 5 per cent, with state government bonds yielding 5.5 per cent. That means investors can lock in real returns – returns above inflation – of around 2.5 per cent on risk-free assets.

Hext says this is a significant shift for retirees – who no longer need to take on equity risk to beat maintain the spending power of their savings.

“For most of the last decade, you were barely getting any returns above inflation,” says Hext, Pendal’s head of government bond strategies.

“Now you can buy a government bond – a risk-free asset – for 2.5 per cent over inflation.

“If you hold that for the next 10 years, you are guaranteed a return of inflation plus 2.5 per cent.

“You used to see super funds talk about their target being inflation plus three or four – and it was quite hard to hit that without a strong economy. Now you don’t need a strong economy to get that – and that’s a wonderful thing.”

Hext appeared alongside ANZ’s head of Australian economics, Adam Boyton, at the Pendal webinar The 2026 outlook on inflation, jobs and rates.

A speeding ticket, not a new cycle

The RBA lifted interest rates by 25 basis points in February – the first increase in rates since 2023.

But both Hext and ANZ’s Boyton suggest this may be the only rate hike this year as the early move looks likely to get inflation back under control.

Hext called the rate hike “a speeding ticket on an economy which was just going a little bit too fast” rather than the start of a new tightening cycle.

Boyton says the impact on consumers and business should show up quite quickly in the economic data.

“Even though I’m relatively optimistic on inflation, I still have no problem with what the Reserve Bank did,” says Boyton.

“It’s about getting some insurance and ensuring that inflation doesn’t get out of control.

“Because what we all miss is that inflation is a tax on everyone – and it’s a tax you cannot avoid every time you spend money in the supermarket.”

Inflation outlook improving

Still, inflation remains the dominant factor in the economic outlook.

“Number one is inflation, number two is inflation, and you can probably guess what I’m going to say for number three,” says Boyton.

“If I was to nominate one thing that will define the way people think about the economy in the first half of this year, it will be inflation – is it getting back to the band, or is it staying around its current 3.25 per cent to 4 per cent?”

Boyton expects inflation to come in lower than RBA forecasts by May, supported by moderating consumer spending and a rising Australian dollar, which helps lower import prices.

Wage growth is also slowing as public sector agreements that peaked at 7-8 per cent are now tracking toward 3.5 per cent.

“The Federal Government recently signed a 3.5 per cent agreement, and I think the RBA would be reasonably happy if they saw that across the economy,” says Hext.

“Wages … around 3.5 per cent is not going to have the same inflationary impulse,” he says.

Investment impacts

Hext says Australian government bonds have underperformed US bonds by 60-70 basis points, making them attractive on a relative basis. Global investor interest in Australian bonds is increasing significantly.

“We’re in quite a positive risk environment. You can see that by equity markets overall, and credit spreads are doing very, very well globally.

“It’s a relatively benign environment. I’m not saying that we’re going to see negative growth or poor risk markets, but I think the best is probably behind us.

“In other words, it’s not a bad time to lock in these returns.

“The balance of risks is definitely now in your favour, given current pricing, and I would encourage investors to take advantage of that.”  

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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

Here are the main factors driving Australian equities this week, according to investment analyst JACK GABB. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

SOFTWARE stocks continued their sharp fall; using the US tech software ETF as a proxy the sector fell 10% last week, taking year-to-date losses to 22%.

The catalyst has been the proliferation of AI tools, with the latest being a new automation tool by US company Anthropic targeted at the legal sector, this also triggered selling in the legal, publishing and financial data companies.

The potential for contagion also hit the alternative asset managers from over-exposure to credit risk.

Even after a sharp rebound in the US on Friday, the S&P 500 ended the five-day period down 0.1% while the NASDAQ lost 1.8%.

That left the S&P/ASX 300 down 2% last week, pushing the local technology sector down 11.4%. Financials (+1.5%) were the only sector to make gains.

The ASX recovered strongly today.

The RBA hiked rates, as expected, with markets moving to price in another increase by August.

US economic news was limited, with key CPI and jobs data due this week.

Bonds were fairly muted, with rate expectations little changed in the US.

Software meltdown

While Anthropic’s new tool itself is not overly significant, the news reinforced the sector bear thesis, which is that AI lowers the cost of building software, increasing competition from insourcing and AI-native startups.

This, in turn, sees margins compress as incumbents embed AI at lower gross margins than the 75-80% they’ve historically enjoyed.

Seat-based pricing is disrupted as AI agents replace human workflows. Moats erode, growth deteriorates, margins deteriorate.

These fears have become ubiquitous and applied to all software companies, leading to the level of selling being three times anything we have seen in the last 10 years.

The sector is deeply oversold, and while the fears are arguably overdone, the reality is that the burden of proof has shifted: software companies must now demonstrate their ability to navigate the AI transition.

The signposts of this include revenue stabilisation, enterprise preference for incumbents, AI-native failure rates, successful business model transitions, and insider buying.

In our view, while there are escalating threats to the sector, the consequences of them are more nuanced, not uniform and may not be as extreme as inferred in share prices.

Moats in the software space can extend well beyond product – domain expertise, regulatory relationships, distribution, and data “flywheels” (the feedback loop where data is used to refine and improve AI models, encouraging more users, which provides more data) at scale are not easily replicated.

The economics also do not obviously favour disruption: pure-large language model (LLM) architectures carry materially higher costs than hybrid approaches, and AI-native startups face a margin trap in that compute costs are falling but model complexity is increasing, and customer acquisition remains expensive.

The disruption risk is not uniform – small-to-medium businesses lack the resources to insource using AI tools, while enterprises can and will consider alternatives.

There is also a logical gap: for AI to be this disruptive it must be rapidly adopted, and if rapidly adopted it must deliver real value – in which case incumbents controlling the system of record are the logical beneficiaries.

Finally, in our view AI is a total addressable market (TAM) expander, not a TAM destroyer. The addressable market potentially shifts from around $600-700 billion in software to incorporate substituting labour which could add materially to the revenue opportunity.

Looking at valuation, the software sector doesn’t look particularly cheap on revenue multiples. However, price/earnings (P/E) tells a different story.

While consensus is currently expecting 15% two-year revenue growth for the US software sector, the P/E implies the market is expecting a significant decline in growth expectations.

Looking at some of the key Australian stocks: Technology One (TNE) and Xero (XRO) are well positioned, in our view, but Wisetech (WTC) faces higher risks.

Technology One

• External value metric pricing provides natural insulation against seat displacement.
• Direct sales eliminate channel conflict.
• Over 99% customer retention and about 70% share of Australian local councils creates extraordinary switching costs.
• AI has already been deployed across the platform with a sensible dual-pricing approach.

Xero

• Is well positioned but must execute.
• Per-entity pricing avoids seat-based disruption.
• Domain depth in accounting creates vertical-like defensibility, despite horizontal customer reach.
• Early AI adoption metrics are encouraging – 73% customer usage, 300,000+ subscribers on new AI features within three to four months.
• Risks are partner channel tension and competitive pressure from Intuit.

Wisetech Global

• Faces higher risks, in our view.
• The Cargowise pricing transition makes strategic sense, but execution has been poor and there is a risk that their largest customer, DSV, moves to an internal solution.
• There have been delays in delivery of AI capability, raising questions.
• Unlike TNE and XRO, WTC’s pricing model creates friction rather than alignment with customers, in our view.

US policy and macro

US rate cut expectations rose slightly during the week, mostly on the back of softer labour data.

There are now 2.23 cuts implied, versus 2.12 prior.

Initial jobless claims came in at 231,000 versus 212,000 expected and 209,000 prior. Challenger data showed 108,000 layoffs in January (+118% year/year). The December JOLTS job openings rate fell to 3.9% (from 4.3%), the lowest level since April 2020.

More positively, the University of Michigan sentiment survey showed inflation expectations over the next 12 months have fallen to 3.5%, versus 4.0% in January, with the five-to-10-year expectation rising to 3.4% from 3.3%.

In addition, the ISM Manufacturing survey beat expectations, with January coming in at 52.6 versus 48.5 expected and 47.9 prior. That marks a strong turnaround and the strongest number since 2022. New orders and production both surged.

The ISM Services survey also came in stronger than expected at 53.8 versus consensus at 53.5 and 54.4 prior, although underling metrics were less positive than manufacturing with employment 50.3 versus 51.8 expected and prices rising to 66.6 from an upwardly revised 65.1.

Key data this week is January CPI, December retail sales and the January employment report – which will include the annual revision to the jobs count.

Macro and policy Australia

The RBA confirmed its outlier status among global central banks, hiking by 25 basis points to 3.85% in a unanimous decision that was more or less in-line with the 70% hike expectation.

Commentary was also hawkish, with inflation expectations revised sharply higher and the RBA admitting inflation is more broad-based and persistent than first thought.

It is now likely to remain above target for some time, which has prompted markets to more than price in another hike by August.

The decision to hike comes despite RBA forecasts of slowing GDP growth and higher unemployment and suggests it is more willing to accept softer economic outcomes in order to rein in inflation.

The consumer price index (CPI) is now seen at 4.2% to June 2026, versus 3.7% previously.

Assuming two cuts in the first half of the year, growth (and inflation) is likely to reduce in the second half, particularly given the stronger AUD.

The inflation outlook is also likely to add pressure on the May budget to deliver higher taxes (and/or curb spending), which likely also weighs on spending.

Importantly, while ‘short-term inflation expectations have risen in Australia since the November Statement’, ‘longer term inflation expectations remain well anchored,’ according to the RBA.

Moreover, the RBA does expect financial conditions to become modestly restrictive under the assumed path for interest rates.

Europe and the UK

The Bank of England voted five to four to hold rates steady, with the Chief Economist saying they are on track to bring inflation back to a 2% target in April. Inflation is expected to stay there, or dip lower, over the coming three years.

The European Central Bank also kept rates on hold, with its President saying the stronger Euro could bring inflation down beyond current expectations.

Commodities

It was a volatile week for commodities and mining equities, if not to the same extent as software.

Gold ended up, rebounding from a low of US$4,400/oz to close at US$5,100/oz. Silver sold off again, but rallied sharply on Friday from a low of US$64/oz.

The bounce in the USD and a broader risk off move saw a sharp reversal of commodity momentum trades, but any renewal of the USD’s downward trend is likely to see precious metals rebound.

The biggest moves were in Bitcoin, with a sharp rally on Friday (~12%) not enough to offset steep falls earlier in the week.

De-escalation of Iran tensions also sent oil lower, while iron ore fell on high inventories and slowing demand in China ahead of Lunar New Year.

Lithium spodumene also saw a pullback following a string of Australian producers announcing plans to restart idled production.

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About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

Find out more about Focus Australian Share Fund

Contact a Pendal key account manager here

Emerging markets have surged over the past year, with broad-based strength across regions and sectors. Pendal’s Global Emerging Markets Opportunities team outlines the drivers that could see this momentum continue

• EM strength is broad and not just tech driven
• History and fundamentals suggest the rally can continue
• Find out about Pendal Global Emerging Markets Opportunities Fund

JUST under a year ago we wrote that “the global economic and political environment remains volatile; but if we were asked what an emerging markets bull market looks like, we would say it looks like this”.

In the 11 months since then, the MSCI EM Index has returned 42.9% (in USD terms), compared with 21% for MSCI World Index and 17.9% for the S&P 500 index.

The MSCI EM Index captures large and midcap representation across emerging markets countries.

The MSCI World Index captures large and midcap representation across developed markets countries.

Both indices cover about 85% of the free float-adjusted market capitalisation in each country.

We have written extensively about the role of the US dollar in driving emerging economies and financial markets.

In 2025, the dollar was significantly weak in the first half of the year but then strengthened against other global currencies in the second half of the year.

That move, combined with a seemingly less volatile US policy environment, has led to questions about what 2026 might bring.

Here we highlight a few observations about the emerging market rally:

It’s not just AI and semiconductors

Undoubtedly this is a substantial part of the much higher returns in the last year –including extremely strong returns from leading semi names in Taiwan and Korea.

This has plenty of potential to continue, given tightness in supply-demand balances in foundry and memory. We retain substantial exposure to these industries in Pendal Global Emerging Markets Opportunities Fund.

However, this is a broad-based emerging market rally.

MSCI Latin America returned 63.9% in those 11 months, MSCI South Africa returned 76.6% and MSCI Eastern Europe 61.1%.

This looks like previous EM rallies

The kinds of markets and stocks that have led previous rallies are generally performing well.

Current-account-deficit commodity markets (Latin America, South Africa) which have done well in previous up-cycles are again performing very strongly.

Higher-beta markets within the more defensive current account surplus markets are outperforming: MSCI UAE +27.6% v MSCI Saudi Arabia +4.0%; MSCI Korea +138.7% v MSCI Taiwan +57.8% (last 11 months in USD terms).

As before, capital-markets-focused businesses in EM – such as exchanges, investment banks, brokerages, life insurers and asset managers – are generally seeing very strong growth in their revenues and profits from increased volumes and activity.

EM bull markets have historically lasted a long time

Asian equities (which were what EM mostly consisted of then) performed very strongly during the US dollar weakness from September 1985 to December 1988.

Emerging markets performed very strongly during the US dollar weakness from May 2002 to May 2008 and again from March 2009 to May 2013.

The US dollar began to decline, and emerging market equities to outperform their developed market counterparts, only a year ago.

The dollar, relative equity valuations, capital flows and history all suggest that there is plenty of room to run.

We don’t build our portfolio from a directional call, but we are aware of the history of the asset class, and our process leads us to prefer parts of the asset class that both should do well and are doing well.

We remain heavily overweight Latin American markets, with a preference for Brazil and Mexico, and are overweight South Africa and the UAE.

We have substantial exposure to capital markets-focused stocks that are benefitting from a reorientation of savings and financial activity towards emerging markets.

We are also significantly exposed to gold and semiconductors. We find much opportunity in the asset class at this time.

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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

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

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

THE announcement of the new US Federal Reserve Chair last Friday led to a sharp reversal in the previously relentless rise of metals such as silver and gold, while the US dollar bounced off recent lows.

Oil continued its rise on increasing geopolitical risks and Treasury yields were relatively muted in their response.

Global equity markets were relatively flat (S&P 500 +0.35%), with most of the price action occurring in FX and commodity markets.

The Fed maintained rates, as expected, despite a couple of dissenting votes.

The statement and Chairman Jerome Powell’s comments were generally more upbeat on the job market and overall economy, with the current monetary policy settings being described as broadly neutral.

In Australia, December Consumer Price Index (CPI) data surprised to the upside and strengthened the case for the Reserve Bank of Australia (RBA) to begin raising rates at its meeting this week.

Australian equities were similarly flat to their international peers (S&P/ASX 300 -0.02%) however mid (-2.17%) and small caps (-3.08%) were weaker, partially reversing their strong start to 2026.

At a sector level, the Technology sector (-6.61%) was again weaker while Energy (+4.19%) stocks followed their underlying commodities higher.

Macro and policy Australia

Following the strong labour force numbers published on 22^nd of January, all eyes were on the December CPI release in order to give a better understanding of the RBA’s likely course of action.

This CPI release was the first to include both the full monthly and quarterly CPI data series. Most analysts and the RBA continue to focus on the quarterly data series for the time being, due to concerns on volatility and seasonal adjustments for the monthly series.

The fourth quarter headline CPI rose by 0.6% quarter on quarter and the annual rate was up 3.6% year on year (consensus 3.2%). The monthly CPI was 1.0% month on month and 3.8% year on year (consensus 3.2%).

The RBA’s preferred measure, the quarterly trimmed mean, gained 0.9% quarter on quarter and 3.4% year on year, which was above the consensus of 3.2%.

Importantly, the RBA’s most recent published forecast for this measure in the November Statement of Monetary Policy (SOMP) was only at 3.2% year on year. The RBA’s stated object for this measure is a target band of 2-3%.

This print was significant because as recently as the August 2025 SOMP, the RBA had forecast a slowing in this measure to 2.6% year on year – so this latest measure is a substantial upside surprise to its forecasts from only a few months ago.

Diving into the CPI components provided something for both the hawks and doves, especially with the mix of both monthly and quarterly data points.

One of the key drivers of inflation has been increasing housing and this was still strong on the year (+5.5%) but rising only 0.1% for the month of December.

Another key driver was electricity costs – rising over 20% for the year with the end of state-based electricity rebates.

Other strong increases were seen in international holidays and motor vehicle prices.

Governor Michele Bullock explicitly mentioned a focus on the housing, market services (excluding travel), and durable goods groups components of CPI.

She has also previously called out “sticky” services inflation – and this remained the case in this release.

There is a divergence in market views on the RBA’s response to this and other recent economic data.

However, pricing quickly moved to a 70% probability of a rate increase at the RBA’s meeting on 2^nd to 3^rd of February.  

A total of two rate hikes is now factored in by the second half of 2026.

The case for the RBA to maintain a “Hawkish hold” includes:

• The quarterly trimmed mean was only a +0.1% surprise relative to the RBA’s most recent forecast.
• The monthly components indicated a slowing in momentum of key categories of housing and market services.
• The rising AUD provides a deflationary boost particularly via cheaper import pricing.
• By raising rates, the RBA would effectively be admitting the three rate cuts of 2025 were at least a partial mistake.

The case for the RBA to raise include:

• Overall, inflation remains too high with both headline and trimmed being well above the 2-3% band.
• The inflation impulse is accelerating, with two-quarter trimmed mean run-rating at 3.9% annualised.
• Inflation is now broad based – the share of items with inflation annualising above 2.5% is now 60%.
• The RBA may have to make a “triple upgrade” for each of inflation, GDP and labour market at the February meeting.
• The RBA’s 30-year inflation credibility is now at stake, especially in an expansionary fiscal environment.

Other data points released during the week included the Producer Price Index (PPI), showing a 0.8% rise in the quarter and 3.5% annually.

This, like the CPI, showed the inflationary pressures currently in the economy.

Also, the NAB Business conditions and confidence survey rebounded in December with most components suggesting solid momentum in the economy coming into the year-end.

Macro and policy US

FOMC Rate decision

The Federal Open Market Committee (FOMC) maintained the mid-point of the target range for the funds rate at 3.625%, as widely expected.

The vote was 10-2 with only Fed Governors Stephen Miran and Christopher Waller dissenting in favour of a 25-basis-point (bp) rate reduction.

As discussed previously, Miran is US President Donald Trump’s chosen temporary appointee while Waller’s vote was seen as a pre-requisite for him to remain in the running for the Fed Chair role.

The FOMC statement itself contained more upbeat language, noting “economic activity has been expanding at a solid pace” (previously moderate) and while “job gains have remained low,” (previously slowed), “…the unemployment rate has shown some signs of stabilisation.”

Significantly, previous commentary on the downside risks to employment were dropped from this statement.

In the subsequent press conference, Fed Chair Powell commented that the outlook for economic activity has improved since the last meeting.

He also noted that most of the excess core inflation looked to be related to tariffs and his belief was that these effects should fade over time.

Overall, he stated that his assessment was the current Fed policy rate was within plausible estimates of neutral (though maybe at the higher end of that range).

Fed watchers took that statement and press conference to mean that Chairman Powell had delivered his last rate cut before his term expires in May 2026.

The market is now only pricing one Fed rate cut by mid-year, with just under two cuts in total priced by the end of calendar 2026.

Federal Reserve Chair candidate

After months of commentary and speculation, President Trump provided a surprise both in terms of timing and eventual final nominee for the Federal Reserve Chairmanship, announcing that he would put forward former Fed official and economist Kevin Warsh.

Kevin Warsh’s background summary:

• Graduate of Stanford University and Harvard Law School.
• Investment Banking expertise: 1995-2002 at Morgan Stanley.
• Public policy experience: President George W Bush appointed him as special assistant to the president for economic policy and as executive secretary at the National Economic Council.
• Federal Reserve experience: Fed’s Board of Governors from 2006 to 2011.

The market immediately moved to factor in implications of this nomination, versus the other favoured candidates.

While for the last year Warsh has consistently argued that rates should come down – a somewhat necessary stance for candidature given Trump’s statements – he has historically been viewed more as a policy hawk compared to the other Fed chair candidates.

This stems from his previous time as Fed governor during and post-GFC, when he argued that higher rates were needed to kill off sticky inflation even as unemployment was rising.

However, Warsh has recently argued a couple of interesting points, such as:

• The justification for lower rates is that the artificial intelligence revolution is set to unleash a wave of productivity growth that will ultimately be deflationary for the economy.
• The Federal Reserve itself requires significant changes, including reducing the size of its balance sheet and rethinking economic models it currently relies upon.

The move to reduce the Fed balance sheet may lead to higher rates as the Fed reduces its stock of Treasuries – but one potential offset is capital reforms to the banking system to encourage Treasury holdings.

Overall, Fed observers view Warsh as an experienced official who is well credential and pragmatic in his approach, while also quelling any fears about the independence of the central bank.

Any sudden changes to policy will likely be tempered by Warsh taking Miran’s temporary seat and then needing to convince the rest of the voting members.

Markets responded to the announcement in slightly hawkish terms with rates a touch higher, a steeper yield curve, and stock futures lower.

The Warsh announcement also helped to support the dollar by reducing fears of debasement and extended dollar weakness, which led to gold and silver moving sharply lower.

Other economic data

Other data release during the week included:

• Durable goods orders rose 5.3% in November versus consensus at 4.0%, but this was boosted by volatile aircraft orders.
• Consumer Confidence: The Conference Board index dropped to 84.5 in January, the lowest level since May 2014.
• Initial jobless claims dipped to 209,000 from 210,000 while continuing claims fell to 1.827 million.
• Headline PPI rose by 0.5% in December, versus consensus of 0.2%, and core PPI increased by 0.7% versus consensus of 0.2%.

Overall, these continued recent trends in data point to a patchy US consumer but a steady jobs market while the effects of tariffs work their way through the economy

Markets

Overall market sentiment remains elevated, with many indicators – such as ETF flows, put/call and bull/bear ratios – being close to recent highs

US equities finished up 1.5% for January. This has historically correlated with superior returns for the rest of the calendar year, relative to those years beginning with a negative January return.

Microsoft was down 12% on fears of slowing growth for its cloud computing software and questions about the returns from its significant OpenAI investments.

Meta, on the other hand, rose 10% driven by positive AI developments boosting user engagement and ad revenue.

Apple was flat despite reporting net sales rising 16% and the company struggling to source enough chips to meet its customers’ iPhone demands.

Commodities and FX Volatility

We saw extraordinary volatility in commodities, especially precious metals.

In the US, the iShares Silver Trust (SLV) was among the most-traded securities by volume last week, behind only the SPDR S&P 500 and Invesco QQQ Trust, and ahead of Nvidia, Tesla and Microsoft.

Gold hit another all-time high of $5,500/oz mid-week, having only crossed $5,000 on Monday, $4,000 in October 2025 and the $3,000 level in March 2026.

However, the nomination of Warsh as Fed Chair triggered a sharp sell-off on Friday, with gold down 9%, silver down over 25% (the worst day since 1980) and platinum down 17%.

Market observers stated that the stronger dollar and leveraged positions/margin calls exacerbated the moves.

Prior to these moves, the strength in gold has seen the gold mining sector reach 6.4% of the S&P/ASX 200, putting it in-line with major sectors such as Healthcare, Real Estate, Industrials and Consumer Discretionary while being substantially larger than five of the smaller GICS sectors.

Energy added to its strong start in 2026, with Brent crude reaching six-month highs as investors monitor US-Iran tensions.

The US dollar trade-weighted index (DXY) started the week softer on fears of intervention to support the Japanese Yen but ended higher on Friday.

Meanwhile, the AUD continued its strong run, cracking the 70 US cents level for the first time since early 2023.

Another area to watch is the reduction in Australian Investment Grade credit spreads to the lowest level since 2022. This helps at least partially offset the rise in Australian Government bond levels for borrowing costs.

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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 in Australian equities. Rajinder manages Pendal 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 Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust
• Regnan Global Equity Impact Solutions Fund

Part of Perpetual Group, 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

Inflation is higher than the RBA would like, but does it mean a rate hike is a certainty? Pendal’s head of government bond strategies TIM HEXT explains what it means for investors

• Find out about Pendal Government Bond Fund
• Browse Pendal’s fixed interest funds

IF THE Reserve Bank was hoping for inflation data that gave a clear reason to hike or to stay put, they did not get it this week. 

The final result for the December quarter trimmed mean (underlying) CPI was 0.9% for the quarter and 3.4% for the year.

Headline was 0.6% for the quarter and 3.5% for the year.

On its own, this should be reason for an RBA hike. These numbers are clearly above the 2-3% target range and 0.2% above the year-end forecasts back in early November.

Combined with a recent pick up in employment and consumer spending it suggests an economy at or near capacity.

The market agrees and now has a 70% chance of a February hike and economists’ predictions are divided in a similar way. (Bonds, however, had a small rally as the urgency for successive hikes was not there. )

But , if the RBA was disposed to more caution, the argument goes that inflation has moderated from the third quarter to the fourth quarter and is likely to continue to do so.

Our early call is for Q1 trimmed mean to be nearer 0.8%.  Hiking rates now would risk a welcome recovery in consumer spending and growth.

This will make for robust discussion at next week’s RBA board meeting, perhaps revealing the balance of “hawks and doves”.

(While we will see the board’s voting numbers — and potentially another split vote — we do not get to see individual votes.)

What did the inflation numbers show?

The Good 

In December the pressure areas of housing — rents and dwellings — only went up by 0.2%.

These have averaged nearer 0.4% for the second half of 2025. Overall they remain above 4% for the annual growth but this result was encouraging. 

A number of consumer items showed some deflation. Clothing and footwear, plus furniture and equipment fell, bucking the unusually higher numbers of the last six months. 

The OK 

Electricity prices are now flat. All the subsidy noise of the last 12 months are now out of the system.  

Fuel prices were slightly up but overall prices are largely flatlining. 

Health prices actually fell but this was another government policy led item as the government attempted to increase bulk billing. Health will remain a key problem area and grow above 4% in the year ahead. 

The Ugly 

Travel prices are booming.

They grew 16% in December, but that is partly seasonality. Over the quarter they were up 4.6%. Domestic travel was up 9.6% from a year ago, although maybe the Ashes boosted that somewhat.  

Key problem areas for inflation

The three key pressure points for inflation remain housing, health and education.

Between them they are around 35% of the CPI basket and they are all running above 4%. 

Health and education are largely wages driven, though some private schools seem determined to increase by more than wages.

Housing is a well-known structural story that may gain some medium-term relief from slower population growth. 

We will be keeping a close eye on upcoming wage agreements, including the Minimum Wage decision (due in June) to see if the recent spike in inflation feeds back into wages.

This is key — not for whether the RBA goes in February, but whether cash rates are closer to 3% or 5% in the medium term.

Is there any good news ?

The good news is that while inflation will be sticky above 3% for most of this year, it’s far more likely medium term to push back down below 3% than above 4%.

We are not on the brink of another high inflation episode (absent a black swan supply shock or major oil price spike).

The following graph shows that both goods and services have been tracking up nearer 4%.

Even though services will remain sticky, goods prices should track back to closer to their longer-term average of 1%.

With goods one-third of the CPI basket this means service inflation can remain at 4% and overall inflation still be sub 3%.

 CPI Goods and Services components, annual movement (%)

 

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

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 rotation that emerged in 2H25 has persisted into early 2026, with markets rewarding selective exposure rather than broad beta. 

Index-level resilience continues to be supported by active hedging and disciplined positioning, not a material improvement in macro confidence.

Earnings momentum remains concentrated in resources and gold-exposed names, whilst Technology (specifically software) sentiment has remained under pressure. We are watching for early signs of software stabilisation following some tentative green shoots last week. 

Geopolitics remains at the forefront of markets, with President Trump’s overtures towards Greenland contributing to a sharp rally in gold (+8.5%) and renewed weakness in the US dollar (-1.8%). The S&P 500 returned -0.3% last week.

Domestically, the S&P/ASX 300 fell 0.5%, weighed down by a hotter-than-expected labour print that brought forward RBA tightening expectations. 

Resources were a bright spot with high commodity prices contributing to strong quarterly results.

US policy and macro

Inflation

November US personal consumption expenditures (PCE), a measure of inflation, was in line with expectations.

Core PCE, the Fed’s preferred measure of inflation, rose 0.16% in November, tracking at 2.79% year on year (YoY). 

The trajectory is consistent with a decline back towards the FOMC’s 2% target and the market is pricing in two interest rate cuts in 2026. 

Adjusting for inflation, real consumption expenditures increased by 0.3% in both October and November, again in-line with consensus. 

Consumer spending was surprisingly resilient in 4Q25 with spending on goods holding up despite tariff-related cost impacts. This continues a trend of hardy consumption despite slowing incomes and a loosening labour market, which points to a declining savings rate. 

At some point, very low savings and further slowing income could become a headwind for consistently strong consumption, but we are not there yet. In addition, larger-than-usual tax refunds in early 2026 should be supportive. 

Real GDP growth

The US Bureau of Economic Analysis revised up 3Q GDP by 0.1% to 4.4%. Downward revisions to real spending were roughly offset by upward revisions to business fixed investment. 

Growth drivers were narrow, driven by the upper-income consumer and AI investment.

Jobs

Initial jobless claims increased 200,000 for the week ended 17th January, up from 199,000 but below consensus (209,000). 

Whilst low, this is more a symptom of relatively lower seasonal hiring in 4Q26 (particularly in retail) rather than a sign of a strengthening labour market. 

Davos

There was little new news on the US policy front out of Davos. 

The market was looking for more movement on Trump’s expected policy announcements on housing – for example instructions to Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds to lower mortgage rates, but there was none forthcoming. 

Trump also appeared to walk back proposed 10% tariff increases on several European nations (set to be enforced 1st of February) and announced “a framework of a future deal with respect to Greenland” after talks with Mark Rutte, the Secretary of NATO. This is seen as positive for markets.

Housing

Pending home sales fell 9.3% in December (versus consensus -0.3%), wiping out four months of recovery and surprising the market. 

Poor weather explains some part of this, but a lack of obvious trigger suggests this decline is likely just noise rather than a new sustained trend. 

In contrast, mortgage applications for the week ended 16th of January grew 5.15% to the highest level since December 2023. The 30-year fixed rate mortgage fell 2 basis points (bps) to 6.16% and is down 16bps calendar year to date.

Other data

–             Cold weather in the US from weaker-than-normal Arctic circulation patterns is contributing to a rise in natural gas prices. This may help Macquarie Group’s (MQG) commodities trading business. Cold weather can also crack pipes, possibly providing a tailwind for Reliance Worldwide’s (RWC) plumbing goods.   

–             S&P Manufacturing & Services PMIs were little changed at 51.9 and 52.5 respectively, close to expectations and providing limited incremental insight. 

Australia policy and macro

Australia is one of very few economies expected to see rates rise in 2026, along with Japan and Colombia.

And economic data last week was consistent with tighter monetary policy as employment increased 65,000 month on month in December – versus consensus at +27,000 – while the unemployment rate fell to 4.1%.

The market is now pricing two rate hikes by November, and the Aussie dollar has increased to US$0.68.

Japan

Japanese government bond (JGB) yields dropped 40bps in 48 hours following political manoeuvring and the announcement that the consumption tax on food prices would be abolished to help address inflation concerns. 

The market, fearful that the government would finance this fiscal stimulus via new debt issuance, moved immediately to short JGBs. 

Globally, bonds moved in sympathy as an idiosyncratic Japanese event manifested into broader repricing of global duration risk.

This suggests that fiscal concerns and potential shifts in central bank reactions are risks endemic to economies globally. 

We do note Japan is in a more challenged position with sticky inflation and interest rates well below where they should be for inflation at current levels. 

But that said, a continued normalisation of Japan yields may destabilise global markets, with the pace at which it occurs the issue. So we keep a watching brief on Japan for now. 

Gold

Ongoing geopolitical uncertainty and a softer US dollar have reinforced demand for real assets, with gold extending its rally and Australian gold equities now representing a larger share of the ASX 300 than at any point since the year 2000.

Gold was +8.5% for the week as it rallied towards $5,000/oz, driven by reignited geopolitical tensions as the market digested the implications of Trump’s desire for Greenland. 

The total value of gold held by central banks outside of the US is close to exceeding that of their US Treasury holdings. 

Goldman Sachs raised its December 2026 gold price forecast to $5,400/oz as private sector diversification into gold continues. 

Unlike other commodities where “high prices cure high prices,” gold supply is largely price inelastic with output limited, stable and worth about 1% of global gold stock outstanding. 

Hence, gold rallies tend to reverse when (a) geopolitical risks ease, (b) macro policy risks ease, or (c) the Fed switches from cutting rates (driving ETF inflows) to hiking rates.  In this vein, the current environment looks supportive for the rally to continue. 

Markets 

Market activity remains elevated, but investors continue to manage risk carefully rather than take big directional bets.

US equities were modestly sold last week, mainly through shorting individual stocks, while broader index and ETF positions were reduced without a clear risk-off move.

Even so, overall trading exposure remains elevated, suggesting investors are staying active while keeping net risk contained.

This reflects a clear shift from the post-pandemic market of 2021, when investors ran high net exposure and used shorts mainly as protection.

The inflation shock and rate tightening in 2022 forced a reset, and since then markets have been driven by stock selection and rotation rather than broad beta.

While directional exposure has edged up recently, it remains well below prior peaks, indicating confidence is rebuilding only cautiously and alongside ongoing risk controls.

Market breadth has improved in the US, creating more opportunities beyond the largest stocks.

Small shifts out of the S&P 500 are having an outsized impact elsewhere, with flows into smaller companies supporting Russell 2000 performance year to date.

A similar pattern is evident in Australia, where small caps, led by Resources, have materially outperformed the large-cap end of the market.

Sector rotation continues to do the heavy lifting.

Technology remains the most sold area in US markets, particularly Software, while Semiconductors have attracted buying.

Energy has seen a sharp turnaround, driven by short covering as prices strengthened, and flows into Consumer and Health Care stocks point to growing emphasis on company-specific earnings outcomes rather than macro themes.

Derivatives markets tell a similar story. Periodic volatility spikes continue to fade quickly, making it cheap to hedge the market overall, even as individual stocks remain volatile.

Investors are therefore protecting portfolios at the index level while taking risk in selected stocks and sectors.

Small caps have joined the rotation, but interest remains tactical rather than high conviction, with many investors preferring to trade volatility rather than commit capital outright.

Overall, the positioning and rotation dynamics that emerged in late 2025 remain firmly in place.

Markets continue to look stable at the index level, but risk and opportunity are increasingly concentrated beneath the surface, favouring selective exposure and active risk management over broad, directional positioning.

Australian equities

In Australia, factor performance continues to point to a market driven more by selective exposure than broad macro conviction.

Growth and momentum outperformed again last week, supported by strong contributions from the Materials sector, while value-oriented styles lagged, led by weakness in dividend yield and net buyback yield factors.

Low volatility also underperformed for a second consecutive week, suggesting investors remain willing to tolerate volatility in pursuit of upside rather than rotating defensively.

The backdrop continues to favour Materials relative to Financials, reflecting investor preference for globally linked earnings and inflation protection over domestic income-sensitive exposures.

Overall, the pattern suggests that the rotation which emerged in the second half of 2025 remains intact and has carried through into the early part of 2026, rather than showing signs of exhaustion.

Commodity prices continue to drive upgrades for Materials across the ASX. At spot prices, most resources companies would see further upgrades to earnings. 

In contrast to Materials, Information Technology has seen the largest negative earnings revisions over the past 12 months. 

Software sentiment meaningfully deteriorated over the past year as the market questions AI’s impact on software business models (e.g. seat-based pricing, barriers to entry on product development, terminal growth rate concerns). 

In Australia, this has been exacerbated by dilutive M&A (Xero) and corporate governance failures (WTC).   

Software is now the most over-sold level it has ever been based on a 14-day relative strength index (RSI) indicator.

We have been looking for a sign of stabilisation or sentiment bottoming, are we finally there?

Last week did see some interest returning to the sector with specialist software PE fund, Thoma Bravo, highlighting value on offer in the Financial Times, while there was some institutional buying in US software on Thursday and Friday and on the ASX on Friday. 

A positive trading update from Life 360 (360) in Australia helped locally. 

Evercore has highlighted the potential for a bounce, noting the iShares Expanded Tech-Software Sector ETF has bounced off its current technical level five times in 15 years, with one exception (the 2022 bear market).

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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. 

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