Market Overview
September produced mixed equity-market returns. The S&P 500 declined 0.20% and the ASX 200 fell 2.42%, while the Nasdaq gained 2.45% and Japan’s Nikkei 225 rose 3.77%. The Dow Jones fell 4.06% and the Russell 2000 declined 5.29%. The contrast between markets reinforces the value of diversification and the importance of assessing earnings, valuations and financing costs.
September brought rate increases from both the Federal Reserve and the RBA, alongside higher long-term bond yields. This makes the distinction between earnings growth and valuation increasingly important. A business can grow revenue while its share price remains vulnerable to higher discount rates or refinancing costs.
Global Developments
United States – The Federal Reserve Raises Rates
The Federal Reserve raised its federal funds target range by 25 basis points to 3.75%–4.00%. It cited elevated inflation while describing economic activity as expanding solidly, domestic spending as resilient and capital investment as robust. [1]
The increase confirms that investors cannot assume the next policy move will be a cut. Higher short-term rates increase financing costs and can constrain borrowing and spending. Further increases remain a risk, although the timing and size of any additional moves depend on incoming data.
Global Debt and Bond Markets – Higher Yields
Long-term bond yields remained elevated, with the US 10-year Treasury at 5.291%, the US 30-year Treasury at 5.634% and the Australian 10-year government bond at 5.354%. Higher yields raise financing costs for governments and businesses and put pressure on asset valuations. For investors, they offer more attractive income opportunities, although existing fixed-rate bonds can fall in value if yields rise further.
Higher yields reflect more than central-bank policy. Inflation expectations, government debt issuance, demand for capital and the compensation investors require for holding longer maturities also matter. AI, energy and infrastructure investment can compete with governments for funding.
When yields rise, the market prices of existing fixed-rate bonds generally fall. Longer-duration bonds are more sensitive. Higher entry yields improve prospective income for new investments, but do not remove the risk of further price declines. Our focus is on the balance between income, duration, credit quality and liquidity.
Artificial Intelligence – Returns Must Justify the Investment
AI remains an important investment theme, particularly across semiconductors, data centres and supporting energy infrastructure. Higher funding costs sharpen the question of who earns an adequate return on that investment. We favour evidence of sustainable cash flow and sensible valuations over exposure to a theme at any price.
Australian Economy
Inflation and Interest Rates
The RBA raised the cash rate by 25 basis points to 4.60%, resuming its tightening cycle after the August pause. Households and businesses should continue to plan for higher borrowing costs, with near-term interest rate relief remaining uncertain. [4]
Our View
Monetary policy can restrain demand, but it cannot directly resolve weak productivity, housing supply constraints or inefficient government expenditure. A durable improvement in inflation and living standards requires a stronger supply response as well as appropriate demand management.
Higher bond yields also raise the hurdle rate for new investment. Businesses with strong balance sheets and pricing power are better positioned than those dependent on cheap borrowing or continuous refinancing. For households, debt servicing and adequate cash reserves remain important.
Taxation and Government Spending
The 2025–26 budget recorded a deficit of $22.3 billion, around $6 billion better than forecast. However, tax receipts reached 24.1% of GDP, close to a historical high, while government spending remained elevated. The improved result reflects a stronger tax take rather than clear evidence of expenditure restraint. [5]
High government spending adds to demand and can intensify inflation when the economy has limited spare capacity. Persistent inflation, in turn, keeps pressure on interest rates, while sustained expenditure increases the need for taxation or borrowing. Fiscal responsibility is therefore essential to help tame inflation and reduce the burden on households and businesses. Greater spending discipline and stronger productivity would support this effort, rather than leaving monetary policy to carry so much of the load.
Card Surcharges – Business Costs and Consumer Prices
October update: no-surcharge rules begin on 1 October for eftpos, Mastercard and Visa. Businesses need to adjust payment systems, pricing displays and customer communication. Card acceptance still has a cost, even when it can no longer be recovered through a separate surcharge. [6]
Our concern is that additional transition and compliance costs may be passed on through higher consumer prices, adding inflationary pressure. This is a risk rather than a certain net outcome. Incorporating an existing surcharge into the displayed price does not necessarily increase the total paid, and lower interchange fees may offset some costs.
Productivity – Australia’s Long-Term Challenge
Productivity determines how quickly wages and living standards can rise sustainably. Increasing population or public expenditure may lift total GDP without delivering a comparable improvement per person. Our priorities remain:
- Private investment and infrastructure that improve economic efficiency.
- Reliable energy and regulation that is proportionate and practical.
- Innovation, workforce capability and disciplined public expenditure.
Without stronger productivity, policy risks redistributing a slowly growing economic pie rather than increasing the value available to households and businesses.
Outlook
The outlook remains selective. Higher interest rates and bond yields create income opportunities while increasing pressure on leveraged borrowers and valuations. Investors should expect volatility as inflation data, earnings and policy decisions alter expectations.
Portfolio Implications
- Maintain an underweight allocation to Australia, favoring offshore markets where investment opportunities, government policy and tax settings are more supportive.
- Favour businesses with strong balance sheets, sustainable cash flow and reasonable valuations.
- Maintain floating-rate debt exposure, with careful attention to credit quality and liquidity.
- Remain cautious on long-term government bonds. Heavy debt issuance and weak fiscal discipline can keep upward pressure on yields, reducing the appeal of locking in fixed rates.
- Cash reserves earning 4.60%–5.25% offer attractive income with less investment risk, reducing the need to chase higher returns from riskier assets.
Fun Fact – The Rising Cost of the RBA
Financial years 2020–21 to 2024–25
The Reserve Bank of Australia has grown substantially across the five reported financial years from 2020–21 to 2024–25. Its year-end workforce increased by 659 employees, or 47.8%, while annual staff costs rose by 62.4%. General operating costs increased by 81.7%.
| Financial year | Employees at 30 June |
Staff costs | General operating costs |
|---|---|---|---|
| 2020–21 | 1,380 | $243.2m | $412.7m |
| 2021–22 | 1,428 | $256.3m | $429.8m |
| 2022–23 | 1,575 | $299.7m | $500.9m |
| 2023–24 | 1,774 | $334.5m | $607.6m |
| 2024–25 | 2,039 | $394.9m | $749.7m |
| Change across period | +659 | +$151.7m | +$337.0m |
| Percentage increase | +47.8% | +62.4% | +81.7% |
Staff costs grew faster than employee numbers, while overall operating costs grew faster than both. An institution asking households and businesses to adjust to tighter financial conditions should also demonstrate expenditure discipline, measurable productivity improvements and value for money.
Combined Treasury and RBA cost increase
From 2020–21 to 2024–25, combined reported operating costs rose from $690.3 million to $1,165.2 million, an increase of $474.9 million a year, or 68.8%. Combined staff costs rose from $416.0 million to $686.8 million, up $270.8 million or 65.1%. Combined year-end employees increased from 2,671 to 3,693, up 1,022 or 38.3%.
Note: Combined totals use Treasury annual report figures and the RBA figures above, retaining each institution’s cost definitions. These are indicative totals, not consolidated accounts. Staff costs are included in operating costs. All increases are nominal.
RBA: Public Charter and Scorecard – What Should Australians Expect?
Fun Fact follow-up: The RBA should be judged against the outcomes it is expected to deliver for
Australians, as well as the quality of its decisions and operations
Public charter
The RBA should promote Australians’ prosperity and welfare through price stability and sustainable full
employment. It should aim for inflation of 2-3%, returning to the 2.5% midpoint over an appropriate
timeframe; support financial stability and efficient, competitive payments; provide reliable settlement and
secure banknotes; and explain decisions, forecasts and risks openly. Independence requires accountability.
The RBA sets monetary policy; fiscal policy, housing supply and structural productivity reform principally sit
with governments. [1]
Public-interest scorecard: 2021-2026 year to date
The supplied independent scorecard assesses January 2021 to 30 September 2026. It weighs the Bank’s public responsibilities against outcomes and provides an editorial judgement, rather than an official RBA rating. [8]
| Obligation | Score | Result | Assessment including 2026 |
|---|---|---|---|
| Price stability and purchasing power | 5/25 | Poor | After the 2022 inflation surge, price stability remains elusive: annual monthly CPI inflation was 4.0% and trimmed mean 3.6% in August 2026, both above target. [2, 3] |
| Sustainable full employment | 15/20 | Good | Employment has been resilient, but unemployment rose to 4.6% in August 2026 from 4.1% in December 2025. Participation was 67.1%; sustained full employment remains uncertain. [4] |
| Financial stability and liquidity | 16/20 | Good | The March 2026 review found financial resilience and well-capitalised banks. Geopolitical, credit and operational risks remain; other regulators share responsibility. [5] |
| Forecast accuracy and policy calibration | 3/15 | Poor | The 2021 inflation forecast missed badly. In September 2026, the RBA reported inflation pressures persisting longer than expected and raised the cash rate to 4.60%. [6, 7, 10] |
| Transparency and public communication | 6/10 | Mixed | Early rate guidance was widely read as a promise. Disclosure reforms and the September 2026 explanation of policy trade-offs improve accountability. [1, 7, 10] |
| Payments, banknotes and reform | 4/10 | Mixed | Banknotes remain secure, but the January outage means RITS will miss its annual reliability target. Surcharge reform adds transition work and price pass-through risk; realised effects need monitoring. [8, 9, 12, 13] |
Indicative overall result: 49/100. Mixed; below expectations.
Independent editorial assessment, not an official RBA rating.
Key conclusion
Including 2026 weakens the assessment: inflation remains above target, unemployment has risen and settlement reliability has suffered another avoidable disruption. Financial resilience and clearer public explanations remain strengths. The RBA should demonstrate better forecasting and operational reliability, and report surcharge reform costs and consumer outcomes.
Scoring method
Independent editorial judgement, not an official RBA rating or statistical estimate. Weights total 100; each score reflects outcomes and execution across the period. Ratings by percentage of available points: below 40% Poor; 40–69% Mixed; 70–89% Good; 90–100% Excellent. Global supply shocks, fiscal policy and private-sector behaviour also affected outcomes.
Final Thoughts
The Fed’s rate increase and rising bond yields reinforce a clear lesson: capital has a cost. Higher yields can benefit investors committing new money, while exposing weaknesses in existing long-duration assets and heavily indebted businesses.
Our response is to maintain diversification, reasonable valuations, quality cash flows and sufficient liquidity. Productivity, investment and fiscal discipline remain essential to Australia’s living standards.
Summary of major share indices
| Index | 1 Month | 52 Weeks | YTD |
|---|---|---|---|
| DJIA | +0.01% | +16.78% | +10.60% |
| Nasdaq | +1.76% | +22.91% | +9.17% |
| S&P 500 | +1.13% | +18.98% | +13.46% |
| Russel 2000 | -0.85% | +24.93% | +19.12% |
| Europe 600 Index | -0.15% | +18.08% | +9.95% |
| UK FTSE 100 Index | -0.40% | +17.82% | +8.99% |
| Hong Kong Hang Seng | -1.70% | -0.20% | -0.25% |
| Japan Nikkei 225 | +4.01% | +57.18% | +31.73% |
| China Shanghai Composite | +4.64% | +2.86% | +0.44% |
| India S&P BSE Sensex | -2.14% | -4.24% | -9.70% |
| ASX 200 (Australia) | +1.54% | +4.40% | +6.30% |
Australian dollar
| Currency | Close | 52-week range |
|---|---|---|
| AUD | 0.6992% | 0.6372-0.7278% |
Government bonds
| Bond | Close | 52-week range |
|---|---|---|
| US 3 Month Bill | 3.827% | 3.58-4.452% |
| US 10 Years Note | 4.756% | 3.923-4.77% |
| US 30 Years Bond | 5.244% | 4.521-5.339% |
| Australia 10 years | 4.938% | 4.100-5.180% |
Source: Wall Street Journal.
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Sources and Notes
[1] Federal Reserve FOMC statement, 16 September 2026 [source]
[2] RBA media conference, 11 August 2026 [source]
[3] ABS Consumer Price Index, July 2026 [source]
[4] RBA media conference, 29 September 2026 [source]
[5] Supplied September news compilation; Final Budget Outcome [source]
[6] RBA card surcharge removal FAQs [source]
[7] Supplied RBA cost report and Treasury annual-report figures, 2020–21 to 2024–25.
[8] Supplied RBA Public Charter and Five-Year Scorecard through 30 September 2026.