Balancing policy easing and persistent risks

Introduction

This October Market View looks back at September’s key developments and sets expectations for the months ahead. Global conditions improved at the margin as policy eased in the United States and services activity strengthened, while consumer demand remained firm in several economies. That support sits alongside ongoing risks: stickier inflation prints, softer labour indicators in places, and tariff‑related uncertainty. The task into year‑end is to lean into durable growth drivers while respecting pockets of volatility.

Macro overview

United States: The Federal Reserve cut its benchmark rate to a 4.00–4.25% range, delivering a 25‑basis‑point easing. Services activity improved, with ISM Services PMI lifting to 52.0 from 50.1, and retail sales rose 0.6% in August, well ahead of consensus and marking a second month of robust gains. Against that strength, job openings fell to 7.18 million and unemployment rose to about 4.3%, signalling softer labour momentum.

United Kingdom & Europe: UK retail sales volumes increased 0.6% in July, above expectations, and Germany’s ZEW Economic Sentiment index climbed to 37.3 from 34.7, well ahead of consensus. At the same time, retail sales across Europe fell 0.5% month‑on‑month, reversing June’s 0.6% gain and underscoring a fragile consumer backdrop.

Australia: August CPI rose 3.0% year‑on‑year (up from 2.8% in July and above expectations), highlighting the risk of inflation inertia and complicating the case for aggressive easing. Unemployment remained at 4.2%, with labour force detail hinting at softer hiring momentum.

Asia: Japan’s data remained uneven. Business investment has been resilient, yet factory output contracted again and retail demand was softer. In China, policy support aims to underpin activity, but property‑sector fragility still weighs on the outlook.

Asset class outlooks

Equities: Corporate profitability has remained durable through Q3, particularly in services and in sectors aligned to long‑term themes such as AI infrastructure, digitalisation, and the energy transition. Australian equities could benefit from easier policy and targeted spending, though sustained inflation would pressure valuations. Discipline remains key: prioritise balance‑sheet strength, margin resilience, and exposure to secular growth drivers.

Fixed income: Bond markets are adjusting to the easing cycle. Short‑to‑intermediate maturities continue to offer attractive income with more controlled duration risk, while investment‑grade credit remains supported by solid corporate fundamentals. High‑yield requires selectivity should global growth slow further. Cross‑market opportunities are emerging as policy paths diverge.

Alternatives & commodities: Precious metals remain useful hedges against both inflation and geopolitical risk. Infrastructure assets in renewables, energy storage, and digital networks continue to attract multi‑year capital supported by policy. Supply‑chain realignment supports renewed interest in logistics and transport infrastructure. Private markets are offering better entry points as valuations reset.

Foreign exchange: The Australian dollar is balancing competing forces—limited scope for aggressive RBA easing given inflation, set against incremental improvement in external demand. The U.S. dollar remains sensitive to evolving policy expectations.

Positioning considerations

• Lean into structural growth (AI, robotics, cybersecurity, energy infrastructure build, and manufacturing reshoring in the US) while remaining valuation‑aware.
• Maintain modest cash buffers to act on pullbacks.
• Diversify fixed income across quality and maturities; favour higher‑quality credit as the cycle matures.
• Retain inflation hedges via real assets and precious metals.
• Adjust tactically as central‑bank paths, inflation prints, and tariff developments evolve.

Base case – 78% probability

The backdrop remains constructive. Liquidity support, fiscal programs, and resilient earnings underpin a pro‑growth stance into year‑end. The Fed’s cut adds to a broader easing trend, which should support activity and valuations over the medium term. Australian equities stand to benefit from a more supportive policy mix, while global markets remain anchored by structural themes—AI adoption, energy infrastructure, and digital investment. Fixed income provides steady income and balance, with selective credit exposure attractive. Intermittent volatility is expected, but pullbacks are more likely to present opportunities than signal a sustained downshift.

Bear case – 8% probability

Key risks include softer global consumer demand, persistent tariff‑driven inflation, and renewed pressure in parts of the financial system. If liquidity support stalls or policy makers are forced to tighten despite slower growth, risk assets could face meaningful headwinds. China’s property‑sector fragility remains a watchpoint with spillover risks for Australia’s resource exports. A resurgence of geopolitical stress or a major credit event could also trigger sharper market dislocations. In such scenarios, a defensive tilt—elevated cash, increased exposure to resilient sectors such as healthcare and staples, and reduced cyclical exposure—would be prudent.

Bull case – 14% probability

An upside scenario would feature moderating inflation, contained tariff effects, and fiscal initiatives that accelerate growth. Productivity gains from faster technology adoption could broaden earnings momentum across sectors and regions. If central banks maintain accommodative settings, markets could see a renewed upswing favouring cyclicals and reducing the need for larger cash buffers. In Australia, targeted spending and earlier easing would reinforce a stronger domestic backdrop.

Closing perspective

September’s data offered a supportive hand‑off into the final quarter: policy easing in the U.S., firmer services activity, and steady consumer demand in several economies. Set against that is persistent inflation, uneven labour signals, and tariff uncertainty. The medium‑term case for growth assets remains in place, but success hinges on agility—anchoring portfolios in durable themes while adjusting quickly as the macro picture shifts.

This publication is prepared by Akambo Pty Ltd (ABN 16 123 078 900) AFSL 322056.

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo’s Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.

Past performance is not a reliable guide to future returns.