Inflation surprises, China stabilises, and liquidity stays central

Introduction

Markets have started 2026 on a cautiously positive footing, but the mix of signals is uneven. Australia’s inflation surprised higher, the U.S. data leaned firmer in parts of manufacturing, and China showed incremental stabilisation in industrial activity while services remained softer. With positioning already optimistic, it wouldn’t take much to trigger sharper swings in risk assets. The more useful question is where the pressure points sit, and what would change the balance of probabilities.

What moved the dial

Supportive signals

• NAB business confidence lifted to 3 (from 2) – a modest improvement in local sentiment.
• U.S. durable goods orders printed +5.3% (vs prior –2.1%) – firmer manufacturing momentum.
• China’s official manufacturing PMI rose to 50.1, ending an eight-month contraction.
• President Xi signalled “more proactive macro policies” for 2026, reinforcing expectations for further pro-growth measures.

Watch-outs

• Australian CPI surprised higher at ~3.8% y/y, with markets lifting the implied probability of an RBA hike in February to 70% (from 56% previously).
• Eurozone manufacturing stayed in contraction at ~48.8, and German IFO readings missed expectations (Business Climate 87.6 vs 89.5 expected).
• China’s services PMI expanded at the slowest pace in six months, highlighting soft domestic demand.

Macro overview

The clearest near-term tension is in Australia: inflation re-accelerated relative to expectations, and the market response has been immediate. A higher implied chance of RBA tightening matters because it can lift bond yields, support the currency at the margin, and weigh on rate-sensitive valuation multiples. It also raises the hurdle for “easy upside” in domestic risk assets, particularly if growth doesn’t re-accelerate at the same time.

In the U.S., the tone is more balanced. Durable goods strength points to healthier capex and manufacturing momentum than markets had been braced for. At the same time, stronger jobs outcomes (relative to expectations) prompted a re-pricing of Fed rate expectations. That combination is a familiar trade-off: less help from future cuts, but better underlying activity.

China remains the key swing factor for global cyclicality. The RatingDog manufacturing PMI returning above 50 is meaningful after a prolonged contraction, and industrial profits were described as stabilising into late December. At the same time, services momentum has softened, which matters because durable recoveries typically need domestic demand to broaden beyond production. The policy signal from Beijing is supportive, but still described as piecemeal, which argues for measured optimism rather than a straight-line recovery call.

Europe continues to look like the laggard. Manufacturing remains in contraction, and German survey data stayed cautious. That backdrop limits the extent to which global growth can broaden without a stronger hand-off from the U.S. and Asia.

Asset class outlooks

Equities: The base case is clear: profits are still described as solid, governments are still spending, and financial conditions remain loose enough to support activity. That mix typically keeps a medium-term bid under equities. The catch is positioning. When investors are heavily exposed to risk assets, the market’s tolerance for negative surprises drops, and short, sharp drawdowns become more likely even if the medium-term trend remains constructive.

What would improve the equity set-up from here is not simply more optimism, but better breadth. Structural tailwinds (AI and energy infrastructure) can support earnings across multiple sectors over time, and lower rates should help broaden profit growth across industries. If China’s manufacturing improvement becomes durable and is eventually matched by stronger services demand, that would be an additional tailwind for cyclicals and commodity-linked markets.

Fixed income: For rates, Australia is the immediate focal point. A CPI surprise that lifts the probability of RBA tightening tends to steepen the policy debate quickly. In practice, that can mean more volatility at the front end of the curve and more sensitivity to each inflation print. In the U.S., the rate narrative is framed as “tough choices”: cuts can support growth but risk weaker currencies and higher yields; tighter policy can slow activity but contain inflation. The practical implication is that bond markets can swing between growth and inflation narratives quickly, even when the underlying economy is “okay.”

Alternatives and real assets: One of the more actionable points is the emphasis on liquidity and refinancing needs through 2026. Large volumes of new and refinanced debt increase the importance of ongoing cash and credit availability in the system. In that context, inflation hedges remain important, with precious metals highlighted as a meaningful portfolio component. That’s not a short-term trade; it’s a portfolio design choice in a world where liquidity conditions can drive asset prices as much as fundamentals.

FX: AUD has competing forces in this set-up. Improving domestic business confidence is supportive on the margin, but the bigger driver is the inflation surprise and what it implies for RBA policy. Meanwhile, China’s industrial stabilisation and manufacturing rebound can matter for commodity-linked sentiment, but the weaker services PMI tempers the “all clear” signal on domestic demand. Net-net, currency volatility is more likely to be driven by relative policy expectations than by a smooth growth narrative.

Positioning considerations

The base case keeps a growth bias, but it’s a specific kind of growth bias: constructive over the medium term, and opportunistic in the short term. The intent is to accept volatility as the price of admission and use pullbacks to add exposure to areas linked to economic and structural growth, while keeping enough flexibility to pivot defensively if the bear case starts to build.

In practice, three ideas follow:

1. don’t confuse a positive base case with a low-volatility environment (crowding can still bite),
2. treat liquidity as a first-order driver in 2026 given the scale of refinancing needs, and
3. keep inflation protection on the table because inflation outside China is expected to run higher than the pre-pandemic decade.

Base case – 79%

Markets begin 2026 cautiously positive: solid profits, ongoing government spending, and supportive financial conditions. The risk is not that the medium-term trend breaks immediately, but that short-term volatility spikes because investor confidence is high and risk exposure is heavy. Inflation is expected to remain higher than the pre-pandemic decade (outside China), and tariffs or fiscal impulse could still create upside inflation surprises. The view remains constructive on global growth and risk assets, supported by structural trends (AI and energy infrastructure) and the lagged benefit of prior central bank cuts.

Bear case – 8%

The downside path is led by weaker consumer spending (especially if the U.S. slows), higher inflation, or reduced liquidity support. That combination pressures earnings and valuations at the same time. Financial system stress and rising sovereign debt concerns could lift yields and tighten lending. China’s property weakness remains a key tail risk, especially if policy support fails to stabilise confidence, with flow-through effects for resource-linked economies. Under this scenario, the response is a defensive tilt: more cash, lower equity exposure, and emphasis on resilient sectors such as healthcare, staples, and utilities.

Bull case – 13%

The upside path features faster growth as uncertainty fades, supply chains normalise, productivity improves, and inflation falls. Technology adoption (including advanced AI) boosts efficiency and profits. Governments increase spending and deregulation/fiscal stimulus adds momentum, with growth outpacing inflation. In Australia, spending and the earlier start to cuts in 2025 support domestic activity, and stronger balance sheets help the recovery broaden. In this scenario, a low cash stance is maintained and exposure increases to cyclical areas that benefit most from stronger growth.

Closing perspective

January’s message is simple: the medium-term backdrop is constructive, but the path won’t be smooth. Australia’s inflation surprise is the near-term pressure point, Europe is still soft, and China is improving unevenly. With heavy risk positioning and large refinancing needs ahead, liquidity and inflation dynamics can move markets quickly. The best outcomes come from staying flexible and using volatility deliberately, not reacting to it.

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.

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