June Market Update

June market view: the energy shock moves into the inflation data

Looking back at May’s dataflow and what it may mean for portfolio positioning.

Introduction

May combined wild swings in oil with stubborn inflation. More than ten weeks into the conflict, the IEA described an unprecedented supply shock, with cumulative losses from Gulf producers above one billion barrels. Prices moved sharply on shifting hopes for a US-Iran deal, while April’s inflation data showed how much of the shock had already reached consumers: US CPI and PCE both hit 3.8%, and the RBA now expects headline inflation to peak at 4.8%.

Some supports held. The RBA signalled room to pause after its third hike, US core PCE rose less than expected, the US-China tariff truce stayed in place, and SpaceX’s IPO filing showed primary markets reopening. The bond market was less forgiving, with the US 30-year yield reaching its highest level since 2007.

Oil swung on every headline in May, but the inflation it had already caused was harder to move.

What moved the dial

Supportive signals

• The RBA delivered its third consecutive 25 basis point hike to 35%, but the post-meeting message did the real work. Governor Bullock signalled the Board now has scope to pause, and three of the four major banks moved to forecast rates on hold for the rest of 2026, with Westpac still calling for further hikes.
• US core PCE rose just 2% in April, below the 0.3% consensus and slower than March, even as headline PCE hit 3.8% year on year, its highest since May 2023. With the Fed on hold, a softer underlying pulse is constructive for duration and rate-sensitive equities.
• China held benchmark lending rates unchanged for a 12th consecutive month. Resilient first-quarter growth reduced the urgency for stimulus, fading deflationary pressure removed a headwind to corporate pricing power, and policymakers are preserving firepower for when it is needed.
• The US-China tariff truce continued to hold. Extended twice and now running to November 2026, it keeps effective tariff rates well below the Liberation Day peaks and preserves a more predictable backdrop for supply chains and business investment.
• The IPO market reopened at scale. SpaceX filed its S-1 on 20 May targeting a $1.75 trillion valuation, which would be the largest public offering on record, with OpenAI also signalling a listing, pointing to a pickup in activity in the second half.

Watch-outs

• The Strait of Hormuz remains the world’s most consequential chokepoint. The IEA’s May report put cumulative supply losses from Gulf producers above one billion barrels, with more than 14 million barrels a day shut in, and described an unprecedented supply shock with inventories drawing at a record pace. Dated Brent, the physical benchmark, set a record of $144 in April.
• Australia’s inflation problem runs deeper than fuel. The RBA’s May Statement forecast headline inflation peaking at 8% in mid-2026 and underlying inflation staying above 3% until mid-2027. With households absorbing three rate hikes, housing costs up 6.5% and electricity 25% higher year on year, that is a material drag on confidence.
• US inflation reaccelerated to a three-year high. April CPI rose 0.6% for the month, lifting the annual rate to 8%, with gasoline up 28.4% year on year. Real average hourly wages turned negative, and markets priced out Fed cuts through at least the end of 2027.
• The US 30-year Treasury yield rose to its highest level since 2007, as inflation worries tied to the war and concerns about US government finances pushed investors out of long bonds, adding momentum to the bear steepener that has been building through 2026.
• Eurozone stagflation deepened. The ECB held at 2% with inflation at 3% and first-quarter growth of just 0.8% year on year, and Deutsche Bank expects rate hikes in June and September. Europe faces the most difficult policy mix among the major economies.

Macro overview

May’s defining feature was the gap between oil prices and the inflation they had already caused. Brent futures swung on every headline about a US-Iran deal and ended the month almost 19% lower, but the IEA’s data showed a physical market still in deficit, with inventories drawing at a record pace. April’s inflation figures captured the earlier spike: US CPI and PCE both reached 3.8%, and the RBA forecast a 4.8% peak for headline inflation.

Underneath, the pulse had not broadened. US core PCE rose just 0.2% for the month, China is choosing patience over stimulus, and the RBA has signalled it can pause. The pressure point was the bond market, where the US 30-year yield reached its highest level since 2007, while in Europe weak growth and 3% inflation had forecasters expecting rate hikes rather than cuts. Policymakers retain some room to manoeuvre.

Asset class outlooks

Equities: Signs that the RBA’s terminal rate may be in place, and a softer US core PCE print, are constructive for rate-sensitive equities. The reopening of primary markets, led by SpaceX’s filing and a likely OpenAI listing, signals confidence in the structural growth themes we favour, including AI, manufacturing and energy infrastructure. Against that, share market valuations are already elevated, and we remain tilted toward companies with strong structural growth that are less exposed to supply disruption.

Fixed income: The softer core PCE print is constructive for duration, but the long end remains under pressure, with the US 30-year at its highest since 2007 and the curve steepening. Markets have priced out Fed cuts through at least the end of 2027, and until the Fed and RBA signal a greater focus on supporting growth, we remain cautious on the outlook for interest rates.

Alternatives and real assets: Energy remains the dominant variable. With the global oil market in deficit and inventories drawing at a record pace, a continued blockade would intensify pressure on prices and on supplies of essential goods such as fertiliser and sulphuric acid.

Implications for asset allocation and portfolio positioning

A constructive base case does not imply a smooth ride. The supply shock is still working through the inflation data, and the path of oil depends on whether the blockade continues.

Practical implications:

• Keep the tilt toward companies with strong structural growth that are less exposed to supply disruption.
• Stay cautious on interest rates until the Fed and RBA signal a greater focus on supporting growth over controlling inflation.
• Watch liquidity. Higher oil prices pull money out of the financial system, so continued support from China and the US Treasury matters for activity and commodity demand.
• Be mindful of valuations. With share markets already elevated, a pullback in US consumer spending is the key risk in our bear case.

Scenarios and probabilities

Scenario probabilities reflect our current assessment and are reviewed as new data emerges.

Base case: 72% probability

The closure of the Strait of Hormuz has pushed energy prices higher and disrupted the supply of essential goods such as fertiliser and sulphuric acid. If the blockade continues, these pressures are likely to intensify, and we have tilted portfolios toward companies with strong structural growth that are less exposed to supply disruption. We entered this period from a position of strength, with healthy corporate profits, supportive government spending, relatively easy borrowing conditions and plentiful oil supply before the conflict.

Inflation had been slowing before the conflict, but rising energy prices have pushed expectations higher. If it proves persistent, the greater risk is a slowdown in consumer spending and demand destruction. Most central banks cut rates last year and those benefits are still flowing through, but until the Fed and the RBA signal a greater focus on supporting growth over controlling inflation, we remain cautious on the outlook for interest rates. Liquidity also matters: higher oil prices pull money out of the financial system, though continued support from China and the US Treasury underpins activity and commodity demand.

Looking further ahead, structural growth themes remain intact, with investment in AI, domestic manufacturing and energy infrastructure expected to broaden profit growth. Resilient earnings, government spending support and the lagged effects of last year’s rate cuts provide a reasonable foundation for markets, though within a more volatile environment than recent years.

Bear case: 14% probability

The key risk is a meaningful pullback in consumer spending, particularly in the United States, the primary engine of global growth. If households tighten their belts while valuations are elevated, and inflation persists or Fed support fades, both profit margins and market prices could fall together. The longer the Iran conflict continues, the more likely this becomes. A sustained oil spike of 50 to 100% above recent levels would feed straight into prices and squeeze demand, producing the kind of stagflation that is historically one of the hardest environments for both shares and bonds, with central banks unable to cut and high government debt limiting fiscal support.

China adds a further layer of risk. If its property sector weakens and stimulus fails to restore confidence, Chinese growth could slow materially, directly affecting Australian national income and earnings given our reliance on Chinese demand. In this scenario a more defensive approach would be warranted, with higher cash holdings, reduced share market exposure and a tilt toward healthcare, consumer staples and utilities.

Bull case: 14% probability

In the most positive scenario the Iran conflict ends relatively quickly and a recovery follows. Falling energy prices, easing supply pressures and improving diplomatic relations support stronger growth while keeping inflation in check. If trade disputes also resolve, profits could grow strongly as input costs fall and consumer spending holds, with continued adoption of AI and other productivity-enhancing technologies lifting output across industries without the widespread job losses many fear.

Government spending would add further support, and strong household and business balance sheets leave both well positioned to respond. For Australia, the rate cuts of 2025 and relatively low public debt give policymakers room to act. If interest rates stay below inflation, conditions remain supportive for asset prices, and a growth-oriented portfolio with low cash and more exposure to industrials, materials and financials would be well placed.

Closing perspective

May left the energy shock unresolved. Oil swung on every headline about a US-Iran deal, but the inflation already in the system was harder to shift, with US CPI and PCE at 3.8%, the RBA forecasting a 4.8% peak and the US 30-year yield at its highest since 2007. The supports are still there: US core inflation has not broken higher, China is holding policy in reserve, the RBA can pause and primary markets are reopening. We remain constructive, tilted toward structural growth and cautious on rates while the blockade persists.

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.