Economy and Markets: Our Read
The months ahead are likely to be bumpier than we've grown used to - not a forecast of disaster - just an honest read of the terrain. Markets move in cycles, and after a long stretch of relative calm, a return to volatility isn't a malfunction. It's the price of admission for the returns that come with staying invested.
So expect a choppier ride, but don't mistake turbulence for trouble. The investors who do best in stretches like this are rarely the ones who react fastest - they're the ones who react least. A steady hand beats a quick one nearly every time.
That said, there's one group this moment speaks to a little more directly. If you're closer to drawing on your portfolio than building it, now is a sensible time to revisit how much risk you're actually carrying - not because the sky is falling, but because the maths of recovery changes as you approach retirement. When you have decades ahead, a downturn is a discount. When you're near or in retirement, it's a headwind you'd rather not be leaning into. If that's you, it's worth a conversation.
With that framing in mind, here's how we're reading the market right now...
Interest rates: Australia zigs while the world zags
The cash rate sits at 4.35%, held steady at the August meeting after three increases earlier in the year. That understates how unusual the local picture has become. Headline inflation eased to 3.5% in the year to July (down from 3.8%), but the trimmed mean - the RBA's preferred read on underlying pressure - stubbornly parked itself at 3.6%, still comfortably north of the 2-3% target band.
Then the June-quarter GDP landed hotter than expected: the economy grew 0.4% for the quarter and 2.1% year-on-year, beating forecasts of 0.3% and 1.8% respectively. Resilient growth is normally good news, but with inflation already sticky, it reads to markets as a reason to tighten further. Money markets responded by lifting the odds of a September hike to roughly 57-58%, with a move to 4.60% now more than fully priced by November.
The big four don't agree with each other, which tells you how genuinely line-ball this is:
NAB - expects a 25bp hike in September
ANZ and CBA - see the next hike landing in November
Westpac - thinks the RBA holds for the rest of 2026
Contrast that with the US, where the debate is about whether the Fed holds or cuts, and you get the core tension driving Australian markets right now. Fed Governor Waller has signalled he could back a September hold if inflation cools - a dovish tilt that's been weakening the US dollar and, by extension, giving the Aussie room to run.
What it means:
Anyone with a mortgage, a margin loan, or floating-rate exposure should plan for "higher for longer" as the base case, not a rate-cut rescue. Cuts are increasingly a 2027 story.
Shares: a two-speed market
The ASX 200 is trading around 8,940, having pulled back roughly 3% over the past month from its early-August record high of 9,296. It's been three straight down sessions into early September, dragged by Wall Street's own wobble as renewed Middle East conflict lifted oil and reignited inflation fears. Zoom out, though, and the index is still marginally ahead of where it sat a year ago, and August closed out a fifth consecutive monthly gain before the recent softness.
The real story is underneath the headline number - a pronounced "long resources, short banks" trade:
Miners have been the engine. Copper consolidating near record highs and iron ore flirting with the psychologically important US$100 mark have powered BHP, Rio and the broader materials complex.
Banks took a beating. Financials fell around 10.5% in August, though they've clawed some back on short-covering.
Reporting season delivered a solid earnings beat driven by cost control rather than demand. In plain English: management teams are protecting margins by squeezing costs, not because customers are spending freely. That's a "divided economy" signature - housing-facing activity is weakening while business investment holds firm.
What it means:
Portfolio positioning matters a little more than usual here; being in the right sectors has mattered more than simply being in the market.
The Australian dollar: quietly having a good year
The AUD is trading around US$0.71-0.72, near its highest levels since early June and up close to 10% over the past twelve months. Two forces are pushing the same way:
A softer US dollar, as the Fed leans dovish and Treasury markets price in holds or cuts.
A hawkish RBA, where the prospect of rising Australian rates makes the currency more attractive to hold.
Add firm commodity prices and you have a genuinely supportive backdrop. UBS has the Aussie reaching 0.73 by late 2026 and 0.76 by mid-2027; broader forecast surveys are more measured but still lean bullish, clustering around 0.72-0.73 into year-end.
What it means:
A stronger dollar is a tailwind for anyone buying imported goods, travelling, or holding unhedged international assets translated back to AUD is worth less - the classic hedging trade-off. It's a genuine headache for exporters and for the tourism and education sectors. Worth revisiting hedging settings on offshore holdings if you haven't lately.
Commodities: the ballast holding it all up
Iron ore - the backbone of the national accounts - is trading around US$97-98/tonne (62% Fe), stuck in the tight US$93-100 band that's held since June. The market is caught between two Chinese realities: import volumes remain strong (up ~6% year-on-year over the first seven months), while crude steel output slumped to its weakest July since 2017 as construction demand softens.
Copper is consolidating just below record highs, and coking coal has been the surprise mover of the season on the back of Chinese supply disruptions. Energy is the wild card: with conflict flaring around the Strait of Hormuz and Iran, Brent has held in the mid-US$90s, keeping upward pressure on fuel, freight and - ultimately - inflation. That last point loops directly back to the RBA's dilemma.
What it means:
Australia's terms of trade remain a national shock-absorber. Firm commodity prices are a big part of why the economy keeps surprising to the upside - and, awkwardly, why the RBA can't relax.
Geopolitical risk: the energy chokepoint that won't clear
The single biggest external risk right now runs through a 21-nautical-mile stretch of water. The Strait of Hormuz crisishas now dragged on for six months - since late February - following US and Israeli strikes on Iran and Iranian retaliation across the Gulf. This isn't the usual proxy-war-and-sanctions choreography; it's direct state-on-state confrontation, a threshold the region hadn't crossed since the Iran-Iraq war of the 1980s. Roughly a fifth of the world's oil moves through that strait, which is why every flare-up shows up almost immediately in the price at the bowser.
The picture as it stands:
Oil has repriced structurally higher. Brent is holding in the mid-US$90s, having spiked above US$100 at the worst moments. Analysts are increasingly modelling a persistent risk premium rather than a quick spike-and-fade.
It could grind on into 2027. Because Iranian barrels are still leaking through the strait, neither side feels acute pressure to settle - the perverse result being a longer, lower-intensity conflict rather than a sharp resolution.
Two chokepoints, not one. Houthi attacks on Saudi-linked shipping through the Bab el-Mandeb strait have created what traders are calling "dual-chokepoint risk" - stress at one passage keeps the premium in place even when the other calms down.
For Australia, the transmission is indirect but real. We're not a big oil importer relative to our own energy exports - indeed, high global gas prices are a tailwind for our LNG exporters - but the flow-through to petrol, diesel, freight and insurance costs feeds straight into domestic inflation. And that, as everything above keeps circling back to, is precisely what's keeping the RBA's finger on the trigger.
What it means:
This is the risk most likely to hijack the local rate story. A genuine closure of the strait would be a stagflationary shock - higher prices and slower growth - which is the hardest environment for a central bank, and for a portfolio, to navigate.
The US midterms: gridlock as the base case
On 3 November, Americans vote on all 435 House seats, 35 Senate seats and 39 governorships - the first midterms of Trump's non-consecutive second term. History is unkind to the party in power at midterms, and the current numbers fit the pattern: the President's approval is sitting in the high 30s, and Democrats have led the generic congressional ballot by around 6–7 points through the northern summer.
Where the models land as of early September:
House - leaning Democratic. Democrats need to flip just three seats, and forecasters have had them as clear favourites (some models around an 85% chance) to take the chamber.
Senate - genuinely close, Republicans favoured to hold. Republicans start from a 53-47 edge and are mostly playing defence. Several models have it on a knife's edge - even 50/50 with the Vice-Presidential tiebreaker keeping Republican control.
The most probable outcome - a Democratic House and a Republican Senate - means divided government and legislative gridlock for the back half of Trump's term. Markets, counterintuitively, often don't mind this. A split Congress makes sweeping new legislation hard to pass, which reduces fiscal-policy volatility. It would also act as a brake on the more expansive parts of the administration's agenda.
For Australian investors, the channels to watch are trade and tariffs (a Democratic House could constrain the tariff agenda that's rattled global supply chains), the US fiscal trajectory (deficit and debt concerns have already been pushing up Treasury yields - a live driver of the weaker US dollar that's lifted the Aussie), and plain old volatility around the event itself. Contested results or a drawn-out count would be the scenario that genuinely unsettles markets.
What it means:
Don't position your portfolio for an election result - the base case is gridlock, which is more of a known quantity than a shock. The tail risk isn't who wins; it's a disputed or messy outcome that injects uncertainty at a moment when markets are already jumpy about energy and rates.
The threads that tie it all together...
Four forces are doing most of the work right now, and they reinforce each other:
Sticky inflation + resilient growth → the RBA stays hawkish → rates higher for longer.
Middle East energy shock → oil and freight costs up → more inflation pressure → the hawkish case gets stronger.
Dovish Fed vs. hawkish RBA → a wider rate gap in Australia's favour → a firmer Aussie dollar.
US political uncertainty → midterm gridlock as the base case, with the real risk sitting in the tails (a messy result, a tariff fight, a fresh energy escalation).
The risk worth watching is that the same forces holding the economy up are exactly the ones keeping rates elevated. A hotter economy isn't buying relief - it's buying another rate rise. And the two big external wildcards - the Gulf and the US ballot box - both feed the same inflation anxiety that's driving the local story.
What to keep an eye on...
29 September - RBA decision. The single biggest local event on the calendar. A hike is close to a coin-flip.
24 September - August labour force data. A strong jobs print would harden the case for tightening.
30 September - August CPI. Lands the day after the RBA meets, but sets the tone for the November decision.
US inflation and the Fed. The AUD story is, right now, as much a US-dollar story as an Australian one.
The Strait of Hormuz. Energy prices are the swing factor for the whole inflation picture - and a full closure would be a stagflationary shock.
3 November - US midterms. Gridlock is the likely result and largely priced; a disputed or messy outcome is the scenario that would actually move markets.
Enjoy your week!
Rick Maggi CFP, Westmount Financial, Financial Advisor, Perth
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Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.