Monthly Economic & Investment Review – January 2026

Executive Summary
January marked a pivotal shift in the Australian policy cycle. Following stronger-than-expected inflation data in December, the Reserve Bank of Australia (RBA) raised the official cash rate, signalling renewed determination to prevent inflation expectations from becoming entrenched. Headline CPI printed at 3.8% year-on-year (monthly series), while the quarterly trimmed mean rose to 3.4% — materially above the 2–3% target band.

Australian equities nevertheless delivered solid gains, with the S&P/ASX 200 Accumulation Index rising 1.8%, led by Energy and Materials. Global markets were mixed, with US equities advancing modestly amid robust Q4 earnings, while developed market indices (AUD terms) were softer. Commodities surged early in the month — particularly oil and gold — before heightened volatility following the nomination of Kevin Warsh as incoming US Federal Reserve Chair.

Bond yields rose in both Australia and the US, reflecting inflation persistence and recalibration of policy expectations. The global economy remains resilient, but the inflation path — particularly domestically — is now the dominant macro driver entering 2026.

Asset Class Monthly Performance
Australia

The S&P/ASX 200 Accumulation Index rose 1.8% in January, with five of eleven sectors closing higher. Energy (+10.6%) and Materials (+9.5%) led gains as uranium and oil prices surged. Small caps outperformed, rising 2.7%, extending their strong 12-month run.

Information Technology (-9.4%) was the largest detractor, reflecting ongoing global rotation away from long-duration growth sectors. A-REITs declined 2.7%, pressured by rising domestic yield expectations following the inflation surprise.

Reporting season has delivered solid aggregate earnings surprises so far, particularly among banks and resource names. However, result-day volatility has increased, suggesting elevated positioning and less tolerance for earnings misses. Poor results tend to come out later in the season and so we wait till the end of February before we can make a better-informed judgement.

Global Developed Equities

Global markets were mixed. The MSCI World Index (AUD) declined 2.7%, while the S&P 500 rose 1.4% (USD terms). US Q4 earnings growth is tracking above 13% year-on-year — materially stronger than expected at quarter end — with revenue growth near 9%.

Sector leadership broadened into value and energy, while software and growth stocks experienced renewed selling pressure amid concerns around AI disruption and valuation sustainability. Japanese equities outperformed strongly, supported by fiscal stimulus and corporate governance reform momentum.

Emerging Markets

Emerging market equities rose 3.6% (AUD), outperforming developed peers. Supportive monetary conditions, stabilising commodity prices and relatively attractive valuations underpin the constructive outlook. China’s manufacturing PMI slipped back below expansion territory (49.3), highlighting ongoing structural fragility, though targeted stimulus continues.

Listed Real Assets

A-REITs fell 2.7% as higher domestic rate expectations weighed on long-duration assets. In contrast, global REITs rose 2.8% (AUD hedged), while global infrastructure gained 3.8%, benefiting from defensive flows and stable cash flow characteristics.

Fixed Income

January saw a meaningful repricing of bond markets. In Australia, the 10-year government bond yield rose 7 basis points to 4.81%, reflecting both the inflation surprise and the RBA’s subsequent rate increase. The December quarterly CPI rose 0.6% QoQ (3.6% YoY), while the trimmed mean printed at 3.4% YoY — above both consensus and the RBA’s prior forecasts. Inflation breadth has expanded, with approximately 60% of CPI components running above 2.5% annualised.

In the US, the 10-year Treasury yield rose 16 basis points to 4.26% as the Federal Reserve held rates steady but adopted more upbeat economic language. Markets now price a gradual and limited easing cycle in 2026.

Credit spreads remain contained. Australian investment-grade spreads tightened to their lowest levels since 2022, partially offsetting higher sovereign yields and supporting corporate borrowing conditions.

Commodities & Currencies

Commodities delivered strong returns. Oil rose between 13–16% amid geopolitical tensions and supply concerns. Gold surged above US$5,500/oz mid-month before experiencing sharp volatility following the Fed Chair announcement. Silver saw particularly pronounced price swings.

The Australian dollar appreciated 4.4% to US$0.6964, supported by stronger-than-expected labour data and rising domestic rate expectations. The unemployment rate declined to 4.1%, reinforcing the narrative of economic resilience.

Global Macroeconomic and Corporate Earnings Overview
The global economy continues to demonstrate resilience. In the United States, payrolls rose 130,000 in January — well above expectations — and unemployment fell to 4.3%. Core CPI moderated to 2.5% year-on-year, the lowest since 2021. The Employment Cost Index rose just 0.7% in Q4, consistent with gradually easing labour cost pressures.

Corporate earnings remain robust. Approximately three-quarters of S&P 500 companies have reported, with aggregate earnings exceeding expectations by a healthy margin. Revenue growth remains strong, though retail sales data and consumer confidence surveys suggest spending momentum may normalise.

In Australia, macro conditions remain firm. Employment growth exceeded forecasts and dwelling finance commitments rose 9.5% quarter-on-quarter in Q4. However, inflation persistence — particularly in services, housing and electricity — was the defining development, ultimately prompting the RBA’s rate hike.

The policy challenge domestically is clear: growth remains resilient, but inflation remains above target and broad-based.

Central Bank Interest Rate Policy
Policy divergence has become more pronounced. The US Federal Reserve held its policy rate at 3.50%–3.75%, with Chair Powell describing the stance as broadly neutral. Markets now price a modest easing path, with limited cuts anticipated through 2026. The nomination of Kevin Warsh as the next Fed Chair was interpreted as moderately hawkish, supporting the US dollar and contributing to volatility in precious metals.

In contrast, the Reserve Bank of Australia raised the official cash rate in January from 3.60% to 3.85%, following stronger-than-expected inflation data. The decision reflects the Bank’s commitment to protecting its inflation credibility and anchoring medium-term expectations. Cash rate futures now price a higher-for-longer domestic rate profile, with further tightening possible should services inflation remain sticky.

Outlook
We enter 2026 in a more complex but still constructive environment. Globally, economic momentum remains intact and earnings growth is solid. However, valuation dispersion is increasing and leadership is broadening beyond US mega-cap technology. Japan and emerging markets continue to offer compelling relative opportunities.

For Australian investors, the rate hike materially shifts the domestic investment landscape. Inflation remains elevated and broad-based, and tighter financial conditions are likely to moderate household consumption over time. Equity sector performance may favour value, resources and income-generating exposures over long-duration growth segments which tend to underperform during periods of rising interest rates.

Bond markets may remain volatile as the RBA seeks to balance growth resilience against inflation credibility. Credit fundamentals remain stable, and infrastructure and real assets continue to provide portfolio diversification benefits.

Overall, we remain cautiously constructive on risk assets but expect returns to moderate as valuations are stretched and policy uncertainty persists. In this environment, disciplined asset allocation, global diversification and quality income exposure remain central to preserving and compounding wealth through 2026.