Executive Summary

Last week, Australian financial markets and economic sentiment were shaped by persistent domestic inflation, a cautious stance from the Reserve Bank of Australia (RBA) and mounting global headwinds. The RBA held the cash rate steady at 3.60% in October, reinforcing expectations that rates will remain “higher for longer,” with most major banks forecasting the first cut no earlier than February June 2026.

Global Context

As of 1 November 2025, Australian equities are influenced by a mix of global macroeconomic and geopolitical forces with significant impacts on performance and earnings across sectors.

The U.S. Federal Reserve has paused its tightening cycle, holding the federal funds rate at 5.25%–5.50% after its October 2025 meeting. U.S. CPI inflation has eased to 3.1% year-on-year, still above the 2% target. This “higher-for-longer” stance has supported U.S. dollar strength and pushed AUD/USD down toward ~0.64. In turn, global funding costs remain elevated, weighing on Australian growth stocks and increasing refinancing risk for firms with U.S. dollar-denominated liabilities.

The U.S. may see its first population decline in 2025, driven by negative net immigration despite more births than deaths a reversal fueled by restrictive immigration policies. This shift threatens labour force growth, especially in critical sectors like agriculture, construction, and healthcare, where immigrants make up a large share of workers. Long-term, it could shrink the under-18 population by 14% by 2035, worsening demographic imbalances as the elderly population grows, straining pensions and healthcare. Reduced immigration may also dampen innovation immigrants contribute disproportionately to Nobel Prizes and high-value startups and could increase housing costs by limiting construction labour.

China’s Q3 2025 GDP growth printed 4.6% year-on-year — slightly below consensus — with its property sector still weak and consumer demand subdued. Given that China absorbs roughly 30% of Australia’s total exports, slower Chinese demand is directly relevant for the large miners (BHP, Rio Tinto, Fortescue) that dominate the materials-heavy ASX 200. While infrastructure and manufacturing investment rose modestly (1.1% and 4%, respectively), overall non-property investment grew by just 3%. The weakness reflects soft consumer demand, trade policy uncertainty, and excess industrial capacity.

China's Manufacturing Purchasing Managers' Index (PMI) fell to 49.0, marking its third consecutive decline and remaining below the 50.0 threshold that indicates sector contraction, signalling persistent economic challenges. Corporate managers use PMI data to guide production and inventory decisions, while suppliers rely on it to forecast customer demand. Investors also monitor the PMI as a leading indicator of broader economic trends, including GDP growth, industrial output, and employment shifts.

Japan’s Nikkei 225 broke through 50,000 for the first time in history. The move was powered by continued corporate governance upgrades, strong September-quarter results from tech and industrials, and a weak yen (around ¥150–¥155 per USD) that padded earnings for exporters such as Toyota and Sony. Despite modest rate hikes, sustained foreign investment inflows and the Bank of Japan’s still-accommodative monetary policy further supported valuations. The index’s rise past 40,000 in early 2024 and now 50,000 has triggered momentum-driven buying from retail and institutional investors.

Geopolitics adds additional complexity

In the Taiwan Strait, heightened tensions emerged in October 2025 as China conducted large-scale military drills near Taiwan, coinciding with U.S. arms sales to the island and triggering sharp reactions in semiconductor markets due to Taiwan’s dominant role in advanced chip production—TSMC alone manufactures roughly 90% of the world’s most advanced chips. These geopolitical flashpoints collectively pose indirect risks for Australian tech exporters and rare earths producers through U.S.–China strategic friction. At the same time, the ongoing Middle East conflict continues to inject upside volatility into energy prices and global risk sentiment, adding further uncertainty for Australian equities heading into year-end.

Australian Economic Indicators

Below is a summary of the key economic developments in the Australian market. Please note that some figures are based on the most recent official data releases available as of late October 2025, as national statistical agencies generally publish data with a short lag.

1-Current RBA Cash Rate: 3.60% (unchanged at the October 2025 meeting)

The Reserve Bank of Australia (RBA) has paused its tightening cycle but remains vigilant about persistent inflationary pressures. Its forward guidance indicates that rates are likely to remain elevated into early 2026.

While the RBA's Monetary Policy and Payments System Boards have other meetings scheduled for November 3–4, the question on everyone's mind is when a rate cut will come. No one can say with certainty, but economists' forecasts guide us. ANZ thinks a February cut is "plausible", though it cautions it could take longer. CBA does not nominate a timing for the next cut, saying instead that rates will likely remain unchanged "for a prolonged period". NAB expects the first cut in the June quarter. Westpac's base case is February, but it stresses this is "far from certain" and says it is actively reassessing its cash rate outlook.

Graph of the Cash Rate Target

2-Inflation: Latest CPI/PPI Data

The headline CPI was 143.6, reflecting a 1.3% quarter-on-quarter increase. On an annual basis, CPI was up 3.2% over the twelve months to September 2025.

The largest contributors to quarterly inflation were housing, which rose 2.5%, followed by recreation and culture at 1.9%, and transport, which increased by 1.2%.

Overall, the September quarter confirmed that price pressures remain broad-based, with core domestic categories particularly housing continuing to exert upward pressure on consumer prices.

3- Australian Producer Price Index (PPI) – Final Demand (Excluding Exports)

Producer prices for final demand rose 1.0% in the September quarter 2025, bringing the yearly increase to 3.5%. The main contributors were broad-based price gains in Services and Construction. A key factor was the residential rental market, where sustained demand continued to push prices up, even as the broader property sector cooled. Additionally, standard September-quarter factors like indexed price adjustments and negotiated wage rises reinforced the underlying, sticky nature of services inflation.

Annual trimmed mean inflation (a measure of underlying inflation) rose to 3.0% in the September 2025 quarter, up from 2.7% in the June quarter. This marks the first increase in annual trimmed mean inflation since December 2022.

Source: Australian Bureau of Statistics, Consumer Price Index, September Quarter 2025.

4- Labour Market Overview

The seasonally adjusted unemployment rate, which smooths out predictable variations, rose to 4.5% in September. However, the more stable trend measure suggests the labour market's underlying health remained consistent, holding at 4.3%.

The seasonally adjusted total employment increased to 14,640,200, supporting a stable employment-to-population ratio of 64.0%. However, broader measures of slack also edged higher: the underemployment rate rose to 5.9%, suggesting some workers are seeking additional hours.

The seasonally adjusted Wage Price Index (WPI) rose 0.8% in the June quarter 2025, consistent with the prior quarter. This brought annual wage growth to 3.4%—unchanged from the March 2025 quarter but notably below the 4.1% recorded in June 2024, indicating a gradual easing in wage pressures year-on-year.

Weakening Consumer Sentiment in Australia

In October 2025, the Westpac–Melbourne Institute Consumer Sentiment Index for Australia stood at 92.1, down 3.5% month-on-month—marking a return to a six-month low. The decline was driven by weaker sentiment around future family finances and the near-term economic outlook. However, expectations regarding unemployment and the longer-term economic trajectory remained relatively stable.

The Australian Bureau of Statistics released September 2025 building approvals data, showing a 12.0% monthly increase and a 7.9% quarterly rise compared to the same period a year earlier, with detached houses up 4.4% and multi-units surging 23.7%. New home sales in New South Wales and Victoria jumped over 34% in September, signalling a delayed but emerging response to earlier cash rate cuts. Multi-unit approvals are recovering from low levels, aided by state government measures to fast-track approvals and buy off-the-plan apartments, potentially boosting 2026 commencements. However, escalating land prices—up 6.8% nationally in the year to June 2025, far outpacing inflation—threaten the federal target of 1.2 million new homes. Smaller capitals saw the steepest land price gains due to population growth and strong housing demand. Without a steady supply of affordable, shovel-ready land with infrastructure, building volumes may stall, worsening affordability in major cities and eroding gains in smaller ones.

ASX Market Overview and Sector Performance

The S&P/ASX 200 (XJO), Australia’s benchmark equity index, closed the week nearly flat on Friday at 8,882, erasing intraday gains as losses in consumer discretionary stocks counterbalanced strength in gold miners and major banks. Despite the flat daily close, the index recorded a weekly decline of 1.5%—its steepest weekly drop since late March 2025—and posted a modest monthly gain of 0.4% for October.

Industry/Sector performance relative to the market

Source: marketindex

The ASX energy sector rose ~4% in October 2025, driven by higher oil and LNG prices, strong operational updates from Woodside and Santos, and a weaker Australian dollar boosting export revenues. Investor rotation into high-yield, commodity-linked defensive stocks and supportive government policy on LNG as a transition fuel further underpinned the rally.

The ASX healthcare sector experienced a significant correction in October 2025, declining roughly 9%. The downturn was primarily triggered by a sharp profit downgrade and guidance cut from sector heavyweight CSL, attributed to operational challenges including diminished plasma collections and manufacturing delays. This was compounded by disappointing results from ResMed and regulatory setbacks for Cochlear. Consequently, investor confidence eroded, prompting a broad de-rating of the sector's premium defensive valuations.

A global tech sell-off hit the ASX, driven by fears that the U.S. Federal Reserve will delay interest rate cuts. This was compounded by poor results from major local players like Block (SQ2) and Xero (XRO), which reported slowing growth and profitability concerns. After strong recent gains, investors also took the opportunity to take profits and rotate out of the high-risk tech sector, accelerating the decline.

Short-Term Australian Market Outlook: Modestly Risk-On & Selective

Our short-term view favours the energy and gold sectors. Geopolitical risks support oil prices, while physical market balances are tight. Gold remains a compelling hedge as markets anticipate that global real yields have peaked.

Tactical opportunities exist in REITs (excluding office), which could see a sharp rebound if bond yields retreat from their Q3 highs. Buybacks support banks, but with peaked net interest margins, clear earnings catalysts are lacking. Local tech remains dependent on a sustained decline in US yields, while consumer cyclicals are the weakest sector due to negative real household cash flow.

Key Catalysts to Monitor

RBA forward guidance, Chinese steel data and stimulus, and US CPI surprises which could ignite duration-sensitive assets.

Base Case

We recommend a modestly risk-on but selective stance, skewing portfolios towards real asset yield (energy, quality REITs, gold) and away from domestic consumer exposure.