Economic Update February 2026

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

Trump’s action in Venezuela and approach on Greenland is destabilising
US jobs and consumer confidence remain weak
Technology and Artificial Intelligence business exhibit share price volatility on lofty valuations
RBA reacts to persistent inflation above 3.0% and increases interest rates from 3.60% to 3.85%

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

Donald Trump took his threats to new levels in January. He had been threatening tariffs not only to try and address trade issues but also as a threat to make countries and regions do his bidding.

The year started with a US military incursion into Venezuela that removed its president and put him on trial in New York. Few people, if any, seemed to have been against the principle of neutralising President Maduro but the way matters unfolded took many by surprise.

Trump accepted the Nobel Peace Prize medal from its Venezuelan Laureate recipient, Machado, as though it had some legitimacy. He coverts the award and has made overtures to anyone that would listen that he is worthy of the Prize. He claimed to have ended eight wars without naming them!

Trump also spent a large part of January demanding that Greenland should be annexed to the USA. He talked of ‘buying’ the resource rich and strategically important island – and he initially did not rule out taking the land by force if necessary.

At Davos he tried to strengthen his demands to the point of threatening 25% tariffs on several European countries until he got his way over Greenland. These claims seriously damaged the nature of NATO and the future of the joint force against China, Russia, and other possible future adversaries.

Several European leaders got together to word a response to Trump. They seemed to be prepared to revoke the trade deals made in mid-2025 with the US and more. They stood up to him! As though he had never mentioned them, Trump cancelled the tariff threats and stated that he would not use military force in Greenland.

Given that Greenland is a territory of the Danish Kingdom, it was never likely that Denmark would give in to Trump especially as it had offered greater US involvement in its Greenland military bases and further access to its resources. Before Trump’s swift backdown, it was difficult to see how this problem could have been resolved.

The US Department of Justice served Fed chair, Jerome Powell, with notice of a criminal action against him – to do with his testimony to a Senate Committee about the Federal Reserve Building’s renovations. This move seems to be an attempt to punish Powell for not cutting interest rates more.

Trump also threated a ‘100% tariff’ on Canada if it tried to flesh out a deal with China. In other words, the political noise coming from Trump-generated invectives overshadowed the normal conduct of global relations.

And to cap it off, at the end of January, the US seemed to be considering military action against Iran.

A delayed US jobs’ report showed continued weakness but, as Powell argued in a press conference, the market might be stabilising within this weaker assessment.

In the latest nonfarm payroll data report, 50,000 jobs were added to the US economy. Powell had previously said that he thought there was an inherent bias in future data revisions to the tune of an overestimate of about 60,000 per month. That puts the recent jobs estimates likely to be revised down to a negative position. Jobs for 2025 were the weakest since 2020.

It is not just US job creation that is weak. Australian jobs’ data have been weak – except the latest month showed a probably temporary blip upwards. Over the last twelve months, Australian jobs only grew by 1.0% which is well below long-term population growth of about 1.6%.

While some are clinging on to hope over US jobs, the US consumer is struggling in its perception of where its economy is heading. The latest Conference Board consumer confidence index fell sharply from 94.2 to 84.5 which is the lowest reading since 2014.

Perhaps in the only bright spot in recent US policy decisions, Trump has nominated Kevin Warsh, a former member of the Federal Reserve (Fed) Board of Governors, as the next Fed chair. He is not known for following Trump’s agenda. In fact, many referred to him as a ‘hawk’ that favoured tight monetary policy in the past.

In recent months, there has been a swing towards expecting the RBA to start hiking rates soon. The argument seems solely based on the last few CPI inflation readings being higher than the previous set. Unfortunately, the CPI readings have been higher not because of rising prices but a calculation by the ABS to try to make the CPI respond positively to the government energy flat subsidies.

It can readily be shown that the electricity price component of the CPI would naturally fall back to acceptable levels in three months after the ABS’ calculation works its way through the CPI construction.

The past three months of annual electricity price inflation using the calculation have been 37.1%, 19.7%, and 21.5%. The ABS stated in the same reports that electricity price inflation without the subsidy would have been 5.0%, 4.6% and 4.6% for the same three months.

The RBA raised the official cash rate from 3.60% to 3.85% at its February meeting. The appended commentary is that further interest rate tightening may be required to subdue inflation and see it return to a level below 3.0%. The bond market has factored in at least one more interest rate increase this year. While this positioning expresses the predominant view currently, there remains the potential that the recent rise in inflation has resulted from data issues previously discussed and inflation could surprise the market to the downside. Activity and data in the coming months will determine where the actual position lays.

Meanwhile, China’s economy has shown some renewed activity in trade. Its latest export growth was 6.6% compared to an expected 3.0%; import growth was 5.7% compared to an expected 0.9%.

At the end of January, several of the possible economic headwinds for equities started to disappear. Importantly, the so-called Big Beautiful Bill in the US will bring fiscal stimulus in the first half of 2026 in the form of tax rebates, tax cuts, and additional government expenditure.

The current round of company earnings’ reports has supported the notion that the Wall Street momentum trade might continue until at least the second half of this year. The mag7 mega-tech companies are starting to break their common movements as the rest of the stocks in the S&P 500, the so-called ‘493’, start to show some renewed growth.

US Treasury yields have been stable at the longer end of maturities. Even if the Fed were to cut its short-term interest rate, it is unlikely to impact the long end of the yield curve. A stable economic and political framework would have a bigger impact on, say, the 30-year mortgage rate than anything standard monetary policy could conjure up.

The US dollar has been falling steadily over recent months pushing the Australian dollar up from under 60 US cents about a year ago to around 70 US cents now. The US dollar against a basket of currencies has shown a similar depreciation. This move will help US exports by removing some pricing pressure. But the depreciation of the US dollar has the impact of making our exports more expensive in $US terms.

The US mid-term elections scheduled for November are dominating Trump’s agenda. He is doing what he can to address the ‘affordability crisis’ that the US middle class is trying to deal with. Not all these policies are necessarily helpful on this front.

For example, Trump wants a cap on credit card interest rates at 10%. While this might seem to help the middle class, it is likely to consequently restrict the availability of credit to the same group. The reason credit card rates are so high has a lot to do with the default rate on these cards.

Trump has also intervened in the single-family rental properties. He is removing the ability for institutional investors to compete with low-income families. While this initiative might seem to help the rental market, institutionally owned properties only amount to about 3% of the relevant market.

Asset Classes

Australian Equities

Australian equities (ASX 200) gained +1.8% over January. Materials gained the most (+10.6%) of the 11 sectors of the broader index followed closely by Energy’s (+9.5%). IT (‑9.4%) was by far the worst performer.

The February company reporting season is not far away. The period before, aptly called ‘confession season’, has not produced any pronounced change in earnings’ expectations as surveyed by LSEG (Refinitiv).

International Equities

All the major indexes we follow made gains in January. The S&P 500 gained +1.4% and the German DAX (+0.2%) were the poorest performers. The London FTSE (+2.9%), the Nikkei (+5.9%), the Shanghai Composite (+3.8%) and Emerging Markets (+8.7%) were particularly strong in January.

After several Magnificent 7 (Mag7) companies reported at the end of January, Meta and Microsoft share prices went off in opposite directions – that was +11% and ‑11%! It seems no longer the case that this group of stocks move in unison which is not a bad thing. A broad-based rally across most of the top 500 US stocks is more likely sustainable than having the index dominated by a handful of names.

Bonds and Interest Dates

The Fed kept rates on hold at the end of January as most people had predicted. However, two members of the Federal Open Markets Committee (FOMC) dissented. Governors Waller and Miran wanted a 0.25% or 25 basis points (bps) cut to the cash rate. This was the second time two dissents had happened in the last year.

Warsh, if he indeed is confirmed by the Senate as the next Fed chair, will need to keep some semblance of consensus among the 19 members – of which only 12 vote at any one time.

Current Fed Chair, Powell, in the media conference that followed the handing down of the interest rates decision, expressed a view on the labour market that was a little more positive than after the previous FOMC meeting.

With Warsh having been nominated by Trump, there should be less negativity about the Fed going forward. The Department of Justice has laid a charge against Powell about the testimony he gave before a Senate committee last year.

Powell’s term as chair expires in May but Powell has the right to stay on the Fed Board of Governors for a further two years if he so wishes.

The RBA has been leaning towards higher interest rates following recent employment and inflation data and acted on this at its February meeting by increasing the cash rate to 3.85%. Outside of Japan it is the first major central bank to raise rates.

The RBA looks poised to rate rates in the next few months, but we believe that, for technical reasons, CPI inflation is likely to start falling in time for the RBA to avoid hiking. The issue is to do with how the ABS adjusted CPI inflation to account for energy subsidies.

The Bank of Canada kept its interest rate on hold.

Other Assets

Brent Crude Oil (+14.2%) and West Texas Intermediate WTI (+13.6%) oil prices were up strongly in January.

The price of gold rose to reach a new all-time high of $US 5,285 while gaining +16.3% over January, but the price collapsed by almost 9% in the last trading day of January. The price of silver fell by nearly 30% on that last day. It is quite possible that these price corrections might just be from profit taking before the next rally rather than being symptomatic of a change in the fundamental valuation story.

The price of copper (+4.9%) again grew strongly in January. The price of iron ore lost ‑0.9% over the month.

The VIX (US share market volatility measure or ‘fear index’) responded to some geopolitical noise but only peaked at 20.1 in January. It ended the month at 17.4 which is just above the ‘normal’ range.

The Australian dollar appreciated by +4.6% against the US dollar in January, ending the month at $US0.70.

Regional Review

Australia

The ABS reported that there were 65,200 new jobs added in the latest month which at first might seem strong. However, these numbers do bounce around quite a bit. Over the course of the last 12 months, new jobs only grew by 1.1% (and full-time by 1.0%). The unemployment rate did fall from 4.3% to 4.1%.

With jobs growing at much less than population growth, the impact of higher interest rates might cause a faster contraction than when the economy is running strongly.

With the slight delay in the November Consumer Price Inflation (CPI) report to January 7th, there were two CPI reports posted in January. The headline rates of 3.4% and 3.8% might look like indicating a resurgence of inflation but much of this reaction is due to the way in which the ABS has adjusted electricity prices in response to the energy subsidies.

It was known when the subsidy first impacted the CPI, there would be a compensatory ‘increase’ in electricity price inflation as the subsidy period ended. These data effects were not caused by interest rates and so the RBA should not react to them. In three months, the statistical problem will be in the rear-view mirror. The RBA should focus on the employment side of its dual mandate of: 1. price stability (inflation in the range of 2% to 3%), and 2. full employment.

China

China’s economy was disrupted by the US tariff policy announcements. China appears to have made inroads into redirecting its trade flows to the US and consequently reduced tariff impacts.

The latest China trade surplus of $US 1.8 trn is the largest on record. China CPI inflation was the strongest since February 2023 – at 0.8%. Producer Price Inflation (PPI) measuring input price changes was ‑1.9%.

China has also reduced its holding of US Government Bonds to its lowest level since 2008, during the GFC. Reduced demand for US Treasurys puts upward pressure on US Treasury yields.

January ended with a partial government shutdown. The last one disrupted data collection and another would have made it much more difficult for the Fed to guide its management of interest rate policy.

The calculation of inflation for residential rents was particularly problematic during last year’s shutdown as rents for a given property are only sampled every six months. It has been suggested that missing data from this sampling procedure were replaced with zero changes. As a result, shelter inflation (which is largely based on rents) fell from 3.6% to 3.0% and then 3.2%. These changes are out of the normal range for this series.

While the US unemployment rate seems to be contained, recent job creation looks decidedly very weak. The nature of unemployment may well be different from that in times gone by. With the advent of the gig economy e.g. delivery service to homes and ridesharing, it might be a lot easier for the unemployed to find temporary work. As some of these new gig economy jobs are classified as self-employed, the impact on jobs and unemployment of demand weakness may well have changed as a result. The official data shows that 2025 job creation was the weakest since 2020.

Europe

Europe came together in strength to challenge Trump’s demands to take control/ownership of Greenland. That unified resistance was enough for Trump to back off from seeking to advance that cause further.

UK growth was 0.3% in November which was above the 0.1% forecast and the ‑0.1% reading in October.

We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.