Economic Update June 2026
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
- US shares again make new highs despite the Iran war.
- Inflation in Australia eases a little, unemployment increases but the RBA raises by 0.25% again.
- US employment remains resilient.
- Oil prices off highs but remain elevated – price stability requires the Straits of Hormuz to open.
The Big Picture
When we look around at all of the troubles in the world, it might seem somewhat incongruous that all three major Wall Street indexes reached multiple record highs in May.
However, markets are based on expectations. The US March quarter reporting season that was just underway was rather good – including forward guidance. And it wasn’t just Magnificent 7 (Mag7) or Artificial Intelligence (AI) stocks.
We expect it has helped that the situation in the Middle East seems to be easing – though not quickly enough for most. The ceasefire is ‘blurred’ at best, but it has not been officially rescinded. The Iran news agency, Fars, counters Trumps comments but other news filters out that an end to the closure of the Strait of Hormuz may be at hand. One line of commentary is that the Strait’s reopening issue is being separated from some of the other big issues like nuclear proliferation in trying to reach an initial agreement.
Three months have passed since the start of the Middle East war which had been ‘billed’ as expected to last 2 – 6 weeks. On one day in May, Iran did allow two China bound tankers to exit the Strait, each with a million barrels of oil on board. Four million other barrels also exited on the same day on other ships.
When we put the war to one side, order seems to be returning to the global economy, albeit slowly. The RBA announced a third straight increase in interest rates of 25 bps to 4.35%. The governor, Michele Bullock, made two important statements. First, she said it would take at least six months for any impact of its recent interest rate rises to be felt on inflation. Secondly, she still ‘wants to get ahead of the fight on inflation’ and dampen any inflation expectations that might ensue from those that followed the onset of war.
Dr Sarah Hunter, chief economist to the RBA, gave a speech in which she said that causing a recession – as in 1990/91 – might be necessary to quell inflation. Given that she earned her BA in 2002, the chances are that she was in primary school and living in the UK when we had the big recession (we had to have), we question the need to have a recession as a solution to a relatively tame inflation problem?
Our latest Consumer Price Index (CPI) inflation reading came in at 4.2% p.a. down from 4.6% p.a. in the December quarter. That inflation fell in less than six months from the RBA rate action means that they can claim no part in that success – nor should they. As we have been arguing, the oil price spike will pass (and partly has already) and, anyway, interest rates in Australia have no impact on global oil prices.
We continue to take our analysis a step further. We object to the use of the Australian Bureau of Statistics (ABS) method to adjust electricity prices from the impact of the energy rebates. Electricity price inflation came in at 22.5% from 25.4% because of the ‘rebate adjustment’. The ABS reported that the rate of this component of inflation would have only been 3.1% without the adjustment.
We calculated that the 4.2% headline CPI inflation read for April would have been 3.7% following 3.4%, 3.2%, 3.0% and 4.1% for December 2025 through to March 2026, respectively. We say the RBA should not have raised interest rates three times this year and that the ‘oil blip’ is already passing, notwithstanding the chance that we could see materially higher oil prices if the Iran war is not resolved in the nearer term. We emphasise that the February 3.0% reading was in the RBA target zone.
As a result, the most recent three interest rate increases are yet to work their way through the system. As they do, they will weigh on an already weakening economy.
Our labour force report for April followed the inflation read. The unemployment rate jumped from 4.3% to 4.5% making it the highest rate since 2021. An alarming upward trend in the unemployment rate started in mid-2022. Total employment fell in April by ‑18,600 and full-time positions fell by ‑10,700.
The Federal government seems intent on changing capital gains tax settings and the use of negative gearing – both in attempt to transfer wealth to those who won’t inherit it.
New Zealand recently tried removing negative gearing with very poor responses on the rental market – and Keating’s two-year experiment with removal of negative gearing in 1985 came with disastrous results. The lessons have not been learnt!
The estimated odds for an interest rate increase at the RBA’s June 16th meeting has gone to 0% as measured by the RBA rate tracker tool on the ASX website.
We think the RBA needs to rapidly unwind the three interest rate increases it has already imposed this year – and then start on a programme of lowering the OCR (overnight cash rate) to neutral, or about 150 bps below where it was at the end of May.
US jobs’ data for April were stronger than expected. 115,000 jobs were created and the unemployment rate was steady at 4.3%. However, there is still a strong downward trend in the 12-month averages of the monthly jobs’ numbers.
The University of Michigan consumer sentiment index, which hit a record low when it was released in April, fell even further in May. The revision to that 74-year low took the latest index down from 48.2 to 44.8.
That measure of consumer sentiment is lower than during the GFC, the 1987 stock market crash and various wars waged around the Middle East, might be due to the presence of social media. Information – good and bad – true and untrue – now travels the globe at unprecedented speed.
US inflation – as measured by the Federal Reserve’s (Fed) preferred measure Private Consumption Expenditure (PCE) came in elevated but on expectations. The oil price spike that took Brent Crude oil prices from $US61 per barrel at the start of the year to a peak of $US114 per barrel, ended May at $US92.
The new Fed chair, who replaced Jerome Powell in May, was nominated by Trump with a view to bringing interest rates down. It is doubtful if the new appointee, Keven Warsh, can make that wish come true as there are 18 other committee members who will express their largely unsupportive opinions at the June 16th – 17th FOMC meeting.
Importantly, the yield on US Treasurys – or US government bonds – at 10- and 30-years duration rose to uncomfortably high levels before they slipped a little at the end of May.
The market – as measured by the CME Fedwatch tool – has factored in a 99% chance of the Federal Open Markets Committee (FOMC) staying ‘on hold’ in June, but there is estimated to be nearly a 50% chance of a hike later in the year.
The China economy has had to withstand a barrage of problems since US President Trump took office last year. His sweeping tariffs have since been rescinded but there are lots of product-specific tariffs still in place.
China had amassed an impressive inventory of oil which must now be dwindling. China (usually) gets much of its oil from the Persian Gulf.
China retail sales were reported to be only 0.2% over the year compared to an expected 2.0%. Industrial output performed better at 4.1% compared to an expected 5.7%.
Wall Street has largely shrugged off the problems in the Middle East. All three major indexes hit record highs in May despite the uncertainty. The market was no doubt buoyed by some impressive results in AI, data centres and software. However, there were many other strong results making the continued rally reasonably broad-based.
Asset Classes
Australian Equities
Australian equities (ASX 200) had a very quiet month compared to several other major indices. It grew only +0.8% in May making for a change of +0.2% over the year-to-date.
However, several sectors of the broader index made strong gains: Materials (+10.5%), Consumer discretionary (+4.6%), Property (+3.0%), Industrials (+2.0%) and IT (+0.6%) were the only ones of the 11 sectors to make gains in May.
International Equities
The S&P 500 gained +5.1% in May and Japan’s Nikkei posted an +11.9% gain. The German DAX gained +3.3% and London’s FTSE was all but flat at +0.3%. China’s Shanghai Composite lost ‑0.1% in May. Emerging Markets gained +9.5% in the month.
Over the year-to-date, a couple of indexes have made stellar gains: Nikkei (+31.8%) and Emerging Markets (+26.0%). The S&P 500 gained +10.7% over the year-to-date.
Bonds and Interest Rates
The general mood across central banks, except for the RBA, has been to retain a holding pattern while the impact of oil price inflation is analysed.
The RBA, in an 8-1 decision, chose to raise interest rates again by 25bps to 4.35%. No other comparable central bank has raised interest rates at all in recent times. The RBA must understand it is on its own in following an aggressive interest rate tightening path. The Fed, for example, has even gone as far as saying it is on hold because ‘it is looking through’ the oil price inflation. RBA Governor Bullock keeps saying that she is trying to get ahead of the inflation problem.
The Royal Bank of New Zealand (RBNZ) was on hold at 2.25% compared to our latest rate at 4.35%. We would place the RBNZ policy stance at being slightly under the neutral rate meaning that it is trying to facilitate growth. The RBA is about 1.5% points above neutral.
Other Assets
Brent Crude (‑19.3%) and West Texas Intermediate (WTI) (‑16.9%) oil prices were down sharply on rumours that the Strait of Hormuz might be re-opened soon.
The price of copper was up strongly at +4.6%. Iron ore was down ‑2.2% and gold was flat at ‑0.6%.
The VIX US share market volatility index ended May in the normal range at 15.3 after peaking at 31.1 earlier in 2026.
The Australian dollar appreciated by +0.7% against the US dollar over May.
Regional Review
Australia
The unemployment rate jumped sharpy to 4.5% from 4.3% making it the highest rate since 2021 and a continuation of a strong upward trend since mid-2022.
Jobs growth over the year to April was only +0.9% which is well below a rate necessary to achieve population growth. Full-time jobs also grew slowly at +1.2%.
The Federal Budget was met with much derision. Reverting the Capital Gains Tax (CGT) formula taxing gains only above the rate of inflation was not unreasonable but creating a minimum tax rate for capital gains of 30% is out-of-left-field and causing significant voter pushback.
Negative gearing was also on the chopping block. However, such is the backlash, there have been calls for changes before the bill goes to parliament and even for a general election!
Inflation data are still marred by the electricity rebate confusion. Elevated oil prices have added to the problem. However, the latest CPI inflation headline was down to 4.2% from 4.6%. We estimate that without the electricity rebate, CPI inflation would have been 3.7% which is comparable to that in the US (3.8%), but the Fed has remained ‘on hold’ all year at a rate of 3.5% to 3.75%.
The wage price index grew by 3.3% over the last 12 months but the real wage, after allowing for CPI inflation, went backwards at ‑0.8%. The purchasing power of the average wage is back to where it was 15 years ago!
China
China reported only +0.2% growth in retail sales compared to an expected +2.0%.
Industrial output was up +4.1% compared to an expected 5.7%.
China did manage to get two million barrels of oil through the Strait of Hormuz on just one day in May.
US
Jerome Powell chose to stay on as a governor of the Fed after his term as chair expired. We think he will play a very supportive role for the rest of the committee. His desire to remain for up to two years was supported by his claim to wait out the legal proceedings that Trump’s supporters have been waging against him over the Fed building refurbishment.
Trump went to China to meet with President Xi and was accompanied by a few mega-tech CEOs. There were no positive outputs reported from the meeting.
Trump’s 10% global tariffs which were brought in when his ‘reciprocal tariffs’ were quashed by the Supreme Court have also been thrown out as being illegal. Trump’s tariff policy is in tatters, and he now has little tariff revenue to support his policies. We think this is good for the economy as the revenue was being taken from households and businesses and not, as Trump claimed, from foreign exporters to the US.
Europe
EU inflation came in at 3.0% from 2.6%. Core inflation was 2.2% from 2.3%.
UK growth was +0.6% in the March quarter from +0.2% in the December quarter. The UK unemployment rate inched up to 5.0% for the three months to March. Inflation, however, fell to 2.8% from 3.3%.
Rest of the World
The unrest continues in the Middle East but at a much lower level than in the first two months of the war.
Japan growth was 0.5% for the March quarter following 0.2% in the December quarter. Inflation (ex-food) was 1.4% which was down from 1.7% in the previous month.
The biggest sporting event in the world, the FIFA World Cup, starts in mid-June for about a month. The group stage matches are being held in the US, Mexico and Canada.
Ticket sales have not met expectations largely it seems because of the pricing. Other reports suggest foreigners are wary about visiting the US during Trump’s unstable immigration policies.
Spain and France are almost joint favourites to lift the trophy with England in third place. Perennial achievers, Brazil, has odds of 10 to 1, Australia at 500 to 1 and NZ at 1,500 to 1. Haiti brings up the rear at 3,000 to 1.
We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.
