Monthly Newsletter Markets Rebound as Inflation Pressures Remain Elevated.

Published on 29 June 2026

Global markets delivered a stronger performance in May as investors became more optimistic that disruption in the Middle East would not intensify further, even though the Strait of Hormuz remained effectively closed and energy markets stayed highly sensitive to geopolitical headlines. International share markets continued to rally, recording an increase of 4.53% over the month in Australian dollar terms. International shares were supported by resilient corporate earnings and ongoing enthusiasm for artificial intelligence-related investment, while oil prices fell sharply during the month on hopes of a potential U.S.–Iran agreement.

The improvement in risk sentiment in the US helped equities advance globally, despite inflation remaining above central bank targets in several major economies. Australia was one of those economies. Australian shares increased by a modest 1.15%, as our market also faced the headwind of higher interest rates and an uncertain outcome of the budget’s proposed capital gains changes. Emerging market shares increased almost 10% over the month driven predominantly by Taiwan and Korea’s AI-related companies including Taiwan Semiconductor Manufacturing Company (TSMC) and Samsung Group. Australian bond prices increased by 1.6% in May as the oil price declined, whilst global bond prices increased by 0.67%.

Australia.

In Australia, inflation remained a central concern. The Reserve Bank of Australia’s May Statement on Monetary Policy noted that inflation was already materially above target before the Middle East conflict and that higher fuel prices had pushed headline inflation higher, with trimmed mean inflation also remaining elevated. The RBA increased the cash rate by 0.25% to 4.35% and indicated that risks to inflation remain tilted to the upside. Consumer sentiment stayed weak, although the Westpac–Melbourne Institute index improved modestly to 83 in May from 80.1 in April, while business conditions remained positive but subdued and business confidence, although less negative, remained deeply pessimistic. The Federal Budget saw a wider-than-expected deficit of $31.5 billion for 2026–27 and added concern that fiscal policy is working against the RBA’s inflation fight.

United States.

In the United States, the inflation backdrop became more challenging in May. Consumer prices increased by 4.2% over the year, up from 3.8% in April, with energy accounting for much of the monthly rise and petrol prices up sharply over the year. Core inflation was more contained at 2.9%, suggesting that while the energy shock was driving headline inflation higher, second-round effects across the broader economy were still relatively limited. Severe drought conditions, concentrated most heavily in the South and Midwest combined with rising pressures on the availability of fertiliser, could put future harvest yields of several key agricultural commodities at risk and lead to higher food inflation, adding to already elevated food price pressures.

On the US employment front, the non-farm payrolls report reinforced an improving labour market. Non-farm payrolls increased by 172 thousand, well above expectations of 88 thousand, while the prior two months were revised sharply higher by 93 thousand. The unemployment rate remained at 4.3%. This strong report caused financial markets to revise away expectations of easing interest rates in 2026. Investment markets now expect the Federal Reserve to remain on the sidelines as officials weigh the tension between elevated headline inflation and softer underlying price momentum.

Europe.

In a symbolic move, the European Central Bank tightened monetary policy by 0.25% to 2.25% as inflation accelerated above target. The increase in inflation was driven by a 10.9% rise in energy costs and an unexpectedly sharp acceleration in services inflation to 3.5% from 3.0%. While price pressures have increased, there is still no sign of second-round effects from the energy shock. Wage growth is muted and market-based inflation expectations remain anchored, suggesting further rate rises may be unwarranted as growth slows.

China.

In China, the economic picture remained uneven. Consumer price inflation held at 1.2% in May, indicating that domestic demand was still relatively subdued, while producer prices accelerated to 3.9% over the year — the fastest pace in almost four years — driven by higher energy and raw material costs and ongoing strength in technology and artificial intelligence-related investment. China’s economy recorded 5.0% growth in the first quarter of 2026, leaving the country on track to meet its official target range, although the split between subdued consumer demand and rising factory-gate prices continues to suggest an unbalanced recovery.

China’s Politburo meeting in April ended without major policy announcements. Policymakers acknowledged a good start to the year but saw a need to consolidate the recovery. The fiscal focus appears to be on accelerating the rollout of existing policy announcements rather than pushing out new measures. The monetary policy tone suggests that rate cuts are conditional on the price of oil and potential easing is unlikely before the second half of the year.

Technology & AI.

Once again, the standout performers were mega-cap technology and semiconductor companies benefiting from the global artificial intelligence investment boom. Investors remain focused on hyperscalers and AI infrastructure leaders that are now beginning to demonstrate tangible returns from years of aggressive capital spending. Strong earnings momentum has helped investors overlook concerns about elevated valuations and concentrated market leadership.

Portfolio Actions.

The Investment Committee bought into the Australian share market for the Tactical portfolio over the month as we believe that better (not great) value emerged in the S&P/ASX 200 (VAS portfolio). Semiconductor share valuations look poor and we maintain reduced exposure in the STAR Tactical portfolio. This has been parked in cash awaiting deployment — patience is a virtue. Share market volatility has increased and more volatility is expected.

For the Australian share market, the price of iron ore held above US$100 per tonne, copper gained on AI-linked infrastructure demand, and lithium prices recovered sharply. Materials (+10.3%) was the best-performing sector over the month. BHP Group outperformed supported by copper strength and a resilient iron ore price. Health Care (-8.8%) was dragged down by CSL (-22.3%) and Telix Pharmaceutical (-13.1%). Other notable detractors included Brambles (-26.7%), The A2 Milk Company (-24.1%) and ASX (-23.9%). Brambles cited profit impacts from repair capacity constraints at US subcontracted service centres, while the ASX flagged increased capital expenditure to fund technology upgrades.

The key message from May is that markets have become more comfortable looking through geopolitical uncertainty for now; however the global outlook remains fragile. The easing in oil prices and hopes for de-escalation in the Middle East improved sentiment materially, yet inflation pressures remain too high for central banks to declare victory. For investors, the combination of resilient equity markets, elevated inflation and ongoing geopolitical risk suggests that volatility is likely to remain a feature of markets through the remainder of 2026.

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General Advice Warning

The information contained in this report has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. Investment markets past performance are not necessarily indicative of future performance. Whilst Financial Advice Co Pty Ltd is of the view the contents of this report are based on information which is believed to be reliable, its accuracy and completeness are not guaranteed, and no warranty of accuracy or reliability is given or implied and no responsibility for any loss or damage arising in any way for any representation, act or omission is accepted by Financial Advice Co Pty Ltd.