ABE Weekly: Australian Confidence Weakens as Higher Rates Bite

Market Insights

• Australia: Confidence Weakens as Higher Rates Bite
• US Labour Market Shows Renewed Strength as October Jobs Growth Exceeds Expectations
• Bank of England Raises Interest Rates
• China’s 10-Year Bond Yield Continues to Fall to Record Lows at Just 1.60%

Key Points

• Australia: The RBA increased cash rates by 0.25% to 4.85% p.a. at its November meeting – its 5th increase in 2026! September CPI increased to 4.3% p.a., while the Trimmed Mean increased to 3.70% p.a.
• United States: The Federal Reserve left the federal funds target unchanged at 3.75%–4.00% p.a. at its October 2026 meeting. The latest U.S. CPI inflation rate accelerated to 3.7% p.a. in September 2026, while core CPI increased to 2.6% p.a.
• United Kingdom: The Bank of England raised Bank Rate by 0.25% to 4.00% p.a. at its November 2026 meeting. Headline CPI rose to 3.5% p.a. in September, while core CPI increased to 2.8% p.a. The Bank warned that headline inflation could approach 5% by mid-2027.
• Eurozone: The European Central Bank kept its key deposit facility unchanged at 2.50% p.a. at its October 2026 meeting. Euro area headline CPI rose to 3.8% p.a. in September, while core inflation rose to 2.5% p.a.

Here are the latest monetary-policy and inflation figures for key economies:

Australia: Confidence Weakens as Higher Rates Bite

Confidence across both households and businesses continues to deteriorate, highlighting the growing strain on the Australian economy from higher interest rates and persistent cost pressures. Consumer expectations for the economy over the next 12 months have fallen to their lowest level since the COVID period, suggesting households are becoming increasingly cautious about the economic outlook.

The business picture is equally concerning. Profitability has weakened sharply, with retail businesses particularly hard hit, reporting profitability at its lowest level in the survey’s history, dating back to the late 1990s. At the same time, forward orders are softening, and input costs remain elevated relative to the prices businesses can charge, further squeezing margins.

Taken together, these surveys point to an economy increasingly feeling the cumulative effects of tighter monetary policy and the cost-of-living squeeze. While the RBA’s latest rate increase may have added to the deterioration in sentiment, the broader concern is that weaker household demand and declining business profitability could reinforce one another, creating a more challenging environment for growth in the months ahead.

Interestingly, markets have taken the weaker confidence readings as further evidence that the RBA’s tightening cycle may be nearing its end, with attention increasingly shifting towards the prospect of rate cuts further out. The RBA faces a tension: while inflation and cost pressures remain a concern, the deterioration in confidence suggests the economic impact of higher interest rates is becoming increasingly evident.

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US Labour Market Shows Renewed Strength as October Jobs Growth Exceeds Expectations

The US labour market delivered a stronger-than-expected performance in October, with non-farm payrolls increasing by 165,000, significantly ahead of market expectations for a gain of approximately 65,000. The unemployment rate also edged lower to 4.1%, from 4.2% in September, reinforcing the view that the US labour market remains resilient despite concerns about a broader economic slowdown.

The latest figures, released on Friday, also included upward revisions to previous employment data. September’s payroll increase was revised from 29,000 to 60,000, while August was revised upwards from 133,000 to 186,000. Combined, employment growth across August and September was 84,000 higher than previously reported.

Job creation was led by professional and business services, which added 70,000 positions, alongside continued growth in healthcare and transportation and warehousing. Average hourly earnings increased by 0.4% during October, taking annual wage growth to 3.1%. This suggests that wage pressures remain relatively contained, although they will continue to be an important consideration for inflation and Federal Reserve policy.

The employment report follows last week’s encouraging jobless claims data, which showed initial claims falling to 189,000, matching a 57-year low, while the four-week moving average declined to 194,750. Continuing claims, meanwhile, increased by 23,000 to 1.718 million, suggesting that some unemployed workers are taking longer to secure new positions.

Overall, Friday’s employment report provides further evidence that the US labour market is proving more resilient than many had anticipated. For credit investors, continued employment stability remains an important positive, helping support household and corporate balance sheets.

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Bank of England Raises Interest Rates

In a significant change of direction, the Bank of England has increased interest rates for the first time in more than three years. On 5 November 2026, the Bank announced a 0.25% increase in its base rate, taking it from 3.75% to 4.00%.

The decision comes as UK inflation continues to rise, reaching 3.5%, largely driven by increasing energy prices. The Bank is concerned inflation could climb to around 5% by mid-2027 if energy costs remain elevated.

The Bank of England’s next interest rate announcement is scheduled for 17 December 2026.

The key takeaway is that the Bank has moved back toward raising interest rates rather than continuing the cuts many had hoped for. However, this does not necessarily signal a sustained period of rate rises, as future decisions will depend on inflation, energy prices and the wider economic outlook.

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China’s 10-Year Bond Yield Continues to Fall to Record Lows at Just 1.60%

China’s government bond market continues to reflect underlying weakness in the domestic economy, with the 10-year government bond yield trading around 1.60% in early November 2026, close to its recent historical low of approximately 1.58%.

The decline reflects subdued domestic demand, persistent weakness in the property sector, deflationary pressures and expectations that monetary policy will remain accommodative. Demand for government bonds has also been supported by investors seeking relatively safe assets amid uncertainty surrounding China’s economic outlook.

The move is significant. The 10-year yield has fallen substantially from levels above 2% in previous years, highlighting a structural shift in China’s interest rate environment. Lower yields reduce government borrowing costs and support bond valuations, but they also reflect investor concerns about the outlook for economic growth and the limited availability of attractive investment alternatives.

For fixed income investors, China’s bond market presents a striking contrast to economies where government bond yields remain elevated. At around 1.60%, Chinese government bonds are pricing in a very different economic outlook, one characterised by subdued growth, weak inflation and expectations of continued monetary support. The key question is whether these exceptionally low yields represent a prolonged new normal, or whether a recovery in domestic demand and inflation will eventually put upward pressure on yields.

China’s 10-year government bond yield is therefore worth watching, not simply as an indicator of monetary policy, but as a broader barometer of investor confidence in the world’s second-largest economy.

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