A tug of war between inflation and AI

Hi, I'm Alex Kersley, portfolio manager here in Sydney, and this is Market Week in Review for the week ending 18th of September, 2026. So, this week was really about one thing, the Federal Reserve. So, we had the Fed meeting where they raised interest rates as was largely expected by the market. The key interest and key focus heading into this meeting was whether this was going to be a a one-and-done kind of interest rate increase or a start of a protracted interest rate increasing cycle. I think that it seems that the Fed is largely landing on the a couple of interest rate hikes, but not a protracted. So, when we look at the dot plots, which is the projection of interest rates by each member, uh we see one more rate hike in December. Uh and then a hold from there. And that is in line with our view. So, we think that we'll probably see another interest rate hike before December, and they'll be on a protracted pause. And there are a couple of really important differences to 2021-2022 and the inflation that we saw then. So, there is a bit of a pick-up of inflation pressure at the moment. A lot of that is being driven by what is happening with energy prices around the Middle East conflict. But when we look more broadly, we don't see the same sort of inflationary pressures that we saw in '21-'22. And there are two real dominant drivers there. The first is the wages story. So, the labor market has been resilient as we've been highlighting, and it's actually showing some signs of improvement. But we aren't seeing wage pressure picking up at this point, and so we think that's a pretty healthy I pretty friendly environment for um not a great deal of inflation pressure. And the second is the housing market. The housing market is still uh quite soft in the US. And so, those two dynamics aren't going to lead to um sustained inflation pressure in our opinion. And so, we should see a slow disinflation trend coming through over the next 12 months. That we'll see the Fed raise interest rates again in December, and then be on hold as that disinflation starts to come through. From a market's perspective, we think that US government bonds look attractive from a valuation perspective right now given the re-rate or the re-pricing of interest rates, but we haven't seen any signs that sentiment has become dislocated that would really represent a tactical opportunity to add to government bonds. We also had the Bank of England meeting where they kept rates unchanged. Um we think that we're likely on a path of just protracted holds from the Bank of England. The economy there is still under some pressure. There's always that inflation pressure from the Middle East and energy prices, but the economy is still quite soft. Finally, it was uh the next bit is in China where we have continued to see this softening in the economy. And the most recent data put we got this week was the credits numbers. So, we see a continued softness in credit demand both from businesses and from individuals. So, if you think that household demand for for credit is largely in the form of mortgages, Chinese house market is still quite soft. And so, there isn't much appetite to be going out and buying new property right now. And on the business side, they're taking their cue from the consumer confidence and the broader economic trends. And there isn't a huge amount of demand for capital expenditure or expansions expansion plans outside of a couple of sectors related to high-tech. And so, that remains fairly soft. Local government side of bond financing has been still a bit of a a bulwark for the credit numbers, but it isn't enough right now. And so, we think that China's going to remain this world where growth is not very strong. We're looking at like 4.5% GDP thereabouts, but it hasn't materially weakened enough to see the government come out aggressively with stimulus. And if we stay in this world where likely to see a continuation of that 4.5 to 4% GDP growth out of China. I think just the final bit is on equity markets. So, point-to-point where we're calling this as a Thursday close. US global equity markets look relatively unchanged. We had some weakness earlier in the week and then a rebound on Thursday. And think I think it's really important is to go from a cycle value and sentiment, which is our framework at Russell, how we're thinking about global equity markets right now. Uh it's from a cycle perspective, we think the economy is quite resilient and it's going to remain that way. Uh and importantly, corporate earnings uh are even stronger. So, we've seen really robust corporate earnings around the world over the last 6 months. Uh profit margins are improving. We have this wave of AI capital expenditure. And we're starting to see early signs of that AI is starting to improve business uh operations. So, that should further improve profit margins. Uh valuation for equities uh they aren't cheap right now. Uh US is still a little bit more expensive than the rest of the world, but they aren't at points that we would describe as extremely expensive. So, not a huge headwind in the short term. So, that leaves us with sentiment. And our sentiment models are still relatively close to neutral. We aren't seeing any signs of euphoria or haven't seen any signs of euphoria over the last couple of months. Uh we're a long way away from panic, obviously. The market is is still quite um robust. Um but for that with that combination of cycle being supportive, valuations not being very expensive or extremely expensive, and sentiment being fairly close to neutral, that's still a fairly constructive backdrop for risk. And so, we think that leaning into equity markets a little bit is still a a prudent place to be. With that, thank you for your time uh and look forward to speaking to you next time. Hi, I'm Sophie Antelme Gilbert, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.