Economic Update - May 2026

A Month of Recovery, With Inflation Still in the Spotlight

April was a broadly positive month for investment markets around the world. Share markets rebounded from a difficult March, but rising inflation and geopolitical uncertainty remained firmly in focus. 

Australian Shares — Technology Leads, Health Care Lags

The Australian share market rose 2.2% in April, with seven of its eleven sectors finishing higher. Technology was the standout, surging 13.2%, while listed property (REITs) and materials also posted solid gains. On the other side, health care fell 8.7% — largely driven by a significant earnings downgrade from one of Australia's largest medical device companies — and consumer staples and energy also declined. Smaller companies continued to outperform larger ones, returning 3.3% for the month. 

The Australian Economy — Inflation Remains Elevated

Australia's annual inflation rate rose to 4.6% in March, well above the Reserve Bank's 2–3% target. Much of the increase was driven by higher fuel costs linked to the conflict in the Middle East, although services inflation eased slightly. The unemployment rate held steady at 4.3%, with full-time job growth offsetting a decline in part-time roles. With inflation still elevated and the labour market tight, markets expect the RBA to keep interest rates restrictive for the time being. 

Global Shares — A Strong Rebound

Global share markets bounced back in April. The US market led the way, rising 10.4%, powered by strong earnings from the financial and technology sectors and renewed enthusiasm for artificial intelligence — a branch of computing where machines perform tasks that typically require human thinking. In Europe, Germany's market rose 7.1%, while Japan rebounded strongly after a tough March. The UK market was more subdued, gaining 2.0%. Emerging markets outperformed, up 9.3%, led by gains in Taiwan and South Korea. 

Interest Rates and Bonds — Inflation Keeps Central Banks Cautious

The US Federal Reserve held interest rates steady at 3.50–3.75% for the third consecutive meeting, noting significant uncertainty caused by the Middle East conflict. In Australia, 10-year government bond yields rose to 5.06%, reflecting expectations of further rate increases. Bond yields — the return you earn for lending money to a government — also rose in Japan and the United Kingdom, as markets priced in the possibility of higher rates to contain inflation. 

What Is Driving Markets From Here?

The key factors shaping markets in the months ahead include the path of inflation — particularly the impact of higher energy prices — and how central banks respond. Geopolitical developments in the Middle East, including the effect on oil prices and global trade, remain a significant source of uncertainty. Markets will also be watching upcoming economic data closely, including GDP growth and employment figures, for signs of how economies are adjusting. 

Thanks to our research partners at Lonsec for assisting with the preparation of this Economic Update.