CIO market update for October 2025

In this CIO market update, Rob Hogg reviews October’s key market drivers. Global equity markets continued to move higher, and the Australian equity market also performed positively.  US CPI was fractionally lower, with an expected rate cut later in the month causing yields to partially rebound.

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In a month starved of key US economic reports (with the notable exception of the Consumer Price Index report) due to the ongoing US government shutdown, equity markets continued to move higher in October, with Japan a standout market (+16.6%) following the election of a new Prime Minister. The Australian equity market also performed positively but was again one of the poorest performing markets globally, likely not assisted by a further downward revision in the number of expected Reserve Bank interest rate cuts.

Tariff related news had a negative impact earlier in the month (US and China announcing trade restrictions and renewed tariffs on each other) but, by end month, all seemed forgiven and/or walked-back “TACO” style (“Trump Always Chickens Out”). October also witnessed some wobbles in a couple of hitherto strongly performing markets – gold and credit.

The key global economic report during October was the mid-month release of the September US CPI which was fractionally lower (and therefore better) than expected. This report pushed US and other global bond yields to their lowest levels for the month. In contrast, the US central bank’s fully expected rate cut late in the month, which was followed by the Fed Chair’s “hawkish” press conference (where he watered-down future rate cut expectations), caused yields to partially rebound. Over the full month, US and European yields finished lower (especially in the UK where yields fell around 0.2%-0.3%) while Japanese yields ended little changed (a surprising outcome given the strength of the Japanese equity market).

Australian interest rate markets performed quite differently to other markets over the month, due entirely to news of higher and broader inflation pressures than investors and the RBA had expected in the September quarter CPI report. The CPI release caused the local yield curve to “bear flatten” with shorter maturity securities (2- and 3-year bonds) rising by around 0.12% on the day of the release while 10-year yields rose by only 0.05% . Over the entirety of October the local curve flattened, the second consecutive month this has occurred, due in both months to higher/stickier inflation than had been expected. Today the case for further rate cuts by the RBA is substantially diminished, and it will be interesting to see if this theme develops globally with a number of other countries also experiencing “sticky” inflation.

The US dollar rose by around 2% over the month (DXY index) as downward revisions to rate cut expectations pushed the USD higher (a reduction in the size of rate cut expectations tends to be currency positive). Against the stronger USD, the Australian dollar fell slightly with the size of the AUD’s depreciation (-1%) minimised by the change in rate cut expectations locally – with fewer, if any, further rate cuts now expected. If not for the change in rate cut expectations in Australia, the AUD would likely have depreciated more against the USD during the month.

Gold prices experienced a sizeable daily 5% correction around mid-month but still ended October around 3.7% higher.

Key market movements over October were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) edged up by 0.4%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index rose 1.9%.
• US equity market (S&P 500) rose 2.3%.
• Australian 10-year bond yield was near unchanged at 4.30%.
• Australian 3-year bond yield rose by 0.05%, closing at 3.61%
• The US 10 bond yield fell by around 0.07%, closing at 4.08%, while 2-year yields fell by just 0.03% to end at 3.57%
• The Australian dollar moved slightly lower against the weaker USD, depreciating to AUD/USD 0.6545 from AUD/USD 0.6610.

Key market movements over the month

In this monthly update, we look at:

• Risks to the current market consensus
• Federal Reserve Chair Powell’s attempt to remove a December rate cut expectation from market pricing in a decidedly hawkish press conference after the Fed’s 0.25% rate cut in late October
• US inflation report is one of the few official economic reports released in October
• Trump/Xi meeting in South Korea in late October yields little new
• Japanese equity market rallies sharply following the election of a new Japanese prime minister
• Wobbles in some market sectors during the month
• Is the equity market being driven by reluctant bulls?
• Only two economic reports mattered in Australia in October – employment and the CPI
• The outlook

Risks to the current market consensus

Despite the slight re-pricing in US rate cut expectations at end month following the latest US central bank policy meeting, and subsequent press conference by the Fed Chair where he tried to talk down the likelihood of future rate cuts, market expectations are for two additional US rate cuts, but not until 2026 – in January (a month ago this cut was expected in December), and mid-June.

With virtually no official US data released in October, the current pace of the economy is more difficult to assess, but it still seems to be the case that market expectations are for a soft landing and easing inflation pressures. This is the combination of supportive economic dynamics that has continued to support US equity markets in 2025, augmented by solid earnings growth expectations.

But there are two clear risks to this equity-supportive consensus view:

• If we continue to see resiliency in economic growth, and sticky inflation, the likelihood of US rate cuts into 2026 will likely diminish further (which is what has occurred in the days since the latest US rate cut and Chair Powell’s attempts to water-down the likelihood of further rate cuts). If continued growth resiliency and continued sticky inflation cause a further reduction in the market’s rate cut expectations, further equity market weakness will likely occur.
• Alternatively, if growth prospects “crack”, perhaps indicated by a sharp payroll/employment slowdown (potentially including falls in employment), there is little currently priced into markets for recession risk. There has been little news on employment over the past six weeks owing to the continued government shutdown. But if, following the end of the shutdown, updates to the employment picture are negative, this outcome would likely put earnings expectations and the equity market at risk.

In other words, as we noted last month, a near-nirvana of continued growth accompanied by rate cuts is what is currently expected by most market participants. But there are significant risks around this consensus.

In Australia, the market reaction when rate cut expectations prove to be too optimistic could be clearly seen in October when the September quarter CPI release caused the market to unwind nearly all of its rate cut expectations, leading to a fall in bond prices (higher yields) and a fall in the domestic share market. This market reaction to the higher than expected CPI release shows clearly the risk to markets should rate cut expectations prove to be too optimistic in the face of sticky inflation pressures.

Review of the month’s major developments

• USA •

Fed Chair Powell attempts to remove a December rate cut expectation from market pricing in a decidedly hawkish press conference after the expected 0.25% rate cut

As always, US central bank actions are usually among the key market movers in any month. And so it was in October as the Federal Open Market Committee (FOMC) lowered the Fed Funds target by 0.25% to a range of 3.75% to 4.0% and announced an end to quantitative tightening (the process of shrinking the Fed’s balance sheet). Both actions were expected.

But what wasn’t expected, and contributed to rate cut expectations being revised lower, was:

• News that one member of the policy making committee had dissented from the vote to cut rates, instead favouring no change in policy
• Fed Chair Powell’s post meeting press conference where he emphasised a number of factors that could reduce the likelihood of another cut at the next (December) meeting. Specifically, he said that
• a December rate cut “is not to be seen as a foregone conclusion. In fact, far from it.”
• there were “strongly different views” on the FOMC about a December cut, and that some participants might see the lack of official data as a reason not to cut in December – “it is appropriate to slow down when driving through a fog”

Following Powell’s commentary, the market-implied probability of a December rate cut fell from about 95% down to 69% and the USD rallied sharply.

Daily market-implied December Federal Funds Rate expectations rise after Powell’s press conference

Source: MFR, Bloomberg (yield implied by December futures pricing)

 

US inflation report is one of the few official economic reports released in October

The US Administration reportedly ordered staff at the US Bureau of Labor Statistics back to work (during the government shutdown) so they could compile the September inflation report. No other official government statistical releases were made in October.

The September CPI report was fractionally better than investors expected and led to a small relief rally in equities and bonds on the day of its release. The September release showed that headline and underlying price increases in the month were slightly less than in August – the headline index increased 0.3% after rising 0.4% in August while the core rate rose 0.2% after rising 0.3% in each of the 2 preceding months. Underlying CPI measures produced by the Cleveland Fed (median and trimmed mean measures) displayed a similar trend. For the Fed to continue cutting rates, this latest one-month trend of easing price pressures will need to continue.

Monthly % change in the CPI (September 2024 – September 2025)

Source: US Bureau of Labor Statistics

Trump/Xi meeting in South Korea in late October yields little new

The Trump/Xi meeting at the end of October, while not including any signed deal, had a de-escalatory tone and included an extension of the reciprocal tariff pause. Equity markets were weaker following the meeting, perhaps because there was no firm outcome.

Japanese equity market rallies sharply following the election of a new Japanese prime minister

During the month Ms. Sanae Takaichi, a former Minister in charge of Economic Security, was elected as the new Japanese Prime Minister. As a member of the party’s right-wing faction she is recognised as an advocate of reflationary economic policy, and this is likely the key reason for the robust reaction of the Japanese equity market to news of her election. Ms. Takaichi is a self-proclaimed successor to “Abenomics” (the reformist economic policies espoused by Prime Minister Abe).

Some believe Ms. Takaichi will be a headwind for the normalisation of BoJ monetary policy (the process of gradually raising the official policy) and perhaps this is why Japanese government bond yields did not rise alongside the equity market as higher growth expectations were priced by the market.

Wobbles in some market sectors during the month

Gold

On October 21 gold had its worst trading day since 2011, falling as much as -6.8% intraday, before closing down by around -5.0%. Despite this fall, over the month the gold price rose a further 3.7%.

The rally in gold prices began in October 2023 and there are a range of theories as to what has been driving the price so dramatically higher:

• Investor concerns about the sustainability of US and global fiscal deficits and whether these rising deficits are becoming unsustainable.
• The “debasement” trade whereby global investors are seeking safe haven assets as the US dollar has lost some of its perceived safety.

The real (inflation-adjusted) gold price

Source: BCA

Credit

Corporate credit spreads rose early in October following the bankruptcy of Tricolor, a subprime auto dealer, and First Brands, an auto parts supplier. The bankruptcy of these two companies, along with broader concerns about the quality of credit origination in some corners of the financial industry, caused JP Morgan CEO Jamie Dimon to remark that “when you see one cockroach, there are probably more… Everyone should be forewarned on this.”

Since this news and Dimon’s comments drove higher credit spreads (the difference in yield between a corporate bond and a government bond with the same term to maturity), spreads have subsequently rallied (fallen) once again, although they still remain above where they were at the start of the month, as measured by Credit Default Swaps (CDS) a measure of the cost of “insuring” credit securities.

Since the Global Financial Crisis, equity investors now place more emphasis on what’s happening to credit markets as these markets can often be an early warning indicator of deteriorating economic and financial conditions. It’s likely that if there is a marked weakening of the US economy, or an issue in the funding (money) markets, credit markets will be among the first to begin pricing any rising risk. For now they remain generally sanguine.

US High Yield Bond Spreads

Source: BCA

Liquidity draining

Perhaps contributing to some of the market wobbles in October are signs of draining liquidity in US money markets. As well as causing some market wobbles, the justification for the Fed’s announced end to quantitative tightening may be the dislocation in the money markets, which is triggered by falling liquidity in overnight funding markets. This is represented in the graph below, which combines the Federal Reserve’s Balance Sheet, the Treasury General Account and overnight repo transactions to reflect liquidity into and out of US money markets.

US Overnight Liquidity

Source: MFR 

Is the market being driven by reluctant bulls?

Recent research from Citi makes the observation that many investors (including Australian investors) have a view that the AI fervour is unsustainable, especially in the context of weakening in the US labour market and wobbles in credit markets. Other concerns include historically high valuations (high P/E ratios) and US policy volatility.

Despite these concerns, foreign investor inflows into the US market remain strong. Citi describe these investors as “reluctant bulls” and point to the level of investor euphoria currently present, despite all of these concerns. This euphoria can be seen in Citi’s “Levkovich Index” which is at its highest levels outside of the Tech bubble and post pandemic recovery trade, in sharp contrast to investors’ long list of concerns.

Citi’s Levkovich Index (Panic/Euphoria), Since 1992

Source: Citi

The extent of current euphoria can also be seen in the chart below of a near-vertical increase in inflows by foreign investors into the US equity market. Such a sharp increase in flows as well as the euphoria displayed in the Levkovich Index suggest caution is still warranted.

Foreign Flows to US Equity (TIC Data), Cumulative Since 1979

Source: Citigroup, TIC data

• AUS •

Only two economic reports mattered in Australia in October – employment and the CPI

Employment

The employment and CPI reports are usually the most important data releases in most countries including Australia. In October these releases moved markets in different directions.

The September labour force (employment) release surprised markets by reporting that the unemployment rate rose by 0.2 percentage points to 4.5% from 4.3% even as the total number of people employed rose by a further 14,900. However the number of people unemployed rose by an even greater 33,900 due to an increase in the participation rate (the proportion of the working age population either working or unemployed and looking for work).

A rising participation rate is usually associated with a healthy labour market (the participation rate falls when people give up searching for work during tough economic times, and rises as employment conditions are improving). As such, the increase in the unemployment rate in the September report does not necessarily signal a sudden deterioration in the employment situation in Australia.

Two-year bond yields fell by around 0.1% and the local share market rose by around 0.8% on the day of the release with investors pricing a greater likelihood of more RBA rate cuts following the news.

Unemployment rate

September quarter Consumer Price Index

While bond and equity prices rose on the release of the weaker than expected labour force report (as investors priced in a higher likelihood of future RBA rate cuts) the opposite market reaction occurred following the release of the September quarter CPI with the 2 year yield rising by 0.12% and the equity market falling by around 1% as investors revised down their expectations for future rate cuts.

The September quarter CPI index rose 1.3% (the highest quarterly rise since March 2023), and 3.2% annually, up from 2.1% over the year to the June quarter. But it was the price pressures in underlying measures of the CPI that gave the market (and the RBA in all likelihood) the biggest fright and caused rate cut expectations to diminish sharply:

• Trimmed mean annual inflation rose 1% in the quarter, and was 3.0% annually, up from 2.7 per cent in the June quarter. This is a material negative surprise for the RBA
  • This is the first time the annual change in the trimmed mean has increased since December 2022
• The other key underlying measure – the weighted median – also rose 1% in the quarter (2.8% annually)

All Groups CPI and Trimmed Mean

Source: ABS

Across the CPI, upward inflation pressure was broad-based with too many spending categories rising too quickly, and many accelerating:

• Discretionary goods and services rose 1.3% in the quarter and rose 2.9% through the year (boosted by Holiday travel and accommodation (+2.9%) and Alcohol and tobacco (+1.6%).
• Non-discretionary goods and services rose 1.4% in the quarter, and 3.4% through the year. The rise this quarter was driven by Housing (+2.5%).
• Non-tradables rose 1.4% for the quarter due to Electricity (+9.0%), Domestic holiday travel and accommodation (+3.2%), Property rates and charges (+6.3%) and Rents (+1.0%).
• Tradables rose 1.0% due to international holiday travel and accommodation (+2.7%).
• Annual Services inflation was 3.5 per cent to the September quarter, up from 3.3 per cent to the June quarter.

The chart below shows the acceleration and broadening of inflation pressures across the economy with an increasing proportion of items rising in price by more than 2% and more than 3%.

Rising proportion of the CPI is accelerating

Source: Barrenjoey, ABS

• CIO market update: Outlook •

We remain cautious about the market outlook. This is particularly due to the evolving policy dilemma in the US. If, after the US government shutdown finishes, the next few  jobs reports are weak (or negative), if inflation pressures remain it will be difficult for the Fed to cut rates.

In October, as was the case in September, it was abundantly clear in market performances that any watering-down of rate cut expectations is negative for equity markets – witness the Australian equity market in both months (falling in September and barely rising in October) as rate cut expectations were wound back. In the US the equity market softened in the aftermath of Fed Chair Powell’s watering down of rate cut expectations after the Fed’s latest 0.25% cut.

Global equity valuations are elevated, leaving little room for disappointment from either poorer-than- forecast company earnings or fewer than-expected expected official policy rate cuts

We are relatively more sanguine about prospects in Australia given that it seems that the domestic economy is beginning to show signs of recovery following the RBA rate cuts this year (in contrast to the direction of the US economy which seems to be slowing)

While rate cut expectations have been wound back domestically, the RBA still has ample room to adjust policy if required, and an elongated process of rate cuts is no longer being discounted by the market.

In contrast to the US, Australia seems more likely to see the pace of growth improve a little further over the year ahead with the economy expected to continue its transition to more private-sector-led growth. Although, in the near term this transition comes with challenges:

• While employment growth in recent years had been largely driven by non-market sectors (those largely funded by public spending), it has stalled this year alongside slower government spending growth.
• Employment growth in market sectors has not yet responded to the pick-up in private sector demand. If the growth recovery is to continue, market sectors will likely need to drive employment growth.

The RBA is likely to face some tough decisions in the months ahead if the pickup in both inflation and unemployment in recent months continues.

The question facing investors, after such a great run over the past 12 months is “are we in a bubble”? Bubbles can occur when there is hyper-bullishness about the prospects for supercharged growth arising from a new technology.  The last such bubble resulted in the tech wreck at the turn of the century.

There is no doubt that, in some pockets of the markets, there are some indicators pointing to bubble like characteristics including significant rises in valuations, and high market concentration, such as we see with the Mag-7.

However, the significant rise in the tech sector has in part been driven by earnings growth, not just irrational speculation (although that does exist in some pockets, we believe). In addition, many of the leading tech companies have strong balance sheets, not overly burdened by debt.

In addition, looking at traditional PE ratios, the valuations of the technology sector while high, are not yet at levels consistent with historical bubbles.

Our conclusion, therefore is that there will be pullbacks, but they are probably more likely to be healthy retracements, not bubbles bursting. That of course comes with caveats about the lack of data coming out of the USA.

We remain cautious, but not significantly underweight – we are looking for opportunities to invest in high quality companies that have not kept up with the market. This has been playing out recently with the strong performance of smaller companies, which have for many years lagged their larger counterparts. But there are not just small companies offering good value. There are many bellwether, traditional large cap companies (not tech), that offer good value in an absolute sense.

It is there that we are focusing our attention.

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