Andrew Baume | June 11 , 2026
While there is still no resolution to the Middle Eastern conflict, inflation continues to drive higher than the RBA target range heading into mid-June. This led to a further hike in the overnight cash rate at the central bank’s 5 May meeting and it now sits at 4.35%, back to the level that prevailed before the recent cutting cycle commencing December 2024. Time will tell whether this retracing of cash rates will influence the level of inflation with the market still predicting one further hike before the end of the year.
Inflation was also rising in the US at an annualised 4.2% in early June. This was the highest monthly inflation number since April 2023 (when the Fed was sharply raising interest rates). The cuts to overnight rates from the Fed are now in danger of being unwound even as President Trump’s new Chair, Kevin Warsh, leads his first policy setting meeting on 16-17 June. Warsh had agreed with the administration’s push to lower interest rates, and this inflation pulse is making that hope less likely.
By the middle of May, the outlook for inflation was so worrisome that the market was pricing a further two hikes in Australia. Weak unemployment data changed the dynamic with strong concerns that the economy might weaken significantly if an aggressive tightening path was to follow. By the end of May, monthly inflation data was slightly lower than expected which was some relief.
The Westpac – Melbourne Institute consumer confidence survey reinforced that consumers are extremely wary of the current economic environment. A small survey by Finder (only 1000 and non-randomised) found over 60% of respondents expect an Australian recession by year end. Auction clearance rates and expected prices for houses are also softer. GDP released in early May was also an anaemic 0.3%, which will concern policymakers.
The path between reigning in inflation and precipitating a significant slowdown is very narrow for the Reserve Bank but although the indicators are weak, the Australian borrower base has remained very strong.
Many commentators were concerned that US equity markets had shrugged off both higher inflation and higher bond markets by reaching new US record levels in May, but markets pulled back in early June. This disconnect is partially explained by the growth still working its way through and little evidence that unemployment will become a concern.
In fact, US employment markets remain robust generating over 170,000 new jobs in May. Closer to home, the recent Federal Budget has introduced several new rules for investors, particularly regarding capital gains and negative gearing. The grandfathering of the latter is expected to reduce the amount of investor properties being sold – certainly in the short term.
Changes to Capital Gains Tax will also be phased in but the rules for pooled superannuation funds are relatively unchanged. Those funds are the biggest investors and also drive the ongoing flow in Australian equities, so it is difficult to predict direct consequences for the broader market.
The main direct consequence may be in private equity where some have focused on the less friendly conditions for early-stage equity, particularly with regards to carried forward losses being less effective offsets for gains. Private debt, with its higher position in the capital structure, has a lower probability of losses and carries a known return.
We expect to see more focus on coupon paying investments over time as the less stable private equity returns lose favour. Given the weakness in fixed rate bond markets, investors have been better off in floating rate investments for most of the last five years. Bond allocations are not delivering the defensive characteristics that drives allocations and are also proving to be less defensive than many investors had expected.
Despite the cloudy inflation picture, the risk in markets in the middle of 2026 continues to be weighted against being uninvested. Many pundits are worried about market dynamics but those with their money at work have seen relative strength in US equities and recoveries in the All Ordinaries after the Iran conflict selloff (beginning to taper somewhat) despite the weak bond market.
The private credit environment has led to strong sector performance with returns that are similar to equity expected returns. The sector remains strong and unemployment is the key indication. While labour markets show no sign of trouble, the volatility affecting other asset classes is not being experienced in loan portfolios. Importantly these portfolios’ continual and stable performance occurs despite dire warnings that appear not only stale but fundamentally misplaced.
Private Credit has a unique advantage of the right to take action when a borrower performs away from expectations. This is only available to equity holders that control a company, but lenders may step in early when there are signals that problems may arise well before they actually do.
This set of early rights is a key advantage for lenders with well-structured loan documents and is often not given due regard. Although there will always be borrowers who find themselves facing circumstances they did not expect, the current environment is producing outcomes well within expectations.
