Insights

Shares and bonds tell different stories

August delivered a somewhat contradictory picture for investors.

Share markets were generally constructive, but government bond yields moved higher across Australia, Europe and Japan as investors became more concerned about persistent inflation, government finances and rising energy prices.

Renewed tensions in the Middle East pushed oil prices higher, adding another source of inflationary pressure and raising the possibility that central banks may need to keep interest rates elevated for longer than markets had previously expected.

Australian shares finished the month higher, while global developed markets also gained in US dollar terms. However, the strengthening Australian dollar reduced the return Australian investors received from international shares. Listed property was one of the weakest areas, falling sharply as higher bond yields weighed on interest-rate-sensitive investments.

The RBA faces a difficult balancing act

The Australian economy continues to send mixed signals.

Household spending and inflation have been stronger than expected, but higher interest rates are increasingly being felt elsewhere. House prices have continued to soften, consumer confidence is weaker and business conditions have deteriorated.

The NAB Business Survey recorded its first negative reading for current business conditions since 2020, while business confidence also declined. Companies are facing higher costs but appear increasingly unable to pass all of those increases on to customers.

At the same time, inflation remains stubborn. Headline inflation was 3.5% over the year, while underlying inflation remained at 3.6%, still above the RBA's preferred range.

That combination makes the RBA's job particularly awkward: inflation remains too high to make an imminent rate cut likely, but signs of weakness in housing, employment and business activity make a sustained series of further increases less clear-cut.

Inflation remains a global problem

The same tension is playing out overseas.

In the United States, employment data were stronger than previously thought, suggesting the labour market remains resilient. At the same time, higher commodity and energy prices have added to inflation pressures, with oil moving back above US$100 per barrel during the period covered by the report.

In Europe, economic growth has been stronger than expected, particularly in Germany, but inflation concerns have also increased. The European Central Bank raised rates again, with higher energy prices playing an important role in its decision.

China presents a different picture. Growth remains within the government's target range, but weak domestic demand, excess industrial capacity and subdued household spending continue to weigh on the economy. Policymakers are expected to remain supportive, although the report suggests any additional stimulus is likely to be measured rather than dramatic.

Australian companies deliver a better reporting season

Australian company reporting season was generally stronger than analysts had expected.

Profits and dividends held up better than forecast, although much of that resilience came from companies controlling costs rather than achieving particularly strong sales growth.

Healthcare was the standout sector during the month, rising strongly and benefiting from sharp gains in companies including CSL and Ansell. Consumer-facing companies were weaker, while smaller and mid-sized businesses generally performed better than Australia's largest companies.

The Australian dollar also strengthened during August, while gold prices rose as changing interest-rate expectations supported parts of the resources sector.

What this means for investors

August reinforced a theme that has been building throughout 2026: financial markets are proving resilient, but the economic backdrop remains unusually complicated.

Inflation is still too high for central banks to declare victory, while higher oil prices have introduced another layer of uncertainty. At the same time, economic growth and corporate profits have generally held up better than might have been expected given the level of interest rates.

For investors, that mix of resilient share markets, persistent inflation and geopolitical uncertainty means periods of volatility are likely to remain part of the landscape.

Click here to read the full August Monthly Market Update, including detailed commentary and asset-class returns.

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