Stubborn Inflation, Shutdown Poker and Economic Momentum

01.10.2025

In this episode of SB Talks, CEO Vincent O’Neill and CIO Nick Ryder, unpack the Reserve Bank’s decision to hold rates at 3.6%, following three cuts earlier this year. They explore what’s behind the RBA’s cautious stance, rising services inflation, stronger consumer spending, and signs of renewed momentum in the housing market. The conversation shifts to the US government shutdown, where a deepening political standoff could stretch on for weeks, highlighting the economic toll drawing on past shutdowns, and the estimated $400 million daily hit to the US economy.

They discuss how this, along with tariffs and other policy moves, adds complexity to the global outlook. As we enter the final quarter of 2025, Vincent and Nick take stock of market sentiment, strong corporate earnings, and the ongoing AI investment wave.

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Transcript

Vincent: Welcome to SB Talks. Today is Wednesday, October 1st, and I am joined by our Chief Investment Officer, Nick Ryder. Welcome, Nick.

Nick: Thank you, Vinny.

Vincent: Now today Nick and I will be discussing yesterday’s unanimous decision by the Reserve Bank to hold rates steady at 3.6%. We’ll provide an update on the impending, government shut down, and we take stock on markets as we enter the last quarter of 2025. Welcome to all our listeners.

Let’s open with yesterday’s RBA rate decision, unanimous decision to hold rates at 3.6% after three cuts earlier this year. Some of the commentaries surrounding that are positive rebounds in some consumer spending, but some red flags potentially or concerns that could come onto the radar around inflation, particularly around aspects of services inflation and not necessarily heading perfectly in the direction that the RBA might want.

Nick: Yeah, so last week we got the August monthly CPI indicator, which typically the RBA hasn’t paid a lot of attention to. But I think this meeting that was certainly alluded to in the post-meeting statement and the press conference, that there was a bit of concern around what they call market services category.

Vincent: So what fits in there?

Nick: So, things like restaurant meals, insurance, and what they call audio, visual and media services, which is things like streaming services, Netflix all grows quite strongly. And that along with a sort of bit of a re-acceleration in new dwelling costs, has the RBA concerned that, inflation in the third quarter, which will be released at sort of third week of October, will be a lot hotter than what they had penciled in August. They had 0.6% for quarterly inflation, trim remain quarterly inflation in August. It looks like it’s going to come in around 0.9 or even maybe 1%.

Vincent: So, on an annualised basis, that’s well above the 2.5, two point ideally trending towards.

Nick: Yeah, so I would say there was a, bit of a nod to that. Yesterday, I wouldn’t say there was a high degree of concern, but certainly the commentary that the confidence that the RBA had expressed that inflation was sort of heading back towards that two-point half percent seems to have been lost. I think they’ll definitely sit on their hands for a while and we’ve seen Michelle Bullock yesterday in the press conference, talk about that. She’s also spoken about just stronger domestic consumption. We call it real wage growth has improved as people’s, wages are now sort of tracking ahead of inflation, so they’ve got more spending power. We’ve had the three rate cuts, so that’s putting a bit more money in.

Vincent: Putting enthusiasm back in the consumer and it’s flowing through.

Nick: Yeah, and she’s spoken about this handover from the public sector, from the government sector, which had been driving the economy for the past couple of years. The big spender back to the private sector. And talking about house prices have started to go up to sort of head higher a bit following those rate cuts, that wealth effect that, feel a bit wealthier, are happier to spend.

Vincent: And also there are a lot of positive factors, let’s say, because we’ve spoken quite a bit on this podcast about the potential two speed economy, a lot the consumer was, not necessarily flying high. That government spending and state spending was really keeping our economy ticking over and as well as immigration and the per capita recession. So, some of these figures, while it may dampen the prospects of further rate cuts, are probably big positives for, in terms of just where the broader economy’s heading.

Nick: Yeah, most definitely. It’s a good news story in the sense that the economy doesn’t need rate cuts to drive growth. We are getting growth from these, other things.

Vincent: And they’ve left the door open in terms of where to from here?

Nick: Yeah definitely, she played a straight bat. There was definitely no forward guidance. Journalists tried to probe her on what it might mean, but she didn’t give anything away on that. So, I think, it’s very much wait and see for them. I mean, she did talk about, the monthly indicator being partial and volatile. She’s still talking about labor costs and weak productivity that we might get more pass through, of inflation pressures into end prices. So, businesses probably that might have been absorbing some of the higher cost pressures will now feel more confident to pass them on because the economy’s doing a bit better. And the labor market’s still pretty stable. So, there’s sort of no stress on that side of their mandate. It was a on balance, a fairly hawkish sort of pitch. We’ve seen market pricing move.

Vincent: Yeah, I was going to ask where’s, how’s the market now positioned? Because there had been, we’d been sitting previously, I think certainly a high expectation of a move in November and that that came off quite a bit.

Nick: Yeah. So, we’ve gone from about a 50% chance of a cup day rate cut to a one in three chance. Right. It’s about 10 basis points. Nine 10 basis points priced at the moment. So not a high probability. And we had. Two cuts, about 47 basis points price sort of mid by middle of next year, and we’re now down to about 30, so maybe one and a bit cuts.

Vincent: Right. Okay. So, there are even people saying that they’re done now for a while. Dare I say, we’re locking into, I know your favourite term, a data dependent period if they’re really just going to look at the numbers. The economy’s not screaming, weakness, or need for action. So, let’s just take it month by month.

Nick: That’s right. And we’ve spoken a bit about the neutral rate before. There’s a bit of uncertainty, maybe it’s around three, maybe a bit above three. The economy doesn’t need a lot of, stimulus, monetary stimulus at the moment.

Vincent: Maybe we are testing the neutral rate right now.

Nick: Well, that’s right. We never know what the neutral rate is until years later. I think that’s the takeaway from that.

Vincent: Yeah, excellent. I might step across to the US if I can right now. So, at time of recording the US is quickly, rapidly heading towards a likely government shutdown, something we talked to in more detail on the last podcast. But just to recap, unless Congress passes a funding agreement, and that’s going to need the support of some of the Democrats in the Senate and they are holding out for some Medicaid or some flexibility around Medicaid cuts and healthcare tax credits, unless the Democrats come to the table, and it doesn’t appear they’re likely to, we are heading for shutdown.

Nick: Well, that’s right. I just read before we started filming this, that there had been another vote in the Senate that had failed. I’m not sure what time it is there, but it very much looks like they won’t hit their midnight deadline. We are heading to another shutdown. We did speak a little bit about it on the last podcast. Markets seem, pretty relaxed with it.

Vincent: Incredibly benign. I was going to interject with that point, since the last recording to now, obviously it’s come up right onto our radar and still markets. It’s obviously not the first time we’ve been there. I think the longest in most recent years was 36 days shut down in 2018. So, markets are taking it in their stride. Too much in their stride. What’s your thoughts?

Nick: That was a 35, 36 day partial shutdown. The last full shutdown was in 2013. And Trump’s threatening that the sort of furloughed workers might be permanently laid off, and extension of the Doge sort of cuts to government employment earlier in the year.

Vincent: Was sort of singing from a hymn sheet that this would give him more interim powers to do things that he’d want to do. So be careful the path that you trade very much. Probably from his usual playbook.

Nick: Yeah. But I don’t think the Democrats are buying it. They’re saying, well, we’ve already got 150,000 government workers leaving this week actually. I think they took this sort of six-month buyout or six-month redundancy, so they all finish up this week. I don’t that they’d be permanently laid off. There wouldn’t be anyone in government to get things done. I mean, I think the interesting thing is we might not get non-farm payrolls report this Friday, because those workers are furloughed. And then I think on the 15th, we’re expecting the inflation data, the CPI data, and these are very important data indicators, particularly for the Fed who meet at the end of the month. And so if we have an extended shutdown, the markets will be flying blind about what’s going on in the labor market and with inflation and, it’ll make the Fed’s job all the harder.

Vincent: Consider the intense scrutiny that they’ve been on up to now.

Nick: And particularly around the employment numbers, the revisions and just how weak is the labor market in the us. So, I think that’s one of the more important things. Not necessarily the fact that, these workers will be furloughed and then generally what happens is they get back pay, maybe not contractors.

Vincent: Yeah, and it’s an interesting one because the Democrats appear to be really solid at this point in their position, so this could certainly run for many weeks.

Nick: I think it will. Yeah, it’s hard to predict, it’s like poker, someone can always fold. But I think this time they see this is a good opportunity. Typically the government in power gets blamed. They’re a long way out from the midterm still, so people will probably have forgotten it by then. And it’s an opportunity for Democrats who’ve been fairly quiet to sort of, reassert themselves.

Vincent: So there certainly have not been the dominant force in US politics in the last few months. But the dominant force in US politics and the administration, very confidently feels it’s got the mandate to do what it wants to do. So, I don’t see them rushing to the compromise table either.

Nick: No. And they’ll obviously try and blame the Democrats for it. But it’s interesting, the CBO, which is the budget office, estimates that the last 35 day shutdown in 2018 saw a loss of $11 billion of economic activity and 3 billion was never recovered. So even though it reopened, that was just activity that was gone. It’s lost productivity, and they estimate that it’ll cost $400 million a day this time around. There is an economic cost to the economy.

Vincent: It’ll shave potentially some growth off in the fourth quarter. Just to add another ingredient into the US economic mix on top of the tariffs and the One Big Beautiful Bill, and now the shutdown down and it just goes on and on and on. But markets remain fairly relaxed. How do you feel about the picture if we look at now as we sort of approach, into the last period in the year. Markets have been strong despite everything since probably Liberation Day markets have certainly rebounded and rally strongly. The question, with all these threats on the horizon, to lurch, to conservatism, that’s obviously one of the things that you’ll always be tussling with. How do you feel, how confident do you feel as an investor?

Nick: Yeah, I don’t think my views have changed dramatically. Market’s still doing well. There’s a lot to like, corporate earnings we’ve spoken about before are still pretty strong. The AI theme continues to be strong. The investment is enormous. The prospect of fed cuts, maybe a bit over baked, but there’s still possibility that there’ll be fed rate cuts, particularly if the labor market softens up. So, I think there’s still some tailwinds and the headwinds are expensive valuations, but we’ve had those for a long period of time.

Vincent: If we had been, ultra strict on valuation methodology, you’d have probably been out of the market potentially for a decade.

Nick: Well, that’s right. By far in a few weeks during COVID. You can’t just look at valuations on their own. You have to look at it in the context of everything else that’s going on. I think it looks all right. Last week we got a revision. This is backward looking, but we got third quarter growth in the US was revised up, particularly consumer spending, so it just paints a picture of an economy that’s doing still pretty well. And a consumer that’s very robust  and we’ve discussed Australia, Australia economy looks probably a little bit better as well. From an economic perspective, I think the backdrops pretty good. And equities are, to some degree reflecting that.

Vincent: And as ever, if you are to remove money from an asset class, you still have to find another asset class that represents, exceedingly better value to put it into.

Nick: Well, that’s right. And that therein lies the challenge because you’ve got high equity markets, you’ve got tight credit spreads, you’ve got government bond yields, particularly at the longer end look. Because they’re paying you a pretty good real yield for once properties, things are improving a little bit there. Infrastructure looks okay, but it’s more defensive. So, yeah, I think we’re pretty happy with how we’re positioned currently.

Vincent: It’s a time for a prudent, diversified portfolio, but not, running for the exit, certainly. Any other key topics you’d like to cover off?

Nick: I think there was some interesting news, overnight, not sure whether it’s more a rumor that, but can certainly conflicting reports coming out of China that they’re telling domestic steel mills not to buy any iron ore from BHP. They’ve got this group called the China Minerals Resource Group, which is sort of like their industry body in charge of negotiating iron ore purchases. Sort of like a monopoly or monopsony buyer, and they’re, in negotiations with BHP over the prices for their, medium, for the forward period ahead. Iron, iron ore and so there’s bit a standoff going or linen. So I think that’s interesting to watch. I’m not sure if that’s actually true or it’s just a Bloomberg report that was denied in another publication, so, potentially,

Vincent: Don’t, don’t, don’t lurch to action on that one, but one to keep a close eye on all the same, given the importance of that.

Nick: Yeah. We did see some weakness in the BHP share price in London trading overnight as a result, of that rumor to what?

Vincent: To what degree?

Nick: It was off 5%.

Vincent: Okay, material.

Nick: Something to watch. And then, I guess the other sort of thing for the Australian market, we’ve had Trump’s 100% tariffs on imported pharmaceuticals, which CSL has said won’t affect them because they’ve got manufacturing in the US but these are sort of geopolitical type things that could potentially affect some of the major stocks in Australia. So just something to watch.

Vincent: Yeah, that’s a very good point. When we sort of speak and not dismiss, but don’t get overly concerned about the tariffs, the picture can be dramatically different from one sector to another. So it again, does require just careful due diligence. Excellent overview. As always, Nick, always appreciated. And on a beautiful, sunny day outside. Thank you Nick. And thank you to all our listen.

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