Monthly Market Commentary
As at 31 January 2026
Economic review
Australia
Strong labour market conditions boost the economy
Australian unemployment fell to 4.1% from 4.3%, supporting the RBA’s view that there is still excess demand in the economy and validating its recent decisions to keep rates on hold.
Australian monthly CPI for December came in at 3.8%, up from 3.4%. The RBA deputy governor emphasized that policy focuses on inflation over a one- to two-year horizon, while also noting that the outlook for interest rates has changed and cuts are no longer likely.
Australian household spending rose 1.0% month on month in November, taking annual growth to 6.3% and aligning with the late-2025 rebound in consumer confidence. However, confidence has since edged lower, likely reflecting a shift in market expectations from interest rate cuts to potential rate hikes in 2026.
The Australian NAB business survey reported slightly improved business conditions and higher confidence in December, partially reversing November’s declines. Pricing pressures on businesses remain elevated.
International
The Fed leaves rates on hold in January
The Fed’s FOMC left its policy rate unchanged at 3.5% - 3.75%, in line with expectations, noting solid economic growth and a stabilising unemployment rate. Markets are currently pricing in around 50 bps of cuts over the year, with the first full cut not anticipated until July.
President Donald Trump has nominated Kevin Warsh as the next Fed Chair. Warsh sees the central bank’s current policy stance as restrictive and will likely argue for further rate cuts.
US headline CPI inflation rose by 0.3% in December. Core inflation rose by 0.2%. The data is not expected to impact the Fed’s rate cutting cycle.
Following the capture of Nicolas Maduro, US President Trump has been putting pressure on other Latin American countries including Cuba, Mexico and Colombia to curb illegal immigration and stop the flow of drugs into the US.
Iran has experienced large scale protests across multiple cities as economic hardship from sanctions takes effect. The latest protests began after shopkeepers closed their businesses in response to high inflation. President Trump has warned that any violent crackdown on demonstrators by the Iranian authorities could trigger a US response.
Market Review
Australian shares gain even as interest rates are set to rise
Australian shares rose 1.7% in January, performing in line with international shares.
The energy sector was the strongest performer, increasing 11.1%, as energy prices climbed on heightened risks of a potential blockade of the Strait of Hormuz. Materials also performed well, supported by higher metal prices.
Information technology was the largest detractor for the fourth consecutive month, down -9.1%. The sector has now fallen -31.8% since August, reflecting its previous elevated valuations.
International share markets continue higher in January
International shares (hedged) rose 1.7% in January, supported by investor expectations of solid earnings growth as Q4’25 reporting began.
Like Australian shares, the best performing sector was energy, up 11.9%, followed by materials, up 7.5%. The largest detractor was the IT sector, which fell -1.3%.
Emerging market shares rose 3.6% in January, supported by their attractive valuations compared with other international share markets.
The AUD surges as the likelihood of interest rate hikes rises.
The AUD surged after employment data released during the month suggested that the Australian economy was stronger than expected. This lifted market expectations for an interest rate hike and pushed the AUD higher.
The AUD rose from US$0.6673 to US$0.6964, an increase of 4.4% and appreciated against all other major currencies.
Australian listed property performed poorly in January
Australian listed property fell -2.7% in January, underperforming international and Australian share markets.
Given the sensitivity of Australian REITs to interest rate expectations, it is unsurprising that the sector came under pressure in January as expectations for higher interest rates increased.
Commodities saw strong returns in January
Commodities advanced, rising 8.4%. Oil jumped 16.2% as heightened geopolitical tensions around Iran raised the risk of a blockade in the Strait of Hormuz. Precious metals delivered strong gains, with gold up 13.3% and silver 11.2% amid increased investor demand, while industrial metals also appreciated over the month.
This document is issued by Mercer Investments (Australia) Limited ABN 66 008 612 397 AFSL 244385 (MIAL). MIAL is a wholly owned subsidiary of Mercer (Australia) Pty Ltd ABN 32 005 315 917 (‘Mercer Australia’). References to Mercer shall be construed to include Mercer LLC and/or its associated companies. ‘MERCER’ is a registered trademark of Mercer Australia.
This document contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission.
The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the Fund, asset classes or capital markets discussed.
Information contained herein has been obtained from a range of third party sources, including underlying investment managers. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.
Investors should be aware that the value of an investment in any MIAL product may rise and fall from time to time and that neither MIAL nor Mercer guarantees the investment performance, earnings or return of capital invested in any MIAL product. Past performance does not guarantee future results.
If you are investing in or considering an investment, you should note that the information contained in this document is general in nature only, and does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. It does not take into account your personal needs and circumstances.
Before deciding whether to acquire, continue to hold or dispose of an investment, you should refer to the Product Disclosure Statement (PDS) and Target Market Determination (TMD) before making a decision and consider seeking independent advice from a professional financial adviser. The Financial Services Guide (FSG) for MIAL can be obtained via mercer.com.au/mercerfunds. Conditions, fees and charges apply to MIAL Fund/s and may change from time to time.
© Mercer 2026. All rights reserved.