3 Things You Need to Know This Week | US Inflation, UK GDP, RBA

Transcript

Charles Dornbush:

Hello and welcome to Three Things You Need to Know This Week.

This is our regular series designed to help you cut through the financial headlines and focus on what really matters for markets. For more market insights, subscribe to our YouTube channel or visit FisherInvestments.com. And with that, here are three things you need to know this week.

First up, US inflation.

The latest US inflation data will be released on Wednesday, offering more insight into the current state of the economy. Let's look at the recent trends. Headline inflation accelerated to 4.2% in May, but then June's reading eased to 3.5%. That's above the 2.4% pace we saw back in February, just prior to the outbreak of the Middle East conflict, but far from the massive energy-induced inflation spike many feared when the conflict began. Renewed conflict in the Middle East could always rattle energy prices again, but likely not to the same degree as earlier this year. Markets are incredibly adaptive. Global supply chains quickly reroute, and the initial shock value of a regional conflict fades as it becomes a known variable. Furthermore, moderate money supply growth suggests inflation may cool sooner than most expect. For stocks, what matters most is how reality compares to expectations. Right now, inflation expectations remain elevated compared to pre-conflict levels. Dour expectations means there's a high probability that reality turns out better than feared. Ultimately, we see inflation fears as another brick in the wall of worry for stocks to climb.

Next, UK second quarter GDP.

On Thursday, the United Kingdom will release its preliminary estimate for Q2 GDP. If you read the financial press, you might think the UK economy is in terrible shape, but the reality is quite different. The UK economy has grown every quarter over the last two years. It accelerated to 0.6% growth in the first quarter of 2026, and we expect another positive reading for the second quarter. Beyond GDP, purchasing manager indices have signaled expansion in recent months, with a sharp acceleration in July. To us, these and other data points point to an economy that is more resilient than many give it credit for. Whether the Q2 reading comes in better or worse than expected, we caution against overstating the importance of GDP reports for stocks. GDP is a backward-looking metric. It tells us what has already happened. Stocks, on the other hand, are always forward-looking. Positive stock returns do not require booming economic growth. Stocks simply need conditions to be better than expected. Remember 2025? Global stocks delivered returns over 20%, even though global GDP slowed compared to 2024. Stock performance ultimately hinges on the gap between investor expectations and reality. While the UK economy certainly faces domestic challenges, stocks only need reality to turn out a little bit better than low expectations to continue their upward trend. That's something we expect for UK stocks, and global stocks as well, as the year progresses.

Finally, Australia's central bank meeting.

The reserve Bank of Australia, or RBA, meets for its next interest rate policy decision on Tuesday. Investors will likely be looking for clues about whether policymakers plan on additional monetary tightening. The RBA has been one of the more hawkish central banks this year, delivering more rate hikes than any other major central bank in 2026 as policymakers have remained focused on containing persistent inflation. To us, the RBA's hawkishness suggests fighting the ghosts of 2022, when inflation spiked alongside surging oil and natural gas prices. But, for investors, inflation isn't the main risk here. The bigger risk is whether the RBA unintentionally inverts the yield curve by going too far with rate hikes. Why does that matter? Banks borrow money at short-term rates and lend it out at long-term rates. When a central bank pushes short-term interest rates higher than long-term rates, it crushes bank profit margins and stifles lending. That is why an inverted yield curve is a reliable economic warning sign. Fortunately, monetary policy affects the economy with a lag, meaning investors have time to weigh the impact of policy moves. More importantly than that, capital is global and Australia is just one piece of a bigger puzzle. Right now, the global yield curve remains positive, which continues to support lending activity and corporate fundamentals across developed markets. An incremental rate adjustment in Australia this week won't change the global picture materially, but it is a trend we are watching closely.

And that's it for this episode of Three Things You Need to Know This Week.

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