March 2026 quarter economic and market commentary
Clearly the most notable development in global financial markets during the March quarter was the decision by both the US and Israel to launch joint military strikes on Iran. The operation was designated as Operation Epic Fury and was ostensibly the product of failed negotiations around Iran’s nuclear military capabilities.
In terms of the macroeconomic consequences, the most arresting feature was a surge in the price of oil. The West Texas Intermediate (WTI) oil price benchmark surged around 75 per cent through the quarter, although that has eased back in April to be some 55 per cent above where it commenced the year.
The initial impacts on financial markets were mostly as expected. After reaching a low of 3.94 per cent on February 27th, the US 10-year bond yield surged reaching a high toward the end of March of 4.43 per cent before retreating modestly in April. Equity markets retreated and by late March the S&P500 was down nearly 7.5 per cent for the quarter. April, however, saw what was to some observers a surprisingly strong rally bouncing nearly 12 per cent from that late March low. In this, the US equity market exhibited a surprising sanguinity that the macroeconomic disruption wrought by higher oil prices was likely temporary. It may also reflect a confidence that the US Federal Reserve would “look through” the near-term inflation consequences of higher oil prices and maybe ease policy in the second half of the year. That notion was given some encouragement by the apparent disposition of the Federal Reserve Chair designate, Kevin Warsh, to contemplate a reduction in the policy rate.
Warsh conjectures that disinflation in the US will follow from tremendous (largely AI motivated) investment. In Warsh’s view that investment has wrought a productivity dividend that (other things equal) has raised the US economy’s “speed limit”. In other words, the US economy can grow at faster rate before igniting inflationary pressures.
Having said that, for all the talk of US productivity exceptionalism (which certainly exists), the Fed’s favoured core private consumption expenditures (PCE) measure is “sticky” at just above 3.0 per cent, unchanged from where it was a year ago and still well north of the Fed’s target 2 per cent. In that context any potential easing under current Fed Chair Powell remains unlikely.
Somewhat surprisingly given its much vaunted “safe-haven” (and “inflation-hedge”) status, the price of gold languished in the wake of the surge in oil prices. That may have reflected the fact that gold prices had surged over the previous year or so. Toward the end of January 2026, the gold price had at one stage more than doubled from where it started 2025 and was up almost 20 per cent in January 2026 alone. That arguably brought gold to “overbought” levels. Indeed, despite a retreat from those highs reached at end – January 2026, the gold price was up 8 per cent in the March quarter.
Locally, inflation data revealed more than a hint of “last mile” complications in getting inflation back to the middle of the target 2-3 per cent range. Inflation was well in excess of the RBA forecasts issued toward the end of 2025 and with the economy and labour market seeming to perform strongly, the RBA increased the policy rate twice through the quarter taking it to 4.10 per cent from 3.60 per cent at the end of 2025. Australian bonds markedly underperformed their US counterparts with the Australian 10-year yield rising some 33 basis points in the quarter to 5.07 per cent.
Unsurprisingly, given the move in interest rates and the performance of global equity markets, the ASX200 declined around 2.7 per cent in the quarter (although as with the US market, it exhibited a strong bounce through April).
Going forward, the key issues for 2026 revolve around how the conflict in Iran plays out and the subsequent impact on oil prices and attendant performance of the global macroeconomy.
Clearly oil prices will have a substantial impact on economic activity growth. Whether central banks including the Fed can mitigate the effect on economic activity will depend largely on how “sticky” inflation proves to be. Certainly, there was evidence of such “stickiness” prior to the oil price surge, and it may be that the structural suppressants to inflation that operated in the three or so decades from the mid to late 1980s to the end of the pandemic are now in abeyance.
The globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating.
The globalisation of goods markets is in retreat as governments resort to protectionist measures (most notably with the Trump trade measures in the US); domestic regulation of goods and labour markets is increasing in scope leading to loss of flexibility in markets and attendant upward price pressures or “sticky” inflation”; and baby boomer workforce participation is declining.
The forgoing may make it more difficult for central banks to respond to activity weakness and raise the spectre of a “stagflation-lite” scenario.
That would be an unhelpful environment for financial markets.
Against that, the strong performance in equity markets appeared to reflect ongoing positive assessments of the financial ramifications of the AI revolution and other structural “mega-trends”.
Other factors include: a fracturing world that has buoyed defence stocks and a tendency toward “oligopolisation” / “monopolisation”, particularly in emergent tech industries, which has boosted returns from those stocks.
It will be the relative strengths of the potentially negative macro forces and the positives emanating from those structural forces that will ultimately determine how markets evolve for the remainder of 2026.
March 2026
Stephen Miller is an Investment Strategist with GSFM. The views expressed are his own and do not consider the circumstances of any investor.
