The December quarter has been defined by unexpected twists. Just as we thought inflation was under control, it kicked back up. Just as rate cuts seemed certain for 2026, we’re now facing the prospect of rate rises. And just as geopolitical tensions appeared to be settling, the US launched a stunning military operation in Venezuela. Through it all, Australian households held their nerve — spending up at Christmas and keeping the economy ticking over.
The US Attack on Venezuela and Market Implications
On 3 January 2026, the USA conducted Operation Absolute Resolve — a military strike on Venezuela that resulted in the capture of President Nicolás Maduro and his wife. The operation, involving more than 150 aircraft, bombed infrastructure across northern Venezuela and transported Maduro to New York to face narcoterrorism charges.
Global reaction was swift and divided. Latin American leaders — including Brazil, Mexico, Colombia and Chile — strongly condemned the action as a violation of sovereignty. European leaders urged restraint and respect for international law. Meanwhile, several US congressional Democrats declared the strikes illegal, citing a lack of congressional authorisation.
For markets, the impact has been surprisingly muted. Venezuela currently produces less than 1 million barrels of oil per day — around 1.1% of global output — so the immediate supply disruption is minimal. But what many don’t realise is that Venezuela sits on 18% of the oil in the ground globally – the highest reserves in the world.
Oil prices edged up only slightly, with Brent rising about 0.2% as markets reopened. The bigger question is what happens next. If US companies succeed in rebuilding Venezuela’s oil infrastructure, the country’s vast reserves could eventually add 2-3 million barrels per day to global supply, pushing oil prices down in the medium term. For now, investors are taking a wait-and-see approach as political uncertainty clouds the transition.
Prospects for Interest Rate Movements in Australia
The Reserve Bank held the cash rate steady at 3.60% in December, but the outlook has shifted dramatically. Inflation jumped to 3.8% in October — well above the RBA’s 2-3% target range. That’s forced a rethink of where interest rates are likely to go.
Commonwealth Bank and NAB are now forecasting a 25 basis point rate rise in February, while Westpac expects rates to remain on hold throughout 2026. The RBA itself has confirmed it’s considering whether a rate increase might be necessary, though officials want to see Q4 inflation data first.
For mortgage holders, this is a significant shift. After three rate cuts through 2025, the prospect of rates heading back up — even modestly — will require careful budget management.
Christmas Spending and Consumer Sentiment
Despite cost-of-living pressures, Australians spent up bigtime for Christmas. Pre-Christmas retail spending hit $72.4 billion in the six weeks to Christmas Eve — up 4% on 2024. Total gift spending reached $12 billion, with shoppers averaging $757 each.
Consumer confidence surged to 103.8 in November — the first reading above 100 since early 2022, meaning optimists outnumber pessimists. Boxing Day spending continued the momentum, with $3.8 billion spent through to the New Year. This has certainly been a godsend for retailers.
Evaluations of Equities and Market Performance
Australian shares closed the year up 6.8% for 2025 — marking three consecutive years of gains. Mining stocks led the charge, benefiting from strong commodity prices and elevated gold prices around US$4,100 per ounce. Banks also performed well, meaning that most super balances should reflect another year of positive returns despite the volatility we saw throughout the year.
The Impact of Fuel Prices on Households
Petrol prices also fell a bit in December, dropping to an average of around $1.74 per litre in December – down from $1.87 in September. With global oil markets settling and the Australian dollar performing reasonably well, experts expect this to continue into early 2026 — provided the Venezuela situation doesn’t escalate.
Trump’s Tariffs and Global Trade Uncertainty
President Trump’s tariff policies continued to reshape global trade through the quarter. The average US tariff rate climbed to nearly 17% — the highest since the Great Depression — covering everything from furniture to auto parts. These tariffs are generating roughly $30 billion per month for the US Treasury and threatening to ignite the inflation rate again.
For Australia, direct impacts remain limited. However, the ripple effects matter — global supply chains are being reshaped, and business investment remains cautious. The US Supreme Court is currently evaluating the legality of Trump’s tariff authority, with a decision expected in early 2026 that could reshape the landscape again.
The Weak US Dollar and Currency Markets
The US dollar posted its worst annual decline since 2017, falling 9.4% against a basket of major currencies. The weakness stems from multiple factors: concerns about fiscal deficits, policy uncertainty around the Federal Reserve, and expectations of continued US rate cuts.
A weaker greenback benefits Australian exporters and tourists heading overseas. Most analysts expect this weakness to persist through 2026, though the dollar could rebound sharply if global tensions escalate and investors seek safe-haven assets.
Looking Ahead
As 2026 begins, Australia’s economy is holding up reasonably well despite the global uncertainty. The labour market remains resilient, wages continue growing faster than inflation, and household savings have improved.
The key wildcards are clear: will the RBA hike rates in February? How will the Venezuela situation unfold? And can global trade tensions be managed without tipping into recession?
For investors, the takeaway remains straightforward: stay diversified, focus on quality assets, and avoid overreacting to short-term noise. While volatility will persist — particularly around geopolitical flashpoints — the fundamentals suggest the economy is on steadier ground than headlines might suggest.
| The information provided in this article is general in nature only and does not constitute personal financial advice. |