Monthly Market Commentary

Last updated: July 2024

Economic overview 

Australia – inflation concerns abate  

Data released over the past month broadly painted a picture of slowing economic conditions in Australia. Surveys of businesses noted declining level of activity with notably the retail sector still reporting challenging conditions. This was corroborated by struggling retail volumes, recording a second consecutive quarter of negative growth. The labour market has remained strong, with the unemployment rate remaining low, despite a significant number of jobs having been added in June.

Inflation was the focus over the month for economists and market participants alike. The consumer price index for Q2’24 rose by 1.0% quarter-on-quarter (QoQ) in Q2’24, bringing the year-on-year (YoY) rate to 3.8%, with food, housing and healthcare among the key drivers for the rise. However, the trimmed mean consumer price index (often considered by the Reserve Bank of Australia’s (RBA’s) preferred measure of inflation) rose by 0.8% QoQ in Q2’24, declining from the 1.0% QoQ in Q1’24, easing concerns that underlying inflation may be accelerating in Australia.

International – US interest rate cuts on the horizon

Global data releases were more mixed over the past month. For the US, the first estimate of Q2’24 gross domestic product (GDP) exceeded consensus economist forecasts, coming in at 2.8% QoQ annualised, rising from 1.4% recorded in Q1’24. Private consumption remained a source of strength with business fixed investment also accelerating. Recent business surveys indicate weaker conditions among manufacturers with some anecdotes emerging of softening customer demand. The labour market remains strong, although it has shown some signs of weakening with the unemployment rate edging up slightly to 4.1% in June, whilst inflation has continued to decline with the US Federal Reserve’s (the Fed’s) preferred measure declining to 2.5% YoY. In the Eurozone, momentum in the recovery has slowed with business surveys pointing to a moderation in activity, notably among manufacturing companies, whilst disinflation appears to have stalled with base effect a contributing factor. Against this backdrop, the Fed kept interest rates unchanged at its July meeting with its chair Jerome Powell stating that a rate cut could be an option in September if inflation moves down as expected. The European Central Bank (ECB) kept interest rates unchanged noting the decision for the September meeting will depend on data releases leading up to the meeting.

In China, economic growth has remained lacklustre. Q2'24 GDP grew at a slower pace than Q1’24, recording 0.7% QoQ growth, bringing the YoY pace to 4.7%.  June data showed softening retail sales growth and ongoing property weakness. Against this backdrop, the Peoples’ Bank of China cut the 7-day reverse repurchase rate by 0.1% p.a. signalling their intent to make monetary conditions more favourable.  Meanwhile in Japan, there have been more positive signs with retail sales rising and business sentiment remaining strong. With signs of a virtuous cycle emerging between wage growth and prices, the Bank of Japan (BOJ) raised interest rates from 0.1% p.a. to 0.25% p.a. in July, with its governor stating that it will continue to raise rates if the economy evolves with inflation expectations.

Market review

Australia

Australian Shares rose in July, supported by rising investor optimism internationally and easing concerns around inflation locally. Australian Government Bonds delivered positive returns, benefitting from international market environment and the weaker-than-expected Australian inflation reading, whilst the Australian dollar (AUD) was weaker against the major currencies, driven by disappointing economic data from China. 

International

International shares ended July higher, supported by easing US inflation concerns and expectations for near term interest rate cuts. Investors rotating from large caps to small caps was a key theme during the month, with small caps performing strongly in anticipation of a lower interest rate and a slower but still growing economic environment. International Government Bonds delivered positive returns as expectations for near-term interest rate cuts in the US rose following another month of disinflationary conditions.

Market Insights

Australia – New tightening cycle unlikely

We expect growth to remain weak with consumption suppressed by high interest rates and cost-of-living pressures. Whilst core inflation appears to be declining, we expect this decline to occur more slowly than other developed economies due to pressures from residential rental markets. A key question that remains is how the RBA will balance the progress on inflation with weak economic growth. We do not believe that the RBA will commence a new tightening cycle but believe that it likely that interest rates have peaked this cycle.

From an asset class perspective, we favour Australian government bonds over cash with cash rates likely to have peaked this cycle.

International – Resilient but regionally divergent growth expected

We expect international economic growth to remain resilient but regionally divergent. We anticipate growth in US to slow gradually, with scope for more resilient growth should labour markets remain strong. Growth in China is expected to improve from its current lacklustre pace, supported by government policies, whilst other emerging economies are expected to benefit from their central banks easing monetary policy.

From an asset class perspective, we favour emerging markets over developed markets in light of their more favourable economic prospect and relatively more attractive valuations.

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