Market Commentary
Last updated: November 2024
Economic overview
Australia – Inflation eases on government energy rebate
Australian economic data releases over the past month painted a mixed picture. Business surveys indicate conditions are subdued but positive, with the retail and manufacturing sectors facing the most challenges. Despite this, retail volumes improved in Q3’24, rising 0.5% quarter-on-quarter (QoQ), with the Australian Bureau of Statistics noting that consumers remain “price conscious”. Meanwhile, labour markets remain strong with about 64,100 jobs added in September and the unemployment rate remaining unchanged at 4.1%.
The Consumer Price Index (CPI) which measures inflation, declined further, bringing the year-on-year (YoY) rate to 2.8% in Q3’24 from 3.8% in Q2’24. The government’s energy rebate was the main reason for the decline. The Reserve Bank of Australia (RBA)’s September meeting minutes considered both raising interest rates if financial conditions turned out to be insufficiently restrictive and cutting rates if “significantly weaker than expected” growth resulted in downward pressure on inflation.
International – US resilience continues
International economic data showed resilient but regionally varied conditions over the month. The resilience was led by the US with Q3’24 Gross Domestic Product (GDP) growing at 2.8% QoQ annualised. Key strengths included personal consumption, business fixed investment and government spending. Meanwhile, business surveys showed ongoing strength in many services sectors. The CPI reading slightly decreased from 2.5% YoY in August to 2.4% in September, while core inflation rose slightly to 3.3% YoY (from 3.2% in August). These reading haven’t influenced US officials much, with the New York Federal Reserve president John Williams noting that while data can fluctuate monthly, inflation is steadily moving downward.
Conditions in the Eurozone were mixed with Q3’24 GDP growth improving to 0.4% QoQ (from 0.2% in Q2’24), partly due to the Olympics. Business surveys indicated slowing conditions, with reports of decreasing customer demand and job cuts, especially in Germany. The latest Eurozone CPI estimate is 2.0% YoY, mainly due to lower energy prices. The European Central Bank cut interest rates by 0.25%, bringing the deposit rate to 3.25% p.a.
Over the month, both the Reserve Bank of New Zealand and Bank of Canada cut rates by 0.5%.
The Japanese economy eased slightly over the month. Retail sales fell month-on-month, reversing strong gains from the previous month and businesses reported a slowdown in new orders. Meanwhile, core inflation showed signs of rising due to higher service prices. The Bank of Japan (BoJ) kept interest rates unchanged with the governor indicating potential for rate increases in the future.
Economic activity remains subdued in China with Q3’24 GDP growing 0.9% QoQ bringing the YoY rate to 4.6%. There are some positive signs that earlier policy measures like the “cash-for-clunkers” trade-in program announced in July to boost electrical-vehicle demand are starting to work, even though the impact is still small.
After the pledge by Chinese policymakers in September to stop the property market decline, recent announcements have not met investor expectations. This included comments from China’s finance minister about a stimulus package with the "strongest debt alleviation measure" in recent years but without a specific figure, disappointing investors.
Market review
Australia
Australian Shares ended October lower with investors disappointed following a lack of detailed stimulus announcements from China and rising international bond yields which affected interest rate cut expectations. Disappointment over the lack of details from China’s policymakers also led to the Australian dollar (AUD) depreciating against most major currencies. Australian Government Bonds had a negative return during the month, despite easing inflation, international economic and market developments led to higher yields
International
International Shares (Hedged) ended October lower driven by a combination disappointing guidance from major US companies and fading investor optimism around the prospects for US interest rate cuts. The depreciation of the AUD boosted returns for International Shares (Unhedged). International Government Bonds had a negative return as bond yield rose due to signs of strong US economic conditions lowering investors’ expectations in the magnitude of future interest rate cuts.
Market Insights
Australia – RBA interest rate hikes unlikely
We expect growth to remain weak as higher interest rates and cost-of-living pressures are likely to keep consumption suppressed. We expect core inflation to slow but not as quickly as in other developed economies, with pressures from the residential rental markets expected to continue. Whilst the Reserve Bank of Australia (RBA) remains cautious of rising inflation risks, we do not believe that it will raise interest rates significantly due to weak growth. Instead, we believe interest rates have peaked this cycle.
From an asset class perspective, we favour Australian sovereign bonds over cash with interest rates likely to have peaked this cycle.
International – Regional divergence expected
We expect international economic growth to remain resilient but regionally divergent. We expect US economic growth to slow but not enter a recession due to healthy corporate and household finances and positive effects from private and public investments. We expect most developed market central banks to cut interest rates if inflation continues to decline. We expect China’s growth to improve with supportive stimulus policies and other emerging economies to benefit from these policies as well as their own central bank actions.
From an asset class perspective, we favour emerging markets over developed markets in light of their more attractive valuations and promising economic prospects. We also favour global listed property because outside of the US office sector, fundamentals are strong, and valuations are attractive.
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