Market Commentary
Last updated: January 2025
Economic overview
Australia – Increased probability of an interest rate cut
The Reserve Bank of Australia (RBA) held rates steady at 4.35% for their ninth consecutive meeting. However, the softening economic environment has increased the possibility of a February interest rate cut, with expectations shifting from a 30% chance prior to the Q3’24 GDP release to 70% following the RBA's December meeting.
Despite the potential for a rate cut, the domestic labour market remained strong. The unemployment rate fell to 3.9% from 4.1% in November, helped by a decrease in the participation rate, compared to market expectations for a rise to 4.2%. In November, 36,700 jobs were added, indicating resilience in the job market. However, business surveys reported weaker business confidence in November, suggesting that businesses are cautious about future economic prospects.
Q3’24 GDP was weaker than the market expected, slowing to 0.8% versus expectations of 1.1%. Growth was driven predominantly by government spending, while household spending remained flat, reflecting consumer caution amid economic uncertainties. Australian house prices have also started to soften, with a -0.1% decline in December. Sydney and Melbourne continued to fall, with Sydney down -0.2% and Melbourne down -0.4% over the month. The other capital cities remained positive, with Adelaide and Perth experiencing low vacancy rates.
International – Central banks delivering on interest rate cuts
In line with market expectations, central banks continued to cut interest rates in December, reflecting a coordinated global effort to stimulate economic growth amid ongoing uncertainties. The European Central Bank and the US Federal Reserve (FED) cut rates by 25 basis points (bps). Meanwhile, the central banks of Canada and Switzerland took a more aggressive stance, cutting rates by 50 bps. These central banks noted that future interest rate cuts were likely to be gradual and dependent on inflation trends, highlighting the delicate balance between fostering growth and controlling inflation.
The Bank of Japan, however, left interest rates unchanged at 0.25%, noting that Japan’s economy had recovered moderately.
New Zealand entered a recession with 3rd quarter GDP falling to -1.0% quarter-on-quarter (QoQ), well below market expectations, which were well below market expectations of -0.2% QoQ. Annual GDP fell to a concerning -1.5% year-over-year (YoY).
In the US, the Consumer Price Index (CPI) data for November showed an annual core increase of 0.3% month-over-month (MoM) to 3.3%. Rent and utility costs, a significant expense for households, were lower in November, likely giving the FED enough comfort to cut interest rates at their next meeting.
US employment data in November was strong, with 227,000 jobs added, although unemployment increased slightly to 4.2% from 4.1%. The US National Federation of Independent Business (NFIB), a small business optimism index, in November suggested increased optimism following the US election, indicating a positive outlook among small businesses. The US ISM manufacturing index was better than expected but still in contractionary mode, rising to 48.4 from 46.5 as the new orders component moved into positive territory. Services continued to expand.
Market review
Australia
Australian Shares ended December lower following the direction of hedged international share markets as weaker Australian economic data weighed on the local share market.
Australian Government Bonds had positive performance in December with yields almost unchanged over the month. While Australian 10yr sovereign bond yields initially fell after the latest GDP data announcement, they moved higher after the unexpected fall in unemployment to finish the month up only marginally by 2bps.
The AUD depreciated against the USD in December. Comments by the FED were seen as more aggressive and weaker economic data in Australia were the key reasons.
International
International Shares (Hedged) ended December lower. Following strong performance over 2024 international equity markets were likely due for a pause. International Shares (Unhedged) were higher in December assisted by a fall in the AUD. Emerging market shares outperformed developed market equities in December.
International Government Bonds saw negative performance in December after the FED’s announcements noting further rate cuts will be made cautiously and be dependent on inflation. International Credit also had a small negative return due to the rise in International Bond yields.
Market Insights
Australia – Probability of the RBA cutting the cash rate in February has increased.
The RBA decided to hold interest rates steady in December, even though the case for cutting rates is gaining traction. This decision comes amid weak GDP data and softening house prices, which have significantly increased the possibility of an interest rate cut in February. While unemployment remains low, wage growth and job vacancies have been falling. This trend suggests that we may begin to see the labour market soften, potentially leading to a modest rise in unemployment in 2025.
We continue to expect economic growth to remain weak, as higher interest rates and cost-of-living pressures are likely to keep consumer spending suppressed. Domestically, we favour Australian Sovereign Bonds over cash, with the belief that interest rates have likely peaked in this cycle.
International – Regional divergence expected to continue
We expect international economic growth to remain resilient, but it will likely be regionally divergent. The US is anticipated to experience a period of softer economic activity compared to other parts of the world. The election of President-elect Trump introduces both upside and downside uncertainty to growth and inflation.
Central banks around the world are likely to continue cutting rates as inflation moderates, although the pace of these cuts may slow. An exception to this trend is Japan, where we expect interest rates to rise as the country emerges from a multi-decade period of deflation. Japan's economic outlook is positive, driven by income growth and continued investment in capital expenditure. As a result, we continue to favour Japanese shares relative to other developed country share markets due to the potential growth rebound and solid earnings growth.
We also favour Global Listed Property, as the fundamentals are broadly healthy, and valuations are attractive. This sector presents opportunities for investors seeking stable returns.
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