Market Commentary

Last updated: October 2024

Economic overview 

Australia – RBA remains vigilant to upside risks to inflation despite weak growth

Economic activity remained broadly weak over the quarter. Q2’24 GDP grew by 0.2% Quarter-on-Quarter (QoQ), bringing the Year-on-Year (YoY) rate to 1.0%, driven by weak household consumption. Business survey responses indicated slowing conditions, with retail facing the most challenges. The labour market has remained broadly strong, although signs of softening emerging with job vacancies declining further over the quarter.

The trimmed mean CPI (the Reserve Bank of Australia (RBA)’s preferred measure of inflation) rose by 0.8% Quarter-on-Quarter (QoQ) in Q2’24, down from 1.0% QoQ in Q1’24, easing concerns about potential accelerating underlying inflation in Australia. More recent inflation indicators have also eased driven by the government's energy rebate for households.

Against this backdrop, the RBA kept interest rates unchanged at 4.35% p.a. over the quarter noting it "remains vigilant to the upside risks to inflation" and pushing back against expectations for an interest rate cut in the coming months.

International – US Federal Reserve cuts by 0.5%

Economic conditions have remained resilient but regionally divergent over the quarter. The resilience was led by the US. Despite fears of a US recession driven by weakening labour markets and the manufacturing sector, overall conditions remain strong. Q2’24 GDP grew at 3.0% QoQ annualised rate, driven by household consumption, while recent surveys of services companies pointed to solid growth. Conditions were more challenging for the Eurozone, with recent data indicating a softening in conditions, led by German manufacturers. With greater confidence in the inflation outlook, the US Federal Reserve (the Fed) cut interest rates by 0.5% to 4.75-5.00% p.a. Fed chair Powell stressed the size of the cut should not be extrapolated going forward and that future decisions will be data dependent and made on a meeting by meeting basis. Meanwhile other regions including the Eurozone, Sweden, Switzerland, United Kingdom, Canada and New Zealand also cut rates by 0.25% in the September quarter due to reducing inflationary pressures.

In Japan, economic activity improved with Q2’24 GDP rising to 0.7% QoQ with the impact of wage increases becoming evident in consumption readings. The Bank of Japan (BoJ) raised interest rates from 0.1% p.a. to 0.25% p.a. with its governor stating that they will continue to hike rates if the economy continues to evolve with expectations. Meanwhile, conditions remained lacklustre in China driven by ongoing weakness in its property sector, impacting both economic growth and consumer confidence. In response, late in the quarter Chinese policymakers pledged necessary fiscal expenditures to meet this year's economic growth targets and address the decline in the property market and the Peoples’ Bank of China also cut interest rates and reserve ratio requirements.

Market review

Australia

Australian Shares ended the quarter higher as investor optimism for interest rate cuts internationally grew and Chinese authorities announced policy measures. Australian Government Bonds also produced positive returns, driven by international economic and market developments, despite the RBA pushing back against expectations for near term interest rate cuts. The Australian dollar (AUD) was mixed against major currencies, appreciating against the US Dollar, as investor optimism grew for interest rate cuts while depreciating against the Japanese Yen following the Bank of Japan’s interest rate hike.

International

International Shares overall continued to produce strong returns. The quarter saw some volatility, with markets initially declining due to fears of a US recession and sharp currency movements before recovering as the Fed began cutting interest rates. Emerging Market Shares also performed well as investor optimism rose following the pledge from Chinese policymakers to stop the decline in their property market. 

International Government Bonds rose following weaker US employment and manufacturing data and in anticipation of a US interest rate cut.

Market Insights

Australia – RBA unlikely to commence a series of interest rate hikes

We expect high interest rates and cost-of-living pressures to keep household consumption and economic growth suppressed. We continue to expect core inflation to decline albeit at a slower pace compared to other developed economies due to pressures in residential rental markets. Whilst risks remain, we do not believe that the RBA will implement a new series of interest rate hikes given the weak growth backdrop. Rather we believe that interest rates have likely peaked this cycle.

Consequently, we favour Australian government bonds over cash as interest rates are likely to have peaked this cycle.

International – Resilient but regionally divergent growth expected

Despite lingering US recession concerns, we expect a soft landing for the US economy, characterised by slowing but positive growth. We expect inflation in the US to slow further, driven by a decline in services inflation, and expect the Fed to continue to cut rates. However, the market’s expectations for US interest rates cuts appears excessive.  We expect China’s growth to improve from its current slow pace, supported by government policies, with favourable policy conditions to also aid growth in other emerging economies.

Broadly, we expect international economic growth to remain resilient but regionally divergent, whilst from an asset class perspective, we continue to favour emerging markets over developed markets due to their better economic prospects and more attractive valuations.

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