Economic Market Update – October 2024

We would like to provide you with an update on recent market developments that may have an impact on your investments.

Market update as of October 2024

Australian Market

Inflation

Inflation has declined significantly since its peak in 2022, driven by higher interest rates aimed at balancing demand and supply. However, underlying inflation as measured by the trimmed mean was 3.9% over the year to June, still above target. The RBA forecasts inflation will not sustainably return to the target range until 2026, indicating that monetary policy will remain restrictive for some time.

Interest rate

At its meeting in September, the Reserve Bank of Australia (RBA) decided to leave the cash rate target unchanged at 4.35%. This decision reflects the persistence of inflationary pressures, which remain above the RBA’s 2–3% target range.

The Reserve Bank of Australia (RBA) is likely to keep interest rates elevated for longer than previously anticipated due to several key factors:

1. Persistent Inflation: Although inflation has declined from its peak, it remains well above the RBA’s target range of 2-3%, with core inflation still hovering around 3.9%. The RBA expects inflation to return to target by 2026, meaning rate cuts are unlikely until there is sustained progress in lowering inflation

2. Labour Market Tightness: Australia’s labour market remains tight, with unemployment at 4.2% as of mid-2024. Wage growth, while slowing, continues to support inflationary pressures. As long as unemployment remains low, the RBA will be cautious about reducing rates.

3. Global Economic Pressures: Uncertainties in the global economy, particularly slower growth in China and rising public debt in advanced economies, are contributing to a higher neutral interest rate globally. This makes the RBA hesitant to lower rates too quickly.

4. Household Resilience: Despite the strain on households from high mortgage rates, consumer spending has not slowed as much as anticipated, which further complicates the RBA’s decision to ease monetary policy

Overall, many experts forecast that the RBA will begin cutting rates around mid-2025, but the cuts may be gradual and limited, as inflation will take time to fall within the desired range. The RBA is expected to remain vigilant to inflationary risks before taking any significant action to reduce rates

Equity Market

The ASX 200 closed the week 0.8% higher, driven by strong gains in the Financials (+4.1%) and Healthcare (+1.0%) sectors. This momentum came as Australia’s job market exceeded expectations, adding 64,000 jobs in September. The robust employment data suggests that the Reserve Bank of Australia (RBA) may delay rate cuts further, as the tight labor market indicates continued economic resilience.

Economic Performance

Australian economic growth has significantly slowed, with GDP growth for the June 2024 quarter coming in at just 1.0% annually. Excluding the pandemic, this marks the slowest annual growth rate since the 1990s recession. A key contributor to this weak performance has been the ongoing impact of high interest rates, which have dampened household consumption and discretionary spending.

GDP per capita also declined for the sixth consecutive quarter, falling by 0.4%, as households continue to feel the strain of elevated borrowing costs. Household savings remain low, further exacerbating the squeeze on disposable incomes. Despite these challenges, rising levels of government spending have played a crucial role in preventing the economy from contracting, offering some stability during this period of economic weakness.

Labour Market

As of August 2024, Australia recorded 329,900 job vacancies, a reduction from pandemic peaks but still double pre-pandemic levels. Approximately 2.2% of all jobs are currently unfilled.

The ratio of unemployed people to job vacancies stands at 1.9, much tighter than the pre-pandemic ratio of 4.0.

Sectors with the highest vacancy rates include:

• Mining: 3.5%

• Utilities: 3.1%
• Accommodation and Food Services: 3.7%

In contrast, vacancy rates in wholesale trade, ICT, financial services, and administrative services have returned to pre-pandemic levels.

Private Sector

Private sector job creation fell sharply in August 2024, with 516,000 jobs lost, equivalent to a 4.4% reduction in the private workforce. This marks the steepest decline in private sector employment since the pandemic. Meanwhile, public sector employment surged by 499,000 jobs (a 19.4% increase), nearly offsetting private sector losses. Overall, the Australian economy lost 17,200 jobs in the quarter, reflecting growing weakness in private sector business conditions and the labour market.

Population Growth

Australia’s net overseas migration (NOM) slowed from a peak of 559,900 in September 2023 to 509,800 in March 2024. Despite the decline, net migration remains the dominant driver of population growth.

• By March 2024, Australia’s population reached 27.1 million, with 83% of this growth attributed to migration and 17% from natural increases (births minus deaths).
• Tighter restrictions on inward migration have led to a decline from post-pandemic highs, which may impact future growth trends.

Construction Sector

Total construction work increased by 1.2% year-on-year in the June 2024 quarter, driven by growth in the engineering sector, which rose by 4.8%. However, residential building completions declined by 2.9%, reflecting challenges in the housing market.

• Ongoing supply chain disruptions, rising material costs, and labour shortages continue to hinder the construction industry’s ability to meet demand.
• Additionally, regulatory hurdles in the permit approval process have further delayed projects, particularly in the residential sector.

US Market

Earnings Growth

The S&P 500 is reporting year-over-year earnings growth of 3.4% for Q3 2024, marking the fifth consecutive quarter of earnings growth, though this is the slowest rate since Q2 2023. A substantial 79% of S&P 500 companies that have reported so far have exceeded earnings expectations. However, the magnitude of these surprises has been lower than historical averages. The forward 12-month P/E ratio for the index stands at 21.9, above both the 5-year (19.5) and 10-year (18.1) averages.

The Financials sector has been a key driver of this growth, reporting a 4.9% earnings increase, driven by strong results from major banks like JPMorgan Chase, Wells Fargo, and Goldman Sachs. Meanwhile, the Information Technology sector is leading the market with 15.6% growth, bolstered by NVIDIA, which has been the largest contributor to earnings growth within the sector.

Federal Reserve Policy

The Federal Reserve is expected to implement a 25bps rate cut in November as inflationary pressures moderate. Strong consumer spending data, particularly in retail sales, has alleviated some concerns about a potential recession, although inflation is still a central focus. With core inflation remaining above target, markets continue to watch the Fed’s policy closely.

Economic Performance

The U.S. economy has shown resilience amid higher interest rates, with retail sales growing more than anticipated in September. Consumer spending has been a key driver of economic performance, helping to sustain growth despite tightening financial conditions. However, the broader economy is still adjusting to these higher rates, with analysts projecting 14.0% earnings growth for Q4 2024, indicating optimism for continued economic expansion.

Technology Sector

The Technology sector continues to outperform, with a 15.6% earnings growth rate for Q3 2024. The sector is led by NVIDIA, which has seen a 37% year-over-year earnings increase, driven by demand for semiconductors and AI-related products. Other industries in the tech sector, such as Software and IT Services, are also reporting solid growth.

The sector’s forward 12-month P/E ratio is 29.5, the highest among all sectors, reflecting investor confidence in its future growth prospects.

Healthcare Sector

The Healthcare sector has delivered mixed results, with a 5.7% earnings growth rate for Q3 2024. Positive earnings surprises from companies like UnitedHealth Group and Elevance Health have supported revenue growth, with the sector reporting a 7.3% increase in revenues. However, downward revisions to estimates for companies like Eli Lilly have tempered overall earnings growth.

European Market

Economic Growth

The European Union (EU) economy is forecasted to grow by 1.5% in 2025, a marked slowdown from the higher post-pandemic growth rates of previous years. The European Commission’s projections indicate that many of the EU’s largest economies, such as Germany, France, and Italy, are expected to see growth rates below 2%, reflecting broader stagnation across the region. In contrast, Malta is forecasted to grow by an impressive 4.3% in 2025, leading the EU in economic expansion.

European Central Bank (ECB) Policy

The European Central Bank (ECB) took a notable step to lower the deposit facility rate by 25 basis points to 3.25% as part of its continued efforts to control inflation. Alongside this, the rates for main refinancing operations and the marginal lending facility were also reduced to 3.40% and 3.65% respectively, effective October 23, 2024.

This decision comes amid signs that the disinflationary process is progressing, with inflation set to rise temporarily before returning to the ECB’s 2% target by next year. The ECB remains committed to keeping policy rates sufficiently restrictive for as long as necessary to achieve this goal. The central bank has emphasised a data-dependent approach, basing future rate decisions on the evolving inflation outlook, underlying price dynamics, and the transmission of monetary policy.

Inflation and Labour Costs

Inflation across Europe remains high, driven by rising wages and elevated labour costs. However, the ECB expects these pressures to ease gradually, with corporate profits partially absorbing the impact of higher labour costs on inflation. Despite temporary inflationary upticks in the coming months, the overall trend points toward stabilisation, with inflation forecasted to decline to target levels by 2025.

The ECB’s Governing Council reaffirmed its commitment to ensuring inflation returns to its 2% medium-term target, stating that interest rates will remain restrictive for as long as needed. However, no specific future rate path has been pre-committed, reinforcing the ECB’s flexible, meeting-by-meeting approach to monetary policy.

Asian Market

Japanese Equities

The Japanese equity market ended September lower, with the TOPIX down 1.53% and the Nikkei 225 falling 1.24%. Early in the month, concerns about a potential US economic slowdown and yen appreciation weighed on stocks. However, sentiment improved later as speculation grew that the US Federal Reserve would cut rates, while expectations for immediate BOJ rate hikes diminished after remarks by Governor Ueda. Despite this, political uncertainty toward the end of the month led to further declines.

Of the 33 sectors on the Tokyo Stock Exchange, 14 sectors rose, led by Textiles & Apparel, Air Transportation, and Warehousing & Harbor Transportation Services. Meanwhile, Pharmaceuticals, Mining, and Securities & Commodity Futures were among the 19 sectors that declined.

Chinese Equities

A brief stock market rally in China fizzled after a much-anticipated government announcement on boosting the economy disappointed investors. Shares surged over 10% following the Golden Week holiday, but optimism quickly faded after the Shanghai Composite Index closed 4.6% higher, while Hong Kong’s Hang Seng Index plunged 9.4% due to the lack of substantial details.

Investors were hoping for concrete plans to support economic growth, but the announcement from China’s National Development and Reform Commission Chairman Zheng Shanjie provided little new information. Although 200 billion yuan ($28bn) has been allocated for spending and investment projects by year-end, concerns over China’s ability to meet its 5% annual growth target persist.

China continues to face downward pressures, including a property market slump and falling prices, while some economists argue that deep structural reforms are needed to set the economy on a sustainable growth path.

Advice Warnings & Disclaimers.
This information is intended to provide general information only and has been prepared without considering any particular person’s objectives, financial situation or needs. Any general advice contained within or given during this presentation (whether orally or in writing) does not consider your objectives, financial situation or needs. Nothing in this presentation is intended to be investment, financial advice or a recommendation to invest in a financial product. Before acting on such information, you should consider the appropriateness of the information having regard to your personal objectives, financial situation or needs. To the maximum extent permitted by law, we (Forward Path Advisory Pty Ltd), Joel Cleary & Rathakrishna Jeyabalasingam (Radz Je) disclaim all liability and responsibility for any direct or indirect loss or damage which may be suffered as a result of relying on anything in this podcast, including any forward-looking statements. Past performance is not an indication of future performance. In particular, you should obtain professional advice before acting on the information contained in this presentation.