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 December 05, 2023
Interest Rates and Inflation
The Reserve Bank of Australia (RBA) held the rates in December after raising the cash rate to 4.35% in November to address the risks of sticky inflation. Inflation, a critical concern for the RBA, showed a slight decrease, with the Consumer Price Index (CPI) falling to 4.9% year-on-year, from the previous 5.6% as of October 2023. Despite these measures, inflation expectations remain a concern.
Gross Domestic Product (GDP)
The Australian economy is experiencing a slowdown, with GDP growth for the full year of 2023 likely to be around 1.00%, down from the long-term annual average of 3.37% between 1960 and 2023. This slowdown is attributed to high mortgage rates, elevated living expenses, persistent core inflation, impacting household consumption and disposable income.
There was a broad bond market rally in November, driven by expectations of a slowing economy and lower policy rates. This rally is reflected in both Australian and global markets. However, there is still high uncertainty about the next moves in the economic cycle.
The S&P/ASX 200 index saw a slight decline, influenced by a subdued outlook and reported profit falls in major mining companies. Banks and financial services, representing a significant portion of the index, showed adequate performance with benign impairment charges. Looking ahead to 2024, moderating growth in corporate profitability is expected due to higher interest rates and operating costs.
There was a rally in risk markets in November, buoyed by softer inflation and activity data. This was evident in the Australian iTraxx Index tightening and positive returns in both fixed and floating credit indices. The domestic primary market was active, with several notable corporate issuances. However, there is a growing bifurcation in the credit markets, with weakness accelerating in lower to mid-quality market segments.
The Australian economy and markets are navigating a challenging phase characterized by high inflation, interest rate adjustments, and a slowing growth trajectory. While there are pockets of resilience, such as in the housing market, the overall outlook suggests moderate growth and continued market volatility into 2024.
Australia’s Easing Inflationary Pressure
As of October 2023, Australia's inflation data indicates a significant easing trend, performing better than market expectations. The Consumer Price Index (CPI) rose by 4.9% in the 12 months to October, a decrease from the 5.6% increase in September and much lower than the peak of 8.4% in December 2022. This inflation rate was also lower than the market forecast of 5.2%, indicating a more substantial than anticipated slowdown in price rises.
This easing was driven by decreases in key areas of inflationary pressure. Housing costs, a significant contributor to inflation, saw an annual increase of 6.1%, down from 7.2% in September. The increase in rent prices was moderated by government interventions like rent assistance, which lowered the annual rise in rents. Similarly, electricity prices rose significantly due to wholesale price hikes, but the impact was partially offset by government rebates. Automotive fuel prices also showed a decrease compared to September, influenced by global oil price trends and domestic tax policy changes.
In contrast, food and non-alcoholic beverage prices saw a slight increase from the previous month, driven by higher prices for items such as fruits and vegetables. Despite this, the overall downward trend in inflation suggests a cooling in the broader Australian economy's price pressures.
In summary, Australia's inflation in October 2023 has not only shown a considerable easing from earlier in the year but also fell below market expectations. This suggests that the inflationary pressures experienced earlier are subsiding more quickly than anticipated, providing a more optimistic outlook for the Australian economy.
US Economic Update:
The monetary and economic policy in the US has been primarily directed towards addressing inflation and maintaining economic growth. Here are some key points regarding the US monetary and economic policy based on recent updates:
As of December 2023, the United States is experiencing a complex economic and market environment:
The U.S. economy grew at a rate of 5.2% in the third quarter, which was the fastest pace since the fourth quarter of 2021. This growth was driven by #business #investment in structures and #residential #investment. However, the momentum appears to have waned due to higher borrowing costs affecting hiring and spending.
Consumer Spending and Corporate Profits
Consumer spending, a critical component of U.S. economic activity, was revised to a growth rate of 3.6%. Corporate profits increased by 4.3%, reflecting gains across various sectors. Personal income also saw an uptick, largely due to wage increases.
Inflation and Interest Rates
Inflation showed signs of trending lower, which has led to optimism that the Federal Reserve might be done with interest rate hikes, with financial markets even anticipating a rate cut in mid-2024. The current federal funds rate range is 5.25%-5.50%.
The S&P 500 index closed at its highest level of the year in early December amid optimism about the Federal Reserve potentially ending its interest rate hikes. The index was boosted by better-than-expected earnings and signs of easing inflation. Federal Reserve Chair Jerome Powell's recent statements have been interpreted as leaning towards a more cautious approach to further interest rate hikes.
There is a debate about whether the U.S. economy will experience a soft landing or a mild recession. The unique circumstances of the pandemic-induced economic cycle, including reshuffled labor markets and supply chain issues, complicate this forecast. While some analysts foresee a mild downturn in the U.S. economy by 2024, there's a prevailing sentiment in the market betting on a soft landing.
The cycle, value, and sentiment (CVS) framework used for #investment decision-making is currently cautious about the one-year outlook for the S&P 500. The valuation is considered expensive, and recession risks are viewed as a headwind. However, there is potential for equity markets to move higher if confidence in a soft landing strengthens.
The U.S. economy in December 2023 presents a mixed picture. While GDP growth and corporate profits have been strong, the potential for slowing consumer spending and concerns about inflation and interest rates are influencing market sentiment. The stock market has shown resilience in the face of these challenges, buoyed by the prospect of a pause or reversal in the Fed's interest rate hikes. However, there is significant uncertainty about the economic trajectory going into 2024, with opinions divided between a soft landing and a mild recession. Investors are advised to adopt a cautious approach, keeping an eye on evolving economic indicators and market sentiments.
US and European Markets
Experienced modest growth, spurred by optimistic inflation data. This trend aligns with the belief that global interest rates might have reached their peak, signaling a possible stabilization in the economic environment. The US market, in particular, showed resilience despite global uncertainties.
The performance in this region was varied, with Japanese and Chinese markets facing declines. These declines could be attributed to local economic challenges and geopolitical factors impacting investor sentiment.
Marked a marginal increase of about 0.3%. The growth was primarily driven by strong performances in sectors like IT, healthcare, and telecommunications. However, this was offset by declines in resources and utilities, highlighting a sector-specific divergence in the market.
Bond Yields and Commodities
The reduction in 10-year bond yields by 10-20 basis points reflects changing investor sentiment, possibly driven by the easing inflation and a less aggressive stance by central banks.
Despite OPEC+'s announcement of production cutbacks, oil prices remained relatively stable, suggesting scepticism among traders about the implementation of these cutbacks.
Metals and Gold
These commodities saw an uptick in prices, indicating a shift towards safer investments amidst market uncertainty. The slight decrease in iron ore prices might reflect sector-specific challenges or supply-demand dynamics.
The strength of the Australian Dollar, surpassing the $US0.66 mark, suggests increased investor confidence in the Australian economy, potentially influenced by the country's inflation trends and interest rate policies.
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 in this market update (whether orally or in writing) does not consider your objectives, financial situation or needs. Nothing in this market update 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 market update, 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.