Monthly Market Commentary

Last updated: August 2024

Economic overview 

Australia – RBA remains vigilant to upside risks to inflation  

Data released in August painted a mixed picture of economic conditions in Australia. Private capex fell -2.2% Quarter-on-Quarter (QoQ) with the Australian Bureau of Statistics (ABS) noting the sharpest declines in the retail sector.  Businesses surveys improved modestly, driven by gains in the wholesale and construction sectors, while the labour market remained strong with 60,500 new full-time jobs added in the July. The unemployment rate rose to 4.2% in July (from 4.1% in June) with more people entering the labour force.

The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% p.a., with RBA Governor Bullock cautioning against expecting future interest cuts in the coming months, noting it had considered raising rates.

The July Consumer Price Index (CPI) declined from 3.8% to 3.5% Year-on-Year (YoY) in July, mainly driven by the government’s energy rebate. Services inflation remains elevated due to residential rents which eased only slightly from 7.1% to 6.9% YoY in July.

International – Fears of a US recession arises

Fears of a US recession increased in August as the US unemployment rate rose from 4.1% to 4.3% in July. Most other US data remained strong, including Q2’24 Gross Domestic Product (GDP) which was revised up to 3.0% QoQ annualised  driven by strong household consumption. Inflation appears to be easing, with the latest US Consumer Price Index (CPI) excluding food and energy declining from 3.3% to a 3.2% YoY in July. Meanwhile, the US Federal Reserve (Fed) Chair Jerome Powell signalled upcoming interest rate cuts citing the cooling labour market was a bigger concern than inflation risks.

Economic activity in Europe improved in August, especially in France’s services sectors with business surveys attributing this to the Olympics. Growth overall has however remained weak with the preliminary estimate of Q2’24 GDP at 0.3% QoQ. Disinflation has stalled in the region, due to services inflation, prompting European Central Bank officials to emphasise that their decision in September will be data dependent.

There were further signs of improvement in Japan with the preliminary estimate of Q2’24 GDP strong at 0.8% QoQ. Many of the underlying components recorded positive growth including business investment and private residential investments. Notably, private consumption rebounded by 1.0% QoQ, the first positive reading since Q1’23, driven by rising wages. Meanwhile, activity in China has remained lacklustre. Retail sales recovered modestly in July, driven by an extended online sales event. The pace of industrial production and fixed asset investment slowed, while property prices declined in most cities in July.

Market review

Australia

The Australian equity market ended August with a positive return, recovering from an initial decline as concerns of a US recession subsided. Meanwhile, Australian government bonds rallied, supported by international economic and market developments, whilst the Australian dollar (AUD) appreciated against the major currencies due to the RBA’s comments cautioning against expectations for interest rate cuts in the near term. 

International

International equity markets ended the month higher on an AUD currency hedged basis. Markets declined earlier in the month due to US recession fears but recovered as subsequent economic data alleviated US recession concerns. Meanwhile, international government bond markets rallied in August supported by US recession concerns and comments from Fed Chair Powell signalling upcoming interest rate cuts.

Market Insights

Australia – New tightening cycle unlikely

We expect high interest rates and cost-of-living pressures to keep consumption suppressed and economic growth weak. Core inflation has declined, and whilst we expect this to continue, the pace is likely to be slower compared to other developed economies due to pressures in residential rental markets. The slow pace of disinflation has led the RBA to be more focused on the upside risks to inflation than the downside risks to growth. Whilst the risk of an RBA interest rate hike remains, we do not believe that the RBA will commence a series of rate hikes given the weak growth backdrop. We believe it is more likely that interest rates have peaked this cycle.

We consequently favour Australian government bonds over cash with interest rates likely to have peaked this cycle.

International – Resilient but regional divergent

We expect international economic growth to remain resilient but regionally divergent. Despite rising US recession concerns, we believe fundamentals are broadly unchanged and expect growth to slow but remain positive for the US supported by healthy corporate and consumer balance sheets and banks not severely limiting credit creation. We expect growth in China to improve from its current lacklustre pace, supported by government policies, while growth in other emerging economies is expected to remain strong as monetary policy eases.

From an asset class perspective, we continue to favour emerging markets over developed markets in light of their more favourable economic prospect and promising valuations.

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