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Market Commentary

Last updated: January 2024

Economic overview – Australian Economy Shows Softening

The latest NAB Business Survey showed signs of easing business conditions, particularly in manufacturing and construction but also in trading conditions, employment, and capacity utilisation. Retail sales also witnessed a decline in December 2023, indicating a softer picture in consumer spending. This was also evident in consumer inflation (Consumer Price Index (CPI)) which saw the smallest quarterly rise since the March quarter of 2021. That said, house prices continued to rise, supported by a tight labour market and population growth, marking the 12th consecutive month of rising property values. Consequently, the Reserve Bank of Australia (RBA) decided to leave interest rates unchanged at 4.35% p.a. and warned that “a further increase in interest rates cannot be ruled out”.

Business activity in the Eurozone remains weak, with surveys of both manufacturing and services companies indicating declining business conditions. The inflation rate rose in December, primarily driven by energy-related base effects, while the core inflation rate continued to cool. In contrast, economic data in the US remains resilient, particularly in the services sector, with positive growth indicated by the US Institute for Supply Management (ISM) Services Purchasing Manager's Index for December.

The European Central Bank (ECB) also kept interest rates unchanged, noting that the uptick in December inflation was expected. The Bank of Japan (BoJ) maintained its ultra-easy monetary policy and readiness to implement additional easing measures if necessary.

The Federal Reserve (Fed) kept interest rates steady at 5.25 - 5.50% p.a. for the fourth consecutive meeting, citing high inflation and indicated an interest rate cut in March was also unlikely. Similarly, the European Central Bank (ECB) also kept interest rates unchanged, noting that the uptick in December inflation was expected. The Bank of Japan (BoJ) maintained its ultra-easy monetary policy and readiness to implement additional easing measures if necessary.

Market review – Equities surge and bond yields rise

Global equities experienced widespread gains in January, driven by resilient economic data in the US and the Fed's indication of potential rate cuts. The Australian share market also saw an increase in line with the global trend.

Government bond yields generally increased in January, despite a sharp decline in the last week of the month. The US 10-year yield rose, driven by strong US economic data. The Australian 10-year yield followed the global trend. The Australian dollar depreciated against the strengthening US dollar, influenced by easing expectations of US rate cuts and ongoing tensions in the Middle East.

Commodity markets had a mixed performance. Oil prices rebounded with their first monthly gain in five months, increasing to US$81.93 per barrel in January, driven by better than expected economic data, forecast growth in demand and a decline in supply. Copper prices remained relatively stable, while gold prices rebounded towards the end of the month due to concerns in the US banking sector and a decline in US Treasury yields, prompting some investors to seek safer assets, like gold.

Market insights – risk of more pronounced slowdown

The economic growth in Australia is expected to slow down as factors that have supported growth, such as household savings and low interest rates, gradually diminish. Inflation is also expected to slow down, although pressures from the residential rental markets may cause it to slow down less rapidly compared to other developed economies. The risks of a more pronounced slowdown in activity appears more likely than currently anticipated by markets. While the market predicts just over two interest rate cuts in 2024, we believe that more cuts are likely and will occur sooner.

Globally, we expect growth to remain resilient, although it will vary across regions. The United States is anticipated to experience a moderation in growth due to less supportive fiscal policy, tighter financial conditions, and the impact of higher interest rates. However, a recession is not anticipated due to the strength of household and corporate balance sheets, as well as the resilience of the US services sector. The Eurozone is expected to see a modest improvement in growth driven by lower inflation and an increase in global manufacturing activity. China is also expected to experience stronger growth, supported by favourable fiscal, monetary, and regulatory policies, as well as a recovery in the manufacturing inventory cycle and potential stabilisation in the housing sector, whilst other emerging economies are anticipated to benefit from their central banks implementing looser monetary policy measures.

From an asset class perspective, we hold a cautious view on developed markets due to their rich valuations and optimistic earnings outlook. We have a favourable view on emerging markets, which offer attractive valuations and more promising economic prospects. In the domestic market, considering the relative risks associated with interest rate expectations, we have a favourable view on Australian Sovereign bonds, despite the persisting risks posed by the volatility of global sovereign bond markets and their impact on our market.

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