Market indices were helped by falling bond yields last week. The ECB cut rates by -0.25%, while benign American inflation data kept the Federal Reserve on track to cut this week. However, the market is still divided on whether the US will see a quarter-point or half-point cut. Rates are expected to be held in the UK, Japan and Norway.
Friday’s Chinese data clearly indicated that economic growth is slowing, and the PBOC could surprise the market by easing monetary policy this week.
Australian unemployment is expected to have remained at 4.2% in August, while the RBA expects the unemployment rate to rise in the coming months as the rising supply of labour outpaces growth in demand.
Stock indices moved higher last week, trading very close to the early August highs in Australia, the US and Europe, while Japan and Emerging Markets continued to trade a little below the high water mark. However, property trusts again outpaced equities as last week’s moves primarily resulted from falling bond yields rather than positive growth news.
As widely anticipated, the ECB cut the eurozone policy interest rate from 3.75% to 3.50%. Nevertheless, American short-term yields saw a more significant drop as investors largely ignored the larger deficit implications from the presidential debate and looked forward to this week’s Federal Reserve meeting.
US inflation data was essentially benign despite coming out a little firmer than economists had anticipated. Headline CPI dropped to just +2.5% yoy, with the slowing aided by softer energy prices. A stubbornly high shelter reading of +5.2% yoy contributed +1.9% of the annual change. But more timely housing and rent series provide a high degree of confidence that shelter price increases will soon begin to slow.
In addition, slowing PPI inflation suggested that consumer price inflation will continue to moderate. Monday’s faster drop in Chinese PPI (-1.8% yoy) provided further confidence that goods prices will continue to pull inflation lower.
The Federal Reserve could be more concerned that the “supercore” services ex-housing measure remains higher than the FOMC would like (+4.5% yoy). However, services sector prices are more likely to respond to weakening growth, which is becoming a more troubling risk for the Fed.
Last week, Ally Financial sparked a bank sell-off after it said that the credit outlook was becoming increasingly challenging as auto delinquencies and job losses rise. At the same time, US consumer credit rose by the most since November 2022 in the July report. However, the Federal Reserve provided some support as it announced it would soon require a lower-than-anticipated +9% increase in commercial bank reserves. The market had previously expected a +20% increase.
At the recent Jackson Hole Symposium, Fed Chair Jerome Powell gave a very clear signal that interest rates would be cut this week. However, the size of the cut and the future path of rates from here remained highly uncertain. Having previously expected a high chance of a -0.5% cut, the market had moved towards a -0.25% cut after the inflation data. But a Nick Timiraos article in Friday’s Wall Street Journal suggested that the FOMC would consider cutting by -0.5%. Mr Timiraos is rumoured to the journalist that the Fed calls when it wants to guide market expectations. The article argued in favour of both possible moves, so the market is now pricing an even chance of a half-point or quarter-point cut on Wednesday night
Also on Friday, Chinese industrial production (+4.5% yoy) and retail sales (+2.1% yoy) were much weaker than expected, and the surveyed unemployment rate ticked up from 5.2% to 5.3%, increasing the chances of a rate cut this week.
The Bank of England, the Bank of Japan and the Norwegian central bank are all expected to keep rates on hold at their meetings on Thursday and Friday. The RBA will meet a week later, on Tuesday 24th September, with no anticipated change to the cash rate.
Last week, the recently-appointed Assistant Governor (Economic), Sarah Hunter, spoke at the Barrenjoey Economic Forum on the path to full employment saying, “Our current assessment is that the labour market is operating above full employment but has moved towards better balance since late 2022 […] While we have not seen a sharp lift in the unemployment rate, the decline in demand for labour and firms’ hiring intentions has translated into a lower rate of new hiring and slower employment growth […] Overall, our current assessment is that the recent easing in labour market conditions has, to date, been similar to mild downturns in Australian history […] We expect the demand for labour to grow at a slower pace relative to the supply of labour in the coming quarters, gradually bringing the labour market into better balance. […] In this view of the outlook, measures of underutilisation – including the unemployment rate – are expected to continue rising gradually from here, before stabilising as the pace of growth in GDP picks up to be broadly consistent with the economy’s underlying trend pace of growth”. The consensus forecast is for August unemployment to remain at 4.2% when released on Thursday.
In other news last week, the UK’s Rightmove rejected the $7.3 billion bid from REA. The company is expected to return with an improved offer. Nine announced that CEO Mike Sneesby will step down on 30th September after just 3 ½ years in charge. Shares slipped by -5.1% over the week. This was, however, less than the -10.7% drop in the Steadfast share price, following allegations related to strata insurance in the recent Four Corners investigation by the ABC. Steadfast has refuted the claims.
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