Encouraging progress on the inflation front locally, and more rate cuts as expected overseas, but the Reserve Bank remains firmly on hold. Our thoughts on the outlook for the last quarter of the year, including the last two RBA policy meetings for 2024.
As expected, the US Federal Reserve joined the majority of other central banks cutting rates in September, although the size of the cut was larger than elsewhere at 50 basis points, and two more Fed rate cuts will follow by Christmas.
Markets took this news as a sign that a US soft landing is on track (rather than fearing it implied more urgency from the Fed) which helped stock markets back to a record high, although the widening of the conflict in the Middle East threatens to derail the rally, and uncertainty around the November US Presidential election continues to build.
Locally, the markets also received a boost from the latest monthly inflation indicator, where headline CPI fell to 2.7%, although underlying core inflation is still up at 3.4 % (as it looks through the short-term benefits of electricity rebates). Still, this fall in CPI and core inflation augers well for the Q3 data to be released on October 30th, and it was interesting that the latest RBA policy meeting no longer considered a rate hike as an option, aligned to our view since January, that the RBA would be on hold for all of 2024.
As for the timing of the first cut in the impending easing cycle, the variables remain: the pace of inflation moderating, the impact of tax cuts and cost of living measures on household demand, and labour markets.
Our unemployment rate remained at 4.2% seasonally adjusted in August (and 4.1 % in trend terms) with a record number of Australians employed and a record high participation rate, so our tight jobs market is a major factor. Australia has a higher vacancy to unemployment ratio than comparable economies, so labour shortages and demand for labour is yet to recede as it has elsewhere, although from here a falling job vacancy rate should align to a gradual uptick in unemployment.
The strength in labour markets and ongoing population growth have shielded our economy from the full effects of higher interest rates and the inflation shock, and the latest spending data for August showed a rise in retail trade, although it was the warmest August since 1910, which appeared to bring forward a range of spring purchases.
Offshore factors are also relevant for our economy approaching year end including the latest stimulus package announced in China, where authorities are supporting the
Chinese property sector and the broader economy with aggressive monetary and fiscal policy support; this has helped the Aussie Dollar to its highest level since February 2023. Our forecasts for a firmer currency in the second half of the year appear on track, but our target above 70 cents is taking time to materialise.
Should the RBA choose to cut rates in December (currently rated a 75% probability by the market) this would impact the Aussie Dollar, but our view is the RBA will be more patient, and avoid the scenario of cutting prematurely and thereby locking in a higher ongoing inflation rate, limiting the extent of further rate cuts.
In short, we expect the last quarter of 2024 to show;
- A slight uptick in unemployment as tight labour markets gradually ease
- Headline CPI settling below 3% but underlying core inflation still above target around 3 ½ %
- The RBA remaining on hold but closer to rate cuts early to mid-next year, and
- With more US rate cuts: a firmer Aussie Dollar, advancing above 70 cents.
Looking overseas, it is encouraging to see how many other central banks have achieved returning their inflation rate back to targets, some experiencing recessions in doing so, but all evidence that monetary policy and independent central banks do still work!
And that’s the market update from Bendigo Bank.