Despite the worsening military conflict in the Middle East, financial markets enjoyed a very solid rebound over the week. Led by the decision of the US Fed to maintain its current Fed Funds Rate at 5.50% global bond markets rallied strongly, with yields lower across all parts of the curve, while equity markets bounced. The decision by the Fed was on the back of weaker than expected economic data with the ISM Manufacturing data showing an increased level of contraction (act 46.7, v’s 49.0 f’cst), while the Un rate was slightly higher at 3.9% (+0.10% pcp) on the back of increased jobless claims. In addition, the recent US reporting season is showing some weakness in the outlook for corporate earnings.
Overall, while the underlying core of the US economy remains sound, data is beginning to show further signs of a slowing economy. This is all music to the ears of the US Fed, and we now are of the view that outside any material change in inflationary pressures, which we f’cst at 3.7% (15th Nov) we believe the rate cycle in the US has now peaked. This will be positive for growth assets. The associated drop in bond yields resulted in a strong equity market rally. The broad base ASX200 Index along with other interest rate sensitive sectors (i.e. REITs) were the best performing parts of the market. It also resulted in the A$ having one of its strongest weeks again the US$. However, domestically, all eyes will be on the two key events this week. The Melbourne Cup and the RBA Board Meeting.
While we believe Irish eyes will be smiling with Vauban, we don’t see the same locally with expectations that the RBA will need to increase the cash rate by a further 0.25% to 4.35%. The recent CPI print continues to show that inflationary pressures remain elevated with few signs of a material contraction.
While the RBA has indicated its decision will be based on inflation moving back towards its 2-3% target by the 4Q25, with the current policy rate well below that of other central banks and few signs that prices are likely to decline in the near term, we believe further action will be required. It sets the scene for a challenging lead in to Christmas spending period.
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