Investment Market Update: December 18
The December Xmas rally continued over the week with equity and bond markets higher, although domestic equities stole the show with exceptionally strong investment performance by the resources sector. In addition, the rebound in the A$ (+2.0% v’s US$) also contributed to solid returns from both hedged global equities and GREITs. The rally in equities has been driven by falling bond yields and the market’s view that the US Fed along with other major central banks are now on hold, with the next move in cash rates to be lower. While we are of the view that the US Fed has finished with raising cash rates, domestically, we believe we will need to wait for the 4q23 CPI data (due in January) before reaching a more concrete view from the RBA.
However, the fact that the major central banks are now on hold has provided the impetus for a rally in bond markets (lower yields) that has continued to support growth assets. While markets are forecasting the Fed to cut rates by 100-125bps over 2024, we are expecting fewer rate cuts (75-100bps) with the Fed remaining on hold for the 1h24. This week will see the market focused on building and housing data as well as consumer confidence data, jobless claims (f’cst 215k), PCE data and durable goods orders (Nov).
Overall, we continue to forecast that the data will continue to point to a sound economic outlook for the US. In Europe, the release of Nov CPI figures (f’cst 2.4% y/y, flat pcp) will ensure that the ECB remains on hold into 2024. However, the ECB has been reticent to proactively talk about the possibility of rate cuts. In China, the better than f’cst industrial production figures may indicate that the economy may be bottoming, despite the fact that the all-important housing market continues to remain challenged. In the UK, CPI data (Nov) will also be closely watch (f’cst 0.1% m/m, 5.6% y/y). The benign monthly figure will be an important barometer for the BoE heading into 2024.
While domestically, the RBA minutes of its Dec meeting along with private sector credit data will round out the Xmas week. The tone of the RBA minutes will provide a further look through on the direction of rates into the 1q24. As this will be our last note for 2023, we wish all our investors a wonderful and safe Xmas as we look forward in doing it all over again in 2024.
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