Debate around Fed policy
Financial markets were again little changed over the week as investors digested both local and global economic data. Over the week US data continued to reinforce the underlying strength of the US economy. While debate continues around the need for further short term rate cuts by the Fed, we continue to f’cst one further rate cut (0.25%) in 2024, most likely at the Dec FOMC meeting. This will see the US Fed Funds rate at 4.75% by EOFCY and in our view provide the Fed with sufficient capacity to take a more cautious approach to reducing rates further through the 1q25 and beyond.
Markets leaning towards a Trump victory
While we continue to f’cst a 3.0% terminal US cash rate, we believe the timing of this could extend into 2026 should the US economy remain resilient. It will also afford increased flexibility as the new (Harris/Trump) White House administration takes control. Additionally, the road to the White House is starting to hot up. While polls continue to point to a tight race, highlighted by the strong early voter turnout across all the 26 (of 50) States, markets are now leaning towards a Trump victory. Whether this plays out remains to be seen, but the continued market strength is favouring Trump.
A Congressional clean sweep unlikely
However, equally important is the Congressional elections that will also frame the Presidency over the next 4 years. In our view the likelihood of a clean sweep (for either Democrats or Republicans) remains unlikely, but with slim majorities across both Houses, it would certainly change the US political landscape if it did occur.
Labour figures dash hopes of a domestic rate cut
Domestically, the solid labour force figures over the week (Un fell -0.1% to 4.1%) saw domestic bond yields rise and pushed back the likelihood of pre Xmas rate cut by the RBA. However, we still believe a Dec cut remains a possibility as inflationary expectations continue to move lower while the domestic economic outlook softens.
European summer draws to a close
In Europe, the ECB cut cash rates by 0.25% (to 3.25%) as expected. The economic outlook for Europe points to the downside as the region’s major economy in Germany continues to stagnate. While markets have been focused on the weak outlook for China, Germany’s declining growth rates and ongoing economic challenges will continue to define the outlook for Europe. In our view, more will need to be done within Europe to bolster growth in order to support wider global economic activity in 2025.
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