Markets rally amid US Fed’s rate cut
Financial markets, led by equities rallied over the week after the US Fed announced a 0.50% cut (to 5.0%) to the official cash rate. The move by the Fed was at odds with our assessment of only a 25bps cut, but comments from the Fed Chair reiterated the view that inflationary pressures are now within its target 2-3% band, with moderation in the labour market along with some slowing in the economy providing the opportunity for a larger initial rate cut. The release of US PCE data (f’cst 2.3% y/y, -0.2% pcp) along with U. of Mich economic surveys and labour market jobless claims will be the major focus this week.
Markets anticipating further cuts
Markets are now pricing a further 2-3 rate cuts (75bps) by the end of the year, with potentially five plus cuts through 2025, with a target long term cash rate of 3.0%. However, the size of the rate cut did little to spur global bond markets with yields actually rising across the curve after the decision. We now see global bonds as trading around fair value with the likelihood that yield curves will continue to steepen as central banks push cash rates lower over the back end of 2024 into 2025. The move by the Fed saw the A$ rally over the week, finishing above US$0.68 for the first time in CY24.
RBA’s decision tomorrow
With the RBA set to meet this week we expect no change in the domestic policy rate (4.35%). With only one further meeting left in 2024, the odds of a domestic rate cut have reduced, and more so given the labour market data from last week with the Un rate remaining steady at 4.2%. However, the rise in part time employment (above f’cst at 47.5k) was offset by a decline in FT employment (-3.1k, -63k pcp). In addition, underemployment has steadily risen (6.7%), reflecting that the underlying employment market remains soft. In addition to the RBA decision, mthly CPI is also set for release with expectations that (f’cst) CPI will drop to 2.7% y/y (-0.6% pcp). Any move below 3.0% will be welcomed by the market, but monthly data remains volatile and is unlikely to move the RBA.
China continues to stagnate
In China, the release of PMI data will also be closely watched. The Chinese economy continues to stagnate, with the manufacturing sector continuing to contract. With the malaise in property markets continuing, we expect further stimulus packages, with the ongoing weakness in China further exacerbating the challenges in commodity markets.
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