Rising Bond Yields
It was a difficult week for financial markets as rising global bond yields impacted all major asset classes. The rise in yields was off the back of continued strong economic data out of the US, which prompted many investors to reassess the extent of future rate cuts by the US Federal Reserve, particularly after the initial 0.50% (50bps) rate cut in Sept, which was viewed as a sign that economic growth and labour market in the US was moderating.
Rate Cuts
However, recent data continues to reflect a sound US economy. While the US Federal Reserve pointed to a 3.0% terminal Fed Funds rate, we believe that given the current trajectory of the US economy, the potential for the (terminal) Fed Funds rate to be higher (~3.5% – 3.75%) is now being ‘priced’ by the market. However, we still expect one further rate cut (0.25%) in the US through 2024. Accordingly, the near-term rally that we have seen in bond and equity markets through the September quarter may dissipate into the back end of the year if investors continue to look to a higher terminal cash rate.
The US Election
In addition, the market is now becoming increasingly more focused on the fiscal position of the US, which is likely to remain under pressure given the current fiscal expansion as well as the proposed policy framework of both Presidential candidates. With the US Govt debt tipping ~123% of the Gross Domestic Product, while the Federal deficit sits at 6.3% of the Gross Domestic Product, the potential for market interest rates (bond yields) to remain elevated remains. Furthermore, while markets have looked to a Trump victory, the US election remains incredibly close. As we head towards the 5th Nov, markets will continue to remain volatile.
China & Europe
Domestically, the focus will be on the release of the 3q24 Consumer Price Index data (f’cst 2.9% y/y, 0.3% q/q), which will shape the near-term direction of cash rates. Should the Consumer Price Index print be more favourable we expect that the Reserve Bank of Australia has the ability to lower cash rates at its Dec Board meeting (-0.25%). In China, the deflationary impact on the economy remains as industrial profits continue to decline. With Purchase Managers Index data due this week, we continue to expect further contraction across the economy, with the impact of the recent policy announcement by the Chinese Govt and the Peoples Bank of China beginning to wane. In Europe, the release of Consumer Price Index and Gross Domestic Product data is set to reaffirm further easing by the European Central Bank going forward, with Germany the major laggard as growth slows.
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