Financial Markets
13 January

Piers Bolger
Chief Investment Officer
Financial Markets – 13 January

The US
A warm welcome to 2025. Financial markets have kicked off the new calendar year in mixed fashion. The strength of the US economy highlighted by strong payroll data into the new year combined with inflation plateauing has seen bond yields continue to push higher as the likelihood of extended Fed rate cuts diminish. Global bond yields continued to move higher over the week with US 10yr yields up 65bps (q/q), while Aust 10yr yields up 36bps (q/q). The potential for the (US) long end of the curve to move above 5.0% remains a real possibility if the economic data continues to remain solid, supported by ongoing strength in labour markets.

Australia
Domestically, data continues to show an overall tepid economic outlook. Recent building approvals as well as consumer demand remain below market expectation, while the strength in the labour market continues to reside heavily on both Federal and well as State Governments as opposed to the private sector, where business confidence has fallen through the back end of the 2024. The upward move in bond yields has also pressured other interest rate sensitive sectors (i.e. REITs), while the weakness in the A$ (v’s US$) further compounds absolute performance.

Consumer Price Index
This week sees the release of US CPI (Consumer Price Index) data. While the trim mean figure is set to remain flat (@ 3.3%), headline CPI is set to increase to (forecast) 2.9% y/y (+0.2% pcp). In addition, a range of retail sales and housing data will be closely watched by the market. With the inauguration of President Trump (21st January) only a little over a week away, there is plenty for markets to digest.

The Reserve Bank of Australia
In Australia this week, outside the sporting world focusing on the Australian Tennis Open, the release of WBC Consumer Confidence data along with jobs data (Un rate f’cst 4.0%, +0.1% pcp) will provide an important signal to the RBA (Reserve Bank of Australia) for its Board meeting in February. Markets are now anticipating that the RBA does have the room to cut cash rates, a view that we have held for some time. While a weaker A$ helps the export market, its does increase business costs for offshore plant and equipment and potentially stymies and further near term downward move in the inflation rate. We view that as a small price to pay should the economy continue to slow further from here. With an upcoming Federal election, the politicisation of the RBA has arrived.

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