Weekly Market Update...

Investment markets and key developments

Share markets mostly rose over the last week helped by good economic data, solid US earnings results and ongoing signs that central banks are moving towards rate cuts albeit they are pushing back against imminent moves. US shares rose to a new record high and Eurozone and Japanese shares also rose, but Chinese shares fell on concerns that stimulus and market support measures are still not enough in the face of the property downturn.

The combination of lower-than-expected local inflation, increased expectations for RBA rate cuts this year and the positive global lead saw the Australian share market rise to a new record high after languishing for two and half years. For the week it’s on track for around a 1.8% rise with gains led by property, energy, health and consumer staple stocks. Reflecting the positive signs on inflation and official interest rates, bond yields fell with 10-year yields in Australia falling back below 4%. The oil price fell as did metal and iron ore prices. The $A rose slightly with the $US down slightly.

“As goes January so goes the year”…the so-called January barometer has a mixed record when it comes to falls in January, but for gains in January it provides a reasonably consistent but not perfect guide to the year. Since 1980 85% of positive Januaries have gone on to a positive year in the US and in Australia its 76%. So with US shares up 1.6% and the Australian All Ords up 1.1% in January it’s a positive sign for the year ahead.

This doesn’t mean there won’t be corrections though and the rise in shares with US and Australian shares hitting records after a brief consolidation into mid-January has left them overbought which together with positive investor sentiment leaves them vulnerable to a short-term correction as we come into the seasonally softer months of February and March. This is particularly so with key risks around recession, US banks and commercial property, the creeping expansion of the conflict in the Middle East, the Chinese property market and uncertainty about when central banks will start to cut rates all of which could provide a trigger for a pullback. In fact, we saw a bit of the latter in the last week with the US share market initially falling after the Fed pushed back against expectations for a March rate cut.

However, while shares have likely run ahead of themselves, the good news on interest rates and inflation has continued and we see this ultimately underpinning another year of gains in shares albeit it will be more constrained and volatile than was the case last year.

• Fed not rushing to cut just yet, but still heading in that direction. Sure Fed Chair Powell pushed back against market expectations for the start of rate cuts in March by saying it was unlikely as the Fed will want to gain further “confidence that inflation is moving sustainably towards 2%”, that was hardly surprising as the March meeting is just six weeks away. More importantly though, he didn’t rule a March cut out, the Fed dropped its reference to further tightening and is now seeing the risks as better balanced and Powell continued to flag rate cuts this year and indicated it will be data dependent. We continue to see the Fed cutting rates 5 times this year starting in May, but a start in March is still possible.

• Eurozone inflation fell to 2.8% in January with core inflation falling to 3.3%yoy, with ECB officials’ comments leaning a bit more dovish. The ECB is likely to start cutting in April.

• The Bank of England has dropped its hawkish bias on interest rates and like the Fed is pushing back against market expectations for early rate cuts but is starting to debate how restrictive it needs to be. Reflecting strong wages growth, it’s likely to lag the Fed and ECB in cutting rates but gradually appears to be heading in that direction.

• The Swedish Riksbank noted that its policy rate can probably be cut sooner than it indicated in November.

• Australian inflation is falling faster than the RBA expected. While hot spots remain (like insurance and rent) inflation fell to 4.1%yoy in the December quarter which is well below the RBA’s forecast for 4.5%, and down from 5.4% in the September quarter and a peak of 7.8% a year ago. Underlying inflation measures also fell with the trimmed mean at 4.2%yoy (below the RBA’s forecast for 4.5%) and services price inflation is now also following goods price inflation down. What’s more the proportion of items seeing greater than 3% inflation has fallen sharply to 43% which is consistent with the pre-pandemic norm and monthly CPI inflation fell to 3.4%yoy in December.

Read full article from Dr Shane Oliver here