September 2024 quarter economic and market commentary
Despite some early anxieties the quarter proved to be a strong one for financial assets. Those anxieties reflected recession fears in the wake of apparently soft US labour market reports and an attendant sharp setback in equity markets.
Benign US inflation numbers, combined with a more measured assessment of the likelihood of a US recession, saw markets stage a strong recovery from early August.
That positive sentiment gathered pace as expectations grew that the US Federal Reserve (Fed) would deliver a “jumbo” 50 basis point (bp) reduction in the policy rate when it met in September. Those expectations were vindicated and excited speculation that further such cuts were possible at the two remaining Fed meetings for 2024. That was the case despite the Fed’s “dot plot” indicating a more modest pace of easing, with a median projection of two further 25 bp easings for 2024, and a further 100 bps of easing projected in 2025.
In any case, those developments saw a pronounced rally in US bond yields to their 2024 lows. After starting the quarter at 4.76 per cent, the US 10-year bond yield got close to 3.60 per cent around mid-September, but ended the quarter closer to 3.80 per cent.
After initially confronting headwinds associated with recession fears, equity markets rallied sharply from early August. To a large extent, equity markets have exhibited resilience throughout 2024, albeit that early in the year that resilience was reflective of a “thematic” and relatively narrowly-based rally focused on technology. However, as markets became more optimistic in their assessment of the likely trajectory of the Fed’s policy rate, and inflation news turned a little more positive, “macro” themes accentuated some of the more “thematic” themes that had driven earlier market strength and equity market strength become more broad-based.
Expectations of a more aggressive Fed saw the USD depreciate, particularly against the JPY as the Bank of Japan raised the policy rate to 0.25 per cent in July. The Japanese equity market was a substantial underperformer in the quarter.
Gold also continued its strong run in USD terms, reflecting in part falling US bond yields and a lower USD.
Locally, and in contrast to developments in the US, the RBA sought to downplay expectations of a policy rate reduction in Australia.
Where the RBA differed from other developed country central banks during the tightening cycle was that it showed a reluctance to raise rates as far and as fast. That relative caution was aimed at minimising any dislocation in the labour market.
That probably means a more cautious approach to lowering the policy rate reflecting a better performed Australian labour market but “stickier” inflation.
Going forward, the key issues for 2024 revolve around the durability of US economic activity growth and the resilience of the US labour market and the “stickiness” of inflation both locally and in the US.
There are also growing concerns of the implications of the large US budget deficit and whether that might hinder any capacity for US bonds to stage a meaningful rally even if the Fed continues to cut the policy rate.
That neither US Presidential candidate has a coherent plan to address the deficit may add to those concerns.
There is also some potential for structural factors to affect the narrative. Structural factors are undergoing some critical shifts: higher “neutral” interest rates, emboldened regulators, growing protectionism, and emergent “mega forces” such as climate, cyber-security and AI.
Geo-political risks remain elevated: the forthcoming US Presidential elections, tensions associated with the Middle East, the Russia / Ukraine conflict, China /Taiwan, and the Korean Peninsula remain capable of upsetting any positive market narrative.
That all suggests that there will be episodic bouts of volatility where the potential for shifts in sentiment and the prices of financial assets exist.
