Economic Update December 2024

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

– ‘Red wave’ in US elections buoyed markets
– China continues to stimulate with the release of a further 10 trillion yuan ($US1.4 trillion) package
– Government Bond yields rise on expectation of inflationary policy settings under Trump
– Australian Senate endorses new interest rate setting committee separate for the RBA Board

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please get in touch with your adviser.

The Big Picture

For the best part of the year, market commentators were focused on the November 5th US presidential election. With current president Biden faltering in front of cameras and ‘Trump being Trump’, commentators had a close call between Harris and Trump both in their narrative and their polls.

Except for a brief ‘honeymoon’ period for Harris after she took the Democratic nomination, sports betting thought Trump was a clear favourite. This proved to be the case and Trump convincingly won the election. Republicans (Trump) now hold the presidency, the House of Representatives and the Senate. A clean sweep. While the Republicans have a majority in both the House and the Senate given the number of discontents within each party, the majorities are not necessarily big enough to guarantee Trump’s policies will seamlessly navigate the path to law and implementation.

Stock markets voted in favour delivering healthy gains in the S&P 500 and the ASX 200. Trump judged his degree of success in his first term by the improvement in stock market indexes. If he continues to be so motivated, it could be good for investors even if they don’t like Trump.

Two of Trump’s policies that attracted most attention during the campaign are: he wants to impose big tariffs on imports, and he wants to undertake a mass deportation of illegal immigrants.

Many economists have made dire predictions about the imposition of tariffs. The expectation being that tariffs from one side are met with tariffs from the other, resulting in a trade war, which historically has not led to an overall favourable economic outcome.

We also think that some of Trump’s rhetoric is part of a bargaining process in that the additional tariffs so far announced, 25% on Mexico and Canada and 10% on China will be removed if the three countries address the respective actions the tariffs are imposed to penalise.

We do not think the US will impose the full range of tariffs currently on the table. By and large, we also note that Biden did not repeal Trump’s first-term tariffs. If tariffs were so toxic, Biden should have repealed them on day one!

During November, the Federal Reserve (Fed) cut rates by 0.25% points to a range of 4.5% to 4.75%. At the recent peak, the rate was the range of 5.25% to 5.5%. In its September meeting, the Fed suggested there may be two more cuts in 2024 (after the 0.5% cut in September) and four more in 2025. Expectations have been pulled back slightly. That means the US is likely to have quite restrictive monetary policy until at least the end of 2025

So far, US economic data has largely held up. The latest September quarter growth data was 2.8% and inflation seems to have been contained. The jobs data have been a bit patchy. The numbers are scaled up from a small sample and the pandemic has redefined what is a normal job.

The latest labour force data were poor. Only 12,000 jobs were created but the unemployment rate was only 4.1% (down from 4.3% in July). Given the enormity of the effect of the two big hurricanes and the Boeing strike on the economy, it is difficult to estimate what the jobs number would otherwise have been. We await a fresh number on the first Friday of December.

China stepped up to the plate by announcing a $US1.4 trn stimulus package to be spent over five years. As it happened, exports surged 12.7% against an expected 5%. Imports just missed expectations at -2.3%.

The Bank of England (BoE) cuts its reserve interest rate for the second time in November. The UK inflation number had got down to 1.7% in October but that rate jumped to 2.3% in data released late in November. The UK unemployment rate just jumped to 4.3% from 4.0% three months earlier. These mixed signals will make it hard for the BoE to manage interest rate policy going forward.

At this juncture, a number of Developed World central banks have started their interest rate cutting cycles. Because of ‘the long and variable lags’ for policy to work, the data might be a little hard to interpret early in the cycle. Nevertheless, most leading economies (excluding Japan) still have highly restrictive interest rate policy settings and in our view a continuation of current interest rate reduction policy is the prudent course.

Australia’s RBA also has a very restrictive monetary policy but it has been reluctant to start policy easing. This situation might soon improve now that the Senate has passed the bill to initiate a new interest rate-setting committee to work alongside the RBA Board. If appropriate members are selected, the new committee might quickly react to almost two years of negative per capita (household) growth and about the same period of negative growth in retail sales volumes.

While it is true that Australia’s labour market has seemingly stood up well to high interest rates, we question the use of pre-pandemic views on what constitutes a strong labour market. International data show that the average working week in Australia is several hours longer than similar countries such as Canada, the UK and the US. Additional survey data also shows that many part-time workers in Australia would prefer to work more hours.

As we drift towards Christmas and the January holiday period, we have good data to support the view that markets in the US and Australia can continue to perform. Survey data of broker forecasts of company earnings suggest 2025 will be strong for these two stock markets even after very strong capital gains in 2024.

Asset Classes

Australian Equities 

The ASX 200 had a strong month in November – up 3.4% for the month and 11.1% for the calendar year-to-date. The Energy and Materials sectors went backwards but the rest were positive. IT gained 10.4% over November, Consumer Discretionary (+6.7%), Utilities (+9.1%), Financials (+5.9%) and Industrials (+5.7%) led the way.

If the newly announced China stimulus package takes hold, it could help our resources sector to play catch up.

International Equities 

The S&P 500 reached an all-time intraday high on the last day of November making for an impressive gain of +5.7% for the month and +26.5% for the year.
Some of the strength in the US market is from the expectations formed following the Trump victory in the US Presidential election on the November 5th.

It wasn’t just Wall Street that rallied on the election result. The London FSE (+2.2%), German DAX (+2.9%) and the Shanghai Composite (+1.4%) all had strong months too. However, the Tokyo Nikkei ( 2.2%) and Emerging Markets (-2.6%) did not share the optimism.

Bonds and Interest Rates

The RBA stood firm again at its November board meeting electing to keep the official Cash interest rate ’on hold’. Pricing indicators give very little chance of a cut at its December 10th meeting. However, some indicate two or three cuts next year starting in the second quarter. The current official interest rate is 4.35% p.a.

The Fed cut its interest rate again (-0.25%) in November following its initial -0.50% cut at the previous meeting. There have been some marked changes for the chance of a cut in December (from about 60% to over 80%). The current odds are set at about 0.66% for a single cut on December 18th. One pricing model agrees with that assessment but also place a 90% or more chance of an additional cut by the January meeting. The current interest rate range is 4.5% to 4.75%.

The BoE cut a second time by -0.25% to 4.75%. Recent UK data confused the outlook for further interest rate cuts.

In October, the Bank of Canada cut by 0.50% following three -0.25% cuts. The current rate is 3.75% p.a.

If the RBA doesn’t cut for a few months, it seems probable that it will have the highest cash interest rate of its peers. Moreover, Australians are particularly reliant on variable rate home loans and owner-occupiers get no tax breaks. Australian households are feeling the pressure of higher short-term interest rates more than most.

It is true that some components of the Australia Consumer Price Index (CPI) Inflation basket have been running too hot and contributing to our inflation rate being higher. However, those components are highly unlikely to be interest rate dependant i.e. not necessarily or directly respond to RBA interest rate movements.

We continue to argue rent inflation might be exacerbated by high interest rates and this result might also flow on to insurance inflation.
Japan’s inflation fell to 2.3% from 2.5% and its central bank declared that it still plans to lift its interest rate to 1% in the second half of next year. After years of having a negative interest rate, Japan is trying to normalise its interest rate from below.

Other Assets 

Brent and West Texas Intermediate (WTI) oil prices were down slightly in November. There seems to be less concern about prolonged tension in the Middle East. For possibly a similar reason, the price of gold pulled back ( 3.0%)

The price of copper fell -5.2%. The price of iron ore rose +1%.

The VIX ‘fear’ index for the US equity market ended November at a normal level (13.9).

The Australian dollar depreciated against the US dollar by -0.8%.

Regional Review

Australia

Australian jobs data were back in a ‘normal’ range after a couple of strong months.15,900 jobs were created of which 9,700 were for full-time positions. The unemployment rate was 4.1% for the third month in a row.

When the employment data are transformed into year-over-year growth rates, part-time jobs growth started to retreat after peaking at 6.8%. While 3.4% is still above long-term population growth, this result is indicative of the recent surge in immigration flows stabilising. Full-time employment growth was 2.4% which is about in line with recent population growth.

Because the Australian Bureau of Statistics (ABS) chose to treat the government energy subsidy payment as an equivalent change in price, electricity inflation came in at -35.6% when, in fact, tariffs had hardly changed. This component, together with the -2.8% inflation in transport costs resulted in headline CPI coming in at the bottom of the RBA target range of 2% to 3% annualised to the end of October. Rent inflation remained elevated at 6.7%. Without the unusual ABS electricity price adjustment, CPI inflation would have come in at 3.5%.

Retail sales volumes grew by a very modest 0.2% over the year when compared to population growth of around 2.5%. Consumers have had to cut back because of the cost-of-living crisis. The wage price index rose by 3.5% which translates to 0.7% when price inflation is taken into account. However, the latest so-called real (inflation-adjusted) wage is -6.6% below its pre-pandemic level.

The latest reads for consumer and business confidence were higher. The business conditions index was flat.

China 

Exports were very strong at 12.7% particularly when compared to the expectation of 5%.

China has initiated a number of stimulus policies, the latest of which was a 10 trillion yuan ($US1.4 trillion) package to be distributed over five years. If it transpires that this amount of stimulus is insufficient, it appears the government is committed to adding more.

US

The US election results seemed to stun many commentators. It would appear that some commentators’ personal preferences biased their interpretation of the polls.

US jobs data were seemingly contaminated by the impact of two hurricanes and a major strike at Boeing. What is a bit more disturbing is the magnitude of the revisions to the previous two months’ worth of employment data. The August figure was reduced from the preliminary estimate of 159,000 to 78,000; September’s jobs number was reduced from 254,000 to 224,000. Moreover, the latest 12,000 reading was swamped by the contributions of government (+40,000) and Health Care and Social Administration (+51,300). Jobs in the other sectors collectively went backwards!

CPI inflation was 2.6% which became 1.4% when shelter inflation was removed from the calculation. There are well-known issues with the calculation which have been noted by the Fed.

The Department of Homeland Security estimated that there were 11 million illegal immigrants at the start of 2022. That number will be a lot higher when the cases during Biden’s term are added. It is not feasible to even find them all, let alone repatriate them. It is not even clear if notionally home countries would take them back.

It is somewhat disturbing that Trump does not have a feasible plan to reduce the national debt. Since he plans to cut taxes of many, large cuts in government spending are called for. Elon Musk has been appointed to a non-official department to try to cut out government waste. The name, Department of Government Expenditure (DOGE), happens to have its acronym mimic a crypto currency that was created as a ‘joke’. Moreover, it would appear that Musk may be conflicted in some of the recommendations he will make.

Europe 

UK inflation came it at 2.3% after the prior month’s 1.7% and the unemployment rate rose to 4.3% from 4.0% in only three months. Since unemployment and inflation moved above previous levels, it is not clear that the BoE will continue to ease interest rate policy as planned.

Rest of the World 

The US and France reportedly brokered a ‘permanent cease fire’ between Israel and Lebanon.

Biden reportedly gave permission for the Ukraine to send US long range missiles deep into Russia. Thus far, there has been no adverse impact on markets.

We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.