Economic Update November 2024

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

Key points:
– Trump sweeps the US election, Republicans take both houses
– The US cuts interest rates by 0.25%, other Central Banks, ex Australia, still cutting interest rates
– Australia’s RBA unlikely to join policy easing just yet
– US economy holding up and Private Consumption Expenditure (PCE) inflation close to target

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 contact your Financial Adviser.

The Big Picture

Donald Trump has won the US election with an emphatic victory. The Republicans are in control of the Senate and appear poised to take control of the House of Representatives. Billed as the most important election in a generation and considered too close to call by most, the American voters have now spoken. The world now waits for what comes next. It appears that Trump’s agenda from a policy perspective at least, is pro-business, stimulatory and possibly more inflationary than under the current Biden administration. From a global perspective there will be much interest in Trumps foreign policy particularly with respect to the wars in the Ukraine and the Middle East as well as the potential fallout from increasing tariffs on China. While we have a sense of policy direction, timing and implementation remain the subject of intense scrutiny and speculation. Worth noting Trump is not president until his inauguration on 20 January 2025.

It was only on Melbourne Cup Day last year that the Reserve Bank of Australia (RBA) last raised its overnight cash interest rate (OCR). Despite forecasts at that time of three interest rate cuts by the end of calendar 2024, none of these cuts have eventuated. The RBA remains data dependent and reported inflation has remained stubbornly higher than anticipated, despite the per capita recession. But the world of central bankers has moved on a lot this year – and particularly since the September 18th meeting of the US Federal Reserve’s (Fed) FOMC (Federal Open Market Committee) that handed down a 0.50% or 50 basis point interest rate cut to start its easing cycle and followed up last week with a further 0.25% rate cut as did the Bank of England (BoE) on 7 November.

At the September meeting, the Fed pencilled in two more cuts of 25 bps this year and another four for next year. The market is strongly expecting (90% chance) a rate cut two days after the November 5th US presidential election.

The Fed certainly seems to have opened the floodgates. The Bank of Canada (BoC) just cut by 50bps (after three 25 bps cuts) to 3.75% because the long and variable lags of past rate hikes are cratering their economy. The Royal Bank of NZ (RBNZ) also just cut by 50bps to 4.75% following an initial 25 pbs cut.

The ECB has cut three times to 3.25% and its job is not yet done. Inflation is below its target and the economy is weak. The ECB President, Christine Lagarde, kept emphasising that they are being data dependent. As we repeatedly write, being data dependant risks being late with policy changes and growth slowing more than intended, driving the economy into a recession. Monetary policy is far from being an exact science.

Sweden’s central bank cut three times to 3.25%. The Bank of England (BoE) just got caught short because its inflation read came in at under target (at 1.7%) and it has only recently made its second cut – to 4.75% – more cuts are expected.

The People’s Bank of China (PBOC) has a broader set of monetary policy tools. The PBOC just cut its loan prime rates (LPRs) this week – to 3.1% for 1-year (mainly for corporate) loans and 3.6% for 5-year (mainly for mortgage) loans.

With all our peer central banks already having started their cutting cycles – and many having their rates below our 4.35% (or soon to be there) – the RBA is looking very alone.

Australia has already had six consecutive quarters of negative per capita growth. We have had five consecutive negative quarters of growth in retail sales volumes (without allowing for our rampant population growth). The IMF just released its updated global forecasts for growth. It has pencilled in 1.2% for Australia in 2024 and 2.1% for 2025. With both being well below population growth, the per capita recession might take us up into 2026. It beggars belief that the RBA can talk about demand pressures fuelling inflation. Our problems are all supply-based. True, if we crushed the economy until it needs its last rites, we could get inflation down to any number we want. But the RBA has a dual mandate of price stability and full employment. The ‘fix’ should be on the supply side with home building and electricity generation investment.

It is true that the unemployment rate is near historic lows at 4.1% but the world has changed and the old data are largely irrelevant. Almost anybody can quickly get a job in food delivery or Uber rides these days. Lots of people reportedly have two jobs because one doesn’t put enough food on the table. And it should be noted that many governments are aware that sampling unemployment numbers with telephone calls no longer works. A graphic on Bloomberg TV showed that survey response rates to phone calls is down to 18% from the pre-pandemic average of above 50% in the US. Apparently, GenZ and others are no longer as responsive to answering inbound phone calls.

In the US people complain about the effect of inflation on the cost of living. But, since 2019, wages in the US have risen 5% more than prices so that, at least on average, US folk are much better off than pre-pandemic. Not so for us! Our wages have risen 7% less than prices. But the RBA stands stubbornly steadfast on interest rates. In a relative sense, we have lost 12% (=5%+7%) to our US brothers and sisters in purchasing power since the onset of the pandemic.

US growth is holding up better than many thought possible. The first estimate for the September quarter was 2.8% p.a. which is only just a little down from the prior quarter’s 3.0% p.a. The consumer is reportedly holding up but, also, government spending is playing a material role in attaining growth.

The presidential election is dividing the nation. We can’t recall such vitriol being hurled from both sides. We think both sides are exaggerating the economic problems that would flow from their opponent’s proposed policies for political gain.

Despite the apparent policy divide between the Trump and Harris policies, in our opinion, we see no evidence that either side would address the massive government deficit. The latest report is the US Government has a deficit of $1.83 trillion (trn) with interest payments making up $1.16 trn, or two thirds, of the deficit. Total debt now stands at about $35 trn!

US government debt rose sharply in the pandemic – and for good reason – but, as conditions improve, the debt mountain needs to be addressed before it risks rendering the economy dysfunctional.

Recent data suggest US consumers are getting more positive about their future prospects. A monthly consumer confidence index rose to 108.7 from 99.2. A figure below 100 signifies quite gloomy times but the same index was consistently over 125 for the years leading up to the pandemic.

We see some cause for concern in the US regardless of the election outcome. A possibly crippling dock strike on the East and Gulf coasts in the run-up to the election was settled (at least as an interim measure) within days. The union was offered pay rises totalling 62% over the next six years and a pledge not to introduce automation.

Boeing machinists were offered a 35% increase over four years but they turned it down. If this is the start of a wage-price spiral, inflation could return with a vengeance.

US consumer price inflation (CPI) has largely been contained. If it were not for the problems in calculating shelter inflation (which makes up a third of the CPI) all would seem to be fine. However, retail sales grew 1.7% over the last year which drops to -0.7% when sales are corrected for inflation. There are mixed signals in the data about the strength of the consumer.

Australia’s quarterly inflation read came in at the end of October for the September quarter. Because of the way the Australian Bureau of Statistics (ABS) allowed for the electricity subsidy, the inflation reading is artificially low and will spring back when the subsidy ends. The headline rate was 2.8% but it would have been 3.5% had electricity price inflation not fallen by the subsidy impacted -24.1%. Of course, electricity tariffs did not fall by that amount. The fall is due to the way the ABS imputed the across-the-board flat subsidy. Rents rose by 6.6% and tobacco prices by 12.9%. Neither of those would likely fall if our interest rate was increased!

The first week of November was dominated by the Fed and RBA board meetings, US jobs data and the presidential election. Nevertheless, we see the company earnings expectations – as collected by LSEG (formerly Thomson-Reuters) for the component listings on the S&P 500 and the ASX 200 – indicate strong optimism for the next 12 months. These forecasts imply above average capital gains for both indexes. But, with so much important information to be imparted in the very near term, it would be foolish not to expect some additional short-term market volatility.

 

ASSET CLASSES

Australian Equities 

The ASX 200 was down in October (-1.3%) but the movement was far from even across the sectors. Most sectors were down -2% to -7% but Financials, the largest sector by market capitalisation, grew by 3.3%.

Our analysis of the LSEG survey of broker-based company earnings forecasts suggest that they are expecting a capital gain materially above the long-term average of 5% (plus dividends and franking credits).

International Equities 

The S&P 500 fell in October (-1.0%). The World index was down less (-0.4%) and Emerging Markets were down -2.2%. The Nikkei was up strongly at +3.1%.

With some of the ‘magnificent 7’ US companies reporting well in October, together with the general AI revolution, the LSEG forecasts for growth in the S&P 500 are again well above the historical average over the next 12 months. However, not all agree. Indeed, there was a big sell-off on some big tech stocks based on their forward guidance at the end of October.

The reputable Goldman Sachs is predicting an average 3% p.a. growth in the S&P 500 over the next ten years against an average 13% over the last 10 years. Goldmans is one of the contributors to the LSEG survey. We think there is merit in going with the consensus average rather than any one forecaster – and there is solid academic research to back that approach.

Bonds and Interest Rates 

Central banks were unusually active during October, with most now well into a cutting cycle. But it is already too late for some to avoid an economic downturn. The US might just pull off a ‘soft landing’ but there is so much restrictive monetary policy response still in the pipeline, it is far too soon to call a soft landing as having been achieved.

US 10-year Treasurys yield got down to below 3.7% in September but it has since risen to about 4.3%. The yield curve between maturities of two and 10 years is no longer inverted. Some of the variation in yields is possibly due to perceptions in how the Middle East conflict might be resolved and some due to how US domestic policy might change under a new president.

The RBA left interest rates ‘on hold’ at its last meeting and few expect any change at its next meeting in December. The RBA is still under the cloud of having stated that rates would not go up before 2024. And if they start to cut now, it is too soon after their last hike 12 months ago to do so without losing face. But they will lose much more credibility if they wait too long to start cutting, particularly as almost everyone else of significance is well into their cutting cycles. The four big banks are all now predicting the first cut in February.

China cut its loan prime rates this month – to 3.1% for 1-year (mainly corporate) loans and 3.6% for 5-year (mainly mortgage) loans. It also relaxed some conditions on home lending.

Japan has experienced some instability in its monetary policy stance as the new prime minister was thought to have a different view from the man he replaced. The election at the end of October took away the government’s majority. It is not yet clear how that scenario will unfold.

Other Assets 

Brent and West Texas Intermediate (WTI) crude oil prices were up slightly over October (1.9% and 1.6%, respectively). There was some intra monthly volatility as opinions varied about how the Israel-Iran conflict may or may not escalate.

The price of gold continued its charge; it gained 4.1% on the month. It is up 32.7% on the year-to-date!

The price of copper fell -3.0%. The price of iron ore fell sharply (-7.1%) but closed October at just above the $US100 / tonne mark.

The VIX ‘fear’ index was elevated throughout October and closed the month at 20.4 a level at the top of its normal trading range. It has subsequently declined post the US election.

The Australian dollar depreciated against the US dollar by -5.2%.

REGIONAL REVIEW 

Australia 

Australian jobs data are starting to look more resilient than they were a few months ago. 64,100 jobs were created in the latest month of which 51,600 were full-time positions. The unemployment rate dropped to 4.1% from 4.2%.

Reports of hardship in the payment of mortgages and companies going into liquidation seem to tell a different story. Except for the jobs data, there are no important macro data points for Australia that are encouraging. Historically, jobs hold up the longest going into a slowdown because of the cost of re-hiring and training. The unemployment rate then rises sharply if the economy hasn’t been sufficiently stimulated.

The Westpac consumer sentiment index did improve to 89.8 from 84.6. The latest reading is the best since May 2022 but it was well above that read just before the pandemic and after the 2020 lockdowns. The NAB business conditions index rose to 6.9 from 3.6 and the business confidence index rose to -1.9 from -4.5. While both business indicators rose, they did not do so by enough to bring much joy.

Retail sales rose 2.3% for the last 12 months or 0.1% after adjusting for inflation. With the population growing at around 2.5%, the volume of goods and services bought by the average household has fallen by over 2% over the last 12 months.

China

The China Purchasing Managers’ Index (PMI) for manufacturing climbed back above the 50 level that divides expected contraction from expansion, for the first time since April. The reading was 50.1 against an expectation of 49.9 and a previous month’s reading of 49.8.

Exports and imports were both much weaker than expected but economic growth at 4.6% was just above the expectation of 4.5%. Retail sales, at 3.2%, beat the expected 2.5% and industrial output at 5.4% beat the 4.6% expectation. Following this data release, China’s leader, Xi Jinping, called for a concerted effort to return growth back to the Party’s expectation of 5%.

The PBOC has started making moves to help stimulate the economy using several tools. We think that it is now possible that the economy will start to perform as expected by the government.

US

The jobs data released in October easily beat expectations of 135,000 new jobs. The 254,000 jobs created helped bring the unemployment rate down to 4.1% from 4.2%.

Nevertheless, retail sales adjusted for inflation continue to fall over a trailing 12-month period. However, wages grew by 5% more than price inflation since 2019.

Headline Private Consumption Expenditure (PCE) inflation came in at 2.1% but the Fed-preferred core rate was 2.7%. The CME Fedwatch tool now attaches a 65% chance of a 0.25% interest rate cut in December down from a 73% chance prior to the election outcome being known.

Europe

UK inflation came in at 1.7% which is under its target of 2.0%. The economy is not looking great so it seems that the BoE is behind on cutting its interest rates. The current reference rate is 4.75% following a further reduction of 0.25% at its meeting on 7 November.

Rest of the World

Canada appears to have realised too late that it was too slow in starting to cut interest rates. The unemployment rate rose from 5.0% at the start of 2024 to 6.5% in the latest reading for September. That is why the BoC has cut four times this year to a total of 1.25% points of cuts to 3.75%.

The RBNZ has similarly been aggressive in cutting. Its OCR now stands at 4.75%.

 

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