What to watch over the week ahead in financial markets
Shane Oliver (AMP Capital)
In Australia, the focus will be on the RBA (Tuesday) which is expected to leave rates on hold, repeat that it’s “not ruling anything in or out”, but retain relatively cautious language and indicate that it’s still waiting “to be confident that inflation is moving sustainably towards the target range.” The RBA’s Statement on Monetary Policy is likely to revise up its 2024 forecast for unemployment to 4.4% (from 4.2%) and revise down its 2024 forecasts for GDP to 1.5%yoy (from 1.6%yoy) and revise down its headline inflation forecast for this year to 3%yoy (from 3.8%yoy) to allow for the impact of “cost of living” measures. As a result of slightly higher unemployment and slightly lower GDP growth along with the influencing effect of lower headline inflation its likely to leave its December 2025 forecasts for the CPI and trimmed mean inflation at 2.8%yoy and continue to forecast both back at the mid-point of the target range by June 2026.
In the US, the services conditions ISM index (Monday) for July is expected to bounce back to 51 after a slump in June. The Fed’s June quarter bank lending survey (Monday) will likely show weak credit demand and possibly tighter bank lending standards. The June quarter earnings reporting season will continue.
Chinese trade data for July (Wednesday) is likely to show continued strength in exports but weak imports with CPI inflation (Friday) remaining weak at 0.4%yoy and producer prices remaining in deflation.
Outlook for investment markets
Easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025-26 should make for reasonable investment returns over 2024-25. However, with a high risk of recession, poor valuations and significant geopolitical risks particularly around the US election, the next 12 months are likely to be more constrained and rougher compared to 2023-24 and there is a high risk of a correction in the next few months.
We have raised our year end forecast for the ASX 200 to 8100. A recession is the main threat.
Bonds are likely to provide returns around running yield or a bit more, as inflation slows, and central banks cut rates.
Unlisted commercial property returns are likely to remain negative due to the lagged impact of high bond yields and working from home.
Australian home prices are likely to see more constrained gains over the next 12 months as the supply shortfall remains, but still high interest rates constrain demand and unemployment rises. The delay in rate cuts and talk of rate hikes risks renewed falls in property prices as its likely to cause buyers to hold back and distressed listings to rise.
Cash and bank deposits are expected to provide returns of over 4%, reflecting the back up in interest rates.
A rising trend in the $A is likely taking it to $US0.70 over the next 12 months, due to a fall in the overvalued $US and a narrowing in the interest rate differential between the Fed and the RBA. A recession is the main downside risk.
