Global share markets rose again over the last week on expectations for a continuation of a “goldilocks” macro outlook on the back of central bank rate cuts reinforced by news of aggressive Chinese policy stimulus
Last week saw US and global shares make new record highs and Chinese shares surge around 15.7%. For the week US shares rose 0.6%, Eurozone shares rose 3.6% and Japanese shares rose 5.6%. Australian shares made it to a new record high above 8200 but rose less than 0.1% for the week with a 9% surge in mining shares on the back of Chinese stimulus measures offset by a correction in bank shares after their strong run. Bond yields were mixed with slight increases in the US, UK, Japan and Australia but falls in Europe.
Despite an escalation in the Israel/Hezbollah conflict oil prices fell with Saudi Arabia set to increase production and Libyan production returning. Consistent with the “risk on” sentiment, metal prices surged higher, the iron ore price rose, the $A rose to $0.69 and the $US fell.
The risk of a near term pullback remains high for shares, but increasing policy stimulus globally as we move into a more positive seasonal period for shares is very supportive. The risk of another correction in shares remains high given: stretched valuations; optimistic investor sentiment; the still high risk of recession in the US and Australia; and geopolitical risk around the US election (if Trump looks like winning or their looks like being a Democrat clean sweep) and in the Middle East with the expansion of the Israel/Gaza war to Hezbollah.
However, the success in getting global inflation down, ramping up central bank policy stimulus (with nearly 50% of global central banks now cutting rates and the RBA getting closer to joining in) and China seemingly moving to “whatever it takes” policy stimulus are all very positive for shares on a 6-12 month horizon particularly if we continue to avoid recession. We are also now coming into a positive time of the year for shares from a seasonal perspective after they performed surprisingly well through the normally weak months of August and September.
RBA keeps Australian rates on hold
RBA on hold and still hawkish but pivoting to be a bit less so – at least it didn’t consider another rate hike! As widely expected, the RBA left rates on hold at 4.35% and its post meeting statement continued to lean hawkish with warnings about too high inflation, excess demand, low productivity and a still tight labour market. However, while Governor Bullock repeated that “in the near term [the RBA] does not see interest rate cuts” there was a step in a dovish direction with the Board not explicitly considering a rate hike after months of considering one, against the background of still “not ruling anything in or or out” which means that despite the guidance against cutting in the near term it may still do so if circumstances warrant!
In this regard, Australian inflation data for August provided good news. Not so much because electricity rebates pushed headline inflation down to 2.7%yoy, to be back in the target range for the first time in three years, which the RBA regards as temporary. But because underlying inflation measures – which the RBA focusses on – all fell. Excluding the electricity rebates inflation fell to around 3.1%yoy from 3.5%, inflation excluding volatile items fell to 3%yoy from 3.7% and trimmed mean inflation fell to 3.4%yoy from 3.8%. And the annualised rate of trimmed mean inflation over the last three months fell to 2.8%, way down from 6.4% in the three months to May. Sure, the Monthly CPI needs to be treated with caution, but further falls in underlying inflation provide confidence that disinflation has resumed after stalling earlier this year. In fact, the trimmed mean is now tracking slightly below RBA forecasts.
The Government should ditch the proposal to split the RBA Board. There has been much angst around this reform over the last few weeks with the RBA becoming a bit of a political football and the Green’s demanding rate cuts before supporting the reform which would severely dent the RBA’s credibility. However, the reality is that there is no evidence that the RBA Review’s proposal to set up a separate interest rate setting board will lead to better outcomes or that its world’s best practice, but it could reduce RBA accountability (as egotistical external economists could outvote the RBA) and create confusion. The reform is not critical to success of the RBA going forward and the best approach is to simply forget about it and work in a bi-partisan way to improve the process of selecting members for the current board.
Shane Oliver, AMP Capital Chief Economist
