Market attention has shifted from recession risks and volatility back to hopes for a soft landing showing just how fast and fickle financial markets can be
The focus was on central bank communication this week, in anticipation of comments from Fed Chair Powell at the Jackson Hole Economic Symposium at the end of the week. Economic data was mostly okay which helped to lift equities, with most major equity indices up (Australia +0.6% and US +0.3%).
The market is still pricing in multiple Fed rate cuts before the end of the year and a rate cut from the RBA (despite the central bank’s rhetoric otherwise). US 10 year-bond yields are below 3.9%, well below their 2024 highs (of 4.7%). And the US dollar has weakened over the past two months alongside lower bond yields and expectations or rate cuts, with the $A now at 0.67.
What about the risks related to the Yen carry trade? The risks around this seem to have disappeared (for now at least) after the Bank of Japan said it would not raise rates further amidst the volatility. The large market moves around this event are a reminder that periods of changes to interest rates are a source of risk to markets, particularly if there are crowded trades.
Commodity price performance has been very mixed. Gold prices remain around a record high (see the chart below), with the value of a gold bar reaching $1million this week.
Australian economic events and implications
It was unlikely that the RBA minutes for the August meeting would contain any new information given the plethora of RBA communication recently, from the post-meeting press conference, the Statement on Monetary Policy and numerous speeches and appearances from RBA officials. The minutes really just confirmed the RBA’s message– that the central bank is still concerned about inflation, that its forecasts suggest there is less spare capacity than previously expected and that while the central bank can’t rule anything in or out, the risk is still with higher rates in the near-term, rather than lower rates. The RBA is placing more emphasis on incoming data is rather than its forecasts, which are more subject to uncertainty. Despite this rhetoric, financial markets do not appear to believe the RBA’s hawkish tilt on rates and are still pricing in a rate cut before the end of the year and think that the cash rate will end 2025 at 3.5%.
Last week, some of the banks started cutting their deposit rates which reflects the market pricing for interest rates but is strange as the rate cutting cycle has not actually begun yet! Fixed mortgage rates are also priced off market expectations for interest rates and there were some reductions to fixed rates last year.
Around 65% of Australian ASX200 listed companies have reported June half-yearly earnings. The results have mostly been okay. 36% of results have beaten expectations, slightly below the usual 40% (results tend to beat expectations because companies downgrade analyst expectations before the results!).
There have been less results disappointing expectations, with 32% of results below expectations from its average of 41%. 55% of companies are increasing earnings from a year ago, close to the 56% average. And 59% of companies are increasing dividends compared to a year ago, in line with the average.
Earnings growth has been negative for the last two financial years in Australia and expectations are for an improvement in 2024-25, with current projections for a 5.4% lift in earnings over the year. The big drag on earnings has been the energy sector due to lower oil, gas and coal prices, and smaller profits in mining, consumer staples, IT and financial sectors. The earnings results show that higher interest rates are working in the economy which has helped some like the banks to improve their net interest margins, although the banks are also seeing some rise in non-performing loans which are a risk that bad debts increase from here. Industrials look like a solid space, with high capex spending.
Australia’s Westpac Leading Index (which is a combination of various leading indicators of economic growth) fell further in July and is still negative compared to a year ago. The Australian Leading Index bounces around a lot more than the US index and even when it has been negative relative to a year ago, it hasn’t always been a sign of a recession. So, it’s basically just telling us that economic growth will be soft in Australia in the near-term.
Diana Mousina AMP Capital
