Ahead of the game: 23 September 2024

US markets rally and record highs for ASX 200

US equity markets surged this week as traders embraced the Goldilocks backdrop of an emerging Federal Reserve (Fed) interest rate-cutting cycle, cooling inflation, and solid economic growth. The tech sector spearheaded the market rally, ably supported by the S&P 500 and the Dow Jones, which hit fresh record highs.

Closer to home, the ASX 200 marked a fourth straight day of record highs. The gains accelerated following the US Federal Reserve's decision to slash its key policy rate by 50 basis points (bps). Meanwhile, the Australian jobs report for August revealed the Australian labour market remains firm but not firm enough to see the Reserve Bank of Australia (RBA) act on its hawkish bias, which it will likely retain at next Tuesday’s Board meeting.

The week that was: highlights

• Federal Open Market Committee (FOMC) cut the Federal Funds rate by 50 bps to a range of 4.75% to 5.00%
• US retail sales rose by 0.1% in August, exceeding economists' expectations of a -0.3% decrease
• US weekly initial jobless claims fell by 12,000 to 219,000, less than the 230,000 expected, bringing the 4-week average to its lowest since early June
• In the UK, the Bank of England (BoE) kept its official bank rate on hold at 5%
• Staying in the UK, the annual core inflation rate increased to 3.6% in August, its highest in four months
• In New Zealand, gross domestic product (GDP) fell by -0.2% in the second quarter, while the market expected a -0.4% contraction
• The Australian economy added 47,500 jobs in August, stronger than the 25,000 gain the market had expected. The unemployment rate was stable at 4.2%
• Crude oil gained 3.5% this week to $71.07, supported by lower inventories and the Fed’s 50 bps rate cut
• Gold hit a fresh record high of $2600
• Wall Street's gauge of fear, the Volatility index (VIX), eased to 16.34 from 16.57

Key dates for the week ahead

Australia & New Zealand

• AU: RBA interest rate decision (Tuesday, 24 September at 2.30pm AEST)
• AU: Monthly consumer price index (CPI) indicator (Wednesday, 25 September at 11.30am AEST)
• AU: RBA Financial Stability Review (Friday, 27 September at 11.30am AEST)

China & Japan

• JP: Bank of Japan (BoJ) meeting minutes (Thursday, 26 September at 9.50am AEST)

United States

• US: Durable Goods Orders (Thursday, 26 September at 10.30pm AEST)
• US: Fed Chair Powell speech (Thursday, 26 September at 11.20pm AEST)
• US: Core personal consumption expenditures (PCE) price index (Friday, 27 September at 10.30pm AEST)

Europe & United Kingdom

• EA: Hamburg Commercial Bank (HCOB) flash Purchasing Managers' Index (PMI) (Monday, 23 September at 6.00pm AEST)
• UK: S&P flash PMI (Monday, 23 September at 6.30pm AEST)

Key events for the week ahead

• AU

RBA interest rate decision

Tuesday, 24 September at 2.30pm AEST

As widely expected, the RBA kept its official cash rate on hold in August at 4.35% for a sixth straight meeting. The tone in the accompanying statement and press conference was hawkish.

The RBA noted that while inflation is easing, it is still well above the midpoint of its 2-3% target range. It highlighted that quarterly underlying inflation has been above the midpoint of the target for 11 consecutive quarters and "has fallen very little over the past year."

The RBA retained the sentence that the Board wasn't "ruling anything in or out." It also retained the sentence at the end of the statement that "the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome."

The Fed's rate cut this week is not expected to influence the RBA’s decision next week. The RBA will likely leave the cash rate on hold at 4.35% on Tuesday and retain its hawkish rhetoric. While it is generally true that an RBA cutting cycle usually begins after the Fed starts cutting rates, there have been times when the two have moved in opposite directions, including as recently as 2015.

The RBA’s current stance is that despite slow economic growth, stubbornly high inflation will prevent it from cutting rates before 2025. Nonetheless, the Fed's 50 bp rate cut this week lowers the threshold for a dovish shift from the RBA in the months ahead.

RBA official cash rate chart

• AU

Monthly CPI indicator

Wednesday, 25 September at 11.30am AEST

In July, the monthly CPI indicator rose by 3.5% year-over-year (YoY), easing from 3.8% in June and above consensus expectations of 3.4%. The ex-volatile measure eased to 3.7% in July from 4.0% in June. Annual trimmed mean inflation eased to 3.8% YoY from 4.1% in June. The modest decline in inflation was primarily due to a fall in energy prices following the start of state and federal government energy rebates.

“The first instalments of the 2024-25 Commonwealth Energy Bill Relief Fund rebates began in Queensland and Western Australia from July 2024, with other states and territories to follow from August. In addition, state-specific rebates were introduced in Western Australia, Queensland, and Tasmania. Altogether, these rebates led to a 6.4% fall in the month of July. Excluding the rebates, electricity prices would have risen 0.9% in July.”

RBA Governor Michele Bullock said, “If high inflation becomes entrenched in the expectations of firms and households, it would be more difficult and costly to reduce.”

The preliminary expectation is for the monthly indicator in August to ease to 3.0% YoY from 3.5%. However, this will likely change as analysts fine-tune expectations in the coming days. There are 16 bps of RBA rate cuts priced for December and a cumulative 72 bps of rate cuts priced for May 2025.

Monthly CPI indicator chart

• JP

BoJ meeting minutes

Thursday, 26 September at 9.50am AEST

At their July meeting, the minutes from the BoJ revealed that policymakers expect to maintain an accommodative monetary stance. Despite a significant 15 bp rate increase to 0.25%, real interest rates continue to be substantially below the neutral level, indicating that monetary conditions remain far from restrictive.

Looking ahead, the prospects for further policy normalisation appear robust, bolstered by rising inflation and wage growth. These factors contribute to the confidence that a beneficial wage-price spiral will sustainably support inflation. Market participants anticipate another rate hike in December, and the upcoming minutes are expected to provide greater clarity on the policymakers' projected timeline.

BoJ short-term interest rates chart

• US

Core PCE price index

Friday, 27 September at 10.30pm AEST

At the latest Fed, Chair Jerome Powell signalled a tentative victory in the battle against inflation, noting that the risks of inflation escalating further have "diminished." The focus of monetary policy has now distinctly shifted towards supporting the labour market to ensure a smooth economic landing, evidenced by the substantial 50 bp cut.

To date, both headline and core PCE measures have largely been stable, with ongoing expectations for the trend of disinflation to persist. The core PCE is projected to remain steady at 0.2% month-on-month, consistent with the previous report. Analyses of underlying data from the CPI and producer price index (PPI) that contribute to the PCE indicate that pricing pressures remain well-contained.

US headline and core PCE price index chart

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