Ahead of the game: 14 October 2024

Record highs in US markets following Fed's rate decision

US stock markets saw gains this week, with both the S&P 500 and the Dow Jones Industrial Average reaching new record highs. These advances were bolstered by the release of the minutes from the Federal Open Market Committee (FOMC) meeting, which revealed strong support among officials for a significant 50 basis point (bp) interest rate cut in September.

Optimism in ASX 200 fueled by China's fiscal policy

In Australia, the ASX 200 also experienced a rally, driven by renewed optimism in Chinese markets. This upbeat sentiment emerged following an announcement by Chinese authorities that the Finance Ministry would hold a briefing on Saturday, 12 October, to discuss measures aimed at "strengthening the counter-cyclical adjustment of fiscal policy." This move is seen as an effort to bolster economic stability and growth amid varying global economic pressures.

The week that was: highlights

• The Federal Reserve (Fed) meeting minutes indicated that most officials supported the Fed's larger 50 bp rate cut in September
• The annual headline inflation rate in the US for September cooled for a sixth consecutive month, dipping to 2.4%, although it was above forecasts of 2.3% year-on-year (YoY)
• US core inflation increased to 3.3%, rising from a three-year low of 3.2% and exceeding expectations for it to remain at 3.2%
• Initial jobless claims rose by 33,000 to 258,000, reaching its highest level in 14 months, surpassing market forecasts of 230,000
• In Japan, the Reuters Tankan sentiment index rose to +7 in October from +4 in September
• In Australia, the Westpac Consumer Confidence index surged 6.2% to 89.8
• The Reserve Bank of New Zealand lowered its official cash rate by 50 bps to 4.75%
• Crude oil prices rose 1.75% this week to $75.67, supported by elevated Middle Eastern geopolitical tensions
• Gold prices fell 0.89% to $2630.00 in response to higher yields and a firmer US dollar
• Wall Street's gauge of fear, the Volatility Index (VIX), increased to 20.94 from 19.20.

Key dates for the week ahead

Australia & New Zealand

• NZ: Third quarter (Q3) Inflation (Wednesday, 16 October at 8.45am AEDT)
• AU: Employment (Thursday, 17 October at 10.30am AEDT)

China & Japan

• JP: Inflation (Friday, 18 October at 10.30am AEDT)
• CN: Gross Domestic Product (GDP) Q3 (Friday, 18 October at 1.00pm AEDT)

United States

• US: Retail Sales (Thursday, 17 October at 11.30am AEDT)
• US: Building Permits (Friday, 18 October at 11.30pm AEDT)

Europe & United Kingdom

• UK: Employment (Tuesday, 15 October at 5.00pm AEDT)
• UK: Inflation (Tuesday, 15 October at 5.00pm AEDT)
• EA: European Central Bank (ECB) interest rate decision (Thursday, 17 October at 11.15pm AEDT)

Key events for the week ahead

• AU

Employment

Thursday, 17 October at 10.30am AEDT

In August, the Australian economy added 47,500 jobs, exceeding the 25,000 gain the market had anticipated. The unemployment rate remained stable at 4.2%, holding at its highest since November 2021, while the participation rate continued at a record high of 67.1%.

Kate Lamb, Australian Bureau of Statistics (ABS) head of labour statistics, said: “The number of unemployed people fell by around 10,000, while the number of employed people grew by around 47,000 in August. This resulted in the unemployment rate remaining steady at 4.2 percent and the participation rate remaining at its record high of 67.1 percent.”

Last month's employment rise exceeded expectations once again, with the labour market cooling more slowly than anticipated. However, as the participation rate (supply) remains at historic highs, it affords the Reserve Bank of Australia (RBA) time to hold rates steady and observe incoming data.

This month, the preliminary expectation is that the Australian economy will create 25,000 jobs and that the unemployment rate will remain at 4.2%. The Australian interest rate market is pricing in 10 bps of RBA rate cuts for December and 46 bps of rate cuts by May 2025.

AU unemployment rate chart

• EA

ECB interest rate decision

Thursday, 17 October at 11.15pm AEDT

At its September meeting, the ECB decided to lower its key deposit rate facility by 25 bps to 3.5%, aligning with market expectations. This decision followed a previous rate cut in June and a pause in July. ECB President Christine Lagarde emphasised a cautious, data-driven approach, suggesting that decisions would continue to be made on a "meeting by meeting" basis, which tempered expectations for consecutive rate cuts.

Despite this stance, recent economic indicators have shown weak growth and a strong disinflationary trend within the Euro Area (EA), signaling a potential need for further monetary easing. The rates market has now fully priced in a 100% probability of another 25 bp cut at the upcoming ECB meeting next week. Additionally, expectations are set for a similar cut in December, which would reduce the deposit rate to 3% by year-end.

These developments highlight ongoing economic challenges in the Euro Area and the ECB's responsiveness to changing economic conditions as it aims to support economic recovery and maintain price stability.

ECB deposit rate chart

• JP

Inflation

Friday, 18 October at 10.30am AEDT

Last month, Japan saw its core inflation rate rise to 3.0% from 2.8%, while the overall inflation rate remained stable at 2.8%. This marks the 29th consecutive month that inflation has exceeded the Bank of Japan (BoJ)'s 2% target. Given these developments, it appears likely that the BoJ will continue with policy normalisation, though the timing and extent of future interest rate increases are major points of focus for financial markets.

In July, the BoJ unexpectedly raised interest rates by 15 bps to 0.25%. However, subsequent actions have been more cautious, with rates held steady in September. This cautious approach coincides with a dovish stance, partly influenced by prior strengthening of the Japanese yen. The new Prime Minister of Japan, Shigeru Ishiba, known for his typically hawkish monetary views, has also adopted a surprisingly dovish tone.

As of 11 October, financial markets are assigning a 71% likelihood to a 10 bp rate hike in December. Should core inflation continue to rise, it would reinforce expectations for a rate increase by year-end. The BoJ previously forecasted a core inflation rate of 2.5% by March 2025, but persistently high core inflation could challenge this projection.

Japan's inflation rate YoY

• CN

GDP Q3

Friday, 18 October at 1.00pm AEDT

China's GDP growth for the second quarter (Q2) of 2024 came in at 4.7% YoY, which was below the expected 5.1%. This underperformance is attributed to continued weak consumption and ongoing issues in the property sector, casting doubt on the country's ability to meet its 5% GDP growth target for the year. In response to these challenges, the Chinese government introduced a significant economic stimulus package in late September, signaling a heightened urgency to address the economic slowdown.

While the full effects of the recent economic measures may not be immediately evident in the upcoming data releases, these figures will provide more insight into how China's economy is faring and whether additional actions may be necessary.

Looking ahead, forecasts suggest improvements in various economic indicators for September. Retail sales are expected to rise to 2.4% YoY from 2.1%, and industrial production is anticipated to increase slightly to 4.6% from 4.5%. However, fixed asset investment is predicted to remain relatively low at 3.3%, compared to 3.4% previously. For Q3, GDP growth is projected at 4.6% YoY, potentially bringing the year-to-date GDP growth to just below the target range of 4.8 to 4.9%.

These projections underline the ongoing challenges in China's economic recovery and the critical need for effective policy interventions to sustain growth and meet annual targets.

China’s GDP growth rate year-on-year

• US

US Q3 2024 earnings season

Next week will see a resumption of earnings announcements from major US banks, including Bank of America, Goldman Sachs, and Morgan Stanley. In addition to these financial institutions, Netflix will also be a significant focus in the market. Despite surpassing subscriber targets in Q2 2024, Netflix provided a cautious outlook for the Q3, indicating that its advertising business is not expected to become a primary revenue driver until at least 2026.

For Q3 2024, Netflix's subscriber growth is projected to be lower compared to the same period last year, which saw an uptick following the implementation of stricter password sharing rules. According to Refinitiv estimates, overall subscriber growth for Netflix is expected to be around 13.8%, a decrease from the previous rate of 16.5%. This reflects ongoing challenges in maintaining high growth rates amidst evolving market conditions and strategic shifts within the company.

US earnings