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Sharemarkets continued to rebound in June, led by large-cap equities and companies with strong earnings growth profiles. The major central banks of Europe and Canada cut interest rates in June. Meanwhile, the Reserve Bank of Australia (RBA) and the US Federal Reserve (the Fed) continued to remain on hold. Improving global inflation data was welcomed by fixed-interest markets, but higher oil prices and shipping costs could hamper further improvements over the coming months.
The MSCI ACWI ex-Australia index posted a gain of 1.8% in June, as growth again outperformed value. Emerging markets rose strongly, with investors focusing on improved economic data releases and the prospect of lower interest rates in developed nation peers, thereby reducing risks to capital flows for EM countries.
More broadly, at the global level, companies exposed to artificial intelligence continued to outperform other areas of the market, which has been a defining theme throughout the year. Notable events included Apple’s unveiling of its custom AI system, “Apple Intelligence,” which helped push its stock to new record highs. Despite the US market’s overall positive performance, some concerns emerged towards the end of the month. High-flying stocks, such as Nvidia, fell sharply in late June on signs of potential market exhaustion. “Magnificent Seven”, which refers to the seven largest technology companies listed in the US. These companies, including NVIDIA, Apple, Microsoft, and Amazon, have significantly skewed the market’s performance—and these 7 businesses account for 59% of the S&P500’s ~15% rise year to date (YTD).
Source: Bloomberg, Lonsec estimates.
US indices benefited from ambitious upward revisions to consensus target prices. The S&P 500’s one-year price target increased for a seventh month to nearly 6,000. The Dow target price also increased for the seventh month, after two months of declines, to more than 43,000. Both indices would need to rise by around 10% over the next twelve months to meet these targets. The US S&P 500 posted seven new closing highs throughout June to finish 3.6% higher (including dividends), while the Dow Jones Industrial Average gained 1.2%. However, it was again a stellar performance by the tech-heavy Nasdaq 100, which jumped 6.3% in June and posted another record high during the month.
On the ASX, in a repeat of the prior month, Financials, Staples and Utilities produced strong performances in June, while the resource-heavy Materials sector was deeply negative. Lithium and gold stocks sold off heavily, while the diversified mining giants such as BHP Group and Rio Tinto lagged the market on sharply lower iron ore and copper prices. Overall gains on the domestic front were solid, with the ASX 200 accumulation index gaining 1.0%. While the strength of large-cap names was notable, the opposite was true in the small-cap space, where most indices finished in the red. The ASX Small Ords gave back 1.4%, while the US S&P SmallCap 600 posted a 2.5% decline.
Fixed interest markets benefitted from the move lower in yields. On the local front, Australian 10-year yields decreased by 10 basis points over June to 4.31%. However, bonds with shorter maturities, such as for 2 and 3 years, saw yields finish the month flat or slightly higher than in May. This reflects ongoing uncertainty about the RBA cash rate outlook as domestic inflation remains sticky. Credit markets enjoyed another positive month as spreads (a risk indicator) remained low. However, as in May, investors favoured investment-grade issuers with resilient business models and conservative balance sheets.
Elsewhere, gold, copper and iron ore were lower in June, while Bitcoin reversed some of its huge gains so far in 2024.
Inflation remains sticky, but the direction is down as collective monetary policy settings have tightened fiscal conditions and COVID-era stimulus wanes. Australia is the exception, recent figures show inflation still running well above the Reserve Bank of Australia’s target band of 2-3%, and the impact of the Stage 3 tax cuts has yet to manifest.
Source: Lonsec estimates, Bloomberg.
Australia
On the economic front, the Australian economy barely grew in the March quarter, expanding by just 0.1% on the back of higher government spending and household outlays on necessities such as electricity and rent. Concerns that households are saving much less than previously, combined with the disposable income boost from the stage 3 tax cuts, prompted some economists to push back rate cut expectations into 2025.
Meanwhile, the May monthly CPI data was again worse than expected. Appearing before a Senate committee, RBA governor Michele Bullock said she “won’t hesitate to move and raise interest rates again” if underlying inflation proved stickier than expected and confirmed state and federal government energy rebates would not affect the timing or direction of interest rates. Bullock also added interest rates would only be cut when the board was convinced that inflation was falling “sustainably” into the 2-3 percent target band.
Australia’s CoreLogic Home Value Index climbed 0.7% in June 2024, registering the 17th consecutive month of expansion.
Rest of world
Elsewhere, inflation in the US eased in May, with headline consumer prices recording zero growth, pushing the annual rate down to 3.3% from 3.4%. Core inflation – which excludes food and energy costs – rose just 0.2% in May, taking the annual rate down to 3.4% from 3.6%. Both readings were better than expected and left financial markets pricing in a higher chance of a cut to US interest rates in September. Also, on the US inflation front, the May core personal consumption expenditures (PCE) price index rose by 0.1% in May and declined to 2.6% growth over the last twelve months. Personal spending and income increased solidly in May, while the saving rate edged up to 3.9%.
In Europe, the European Central Bank (ECB) lowered interest rates by 25bp in June, which was in line with expectations, marking a shift from the previous nine months of stable rates. However, domestic price pressures remain elevated, suggesting inflationary challenges remain and have seen Eurosystem staff projections for headline inflation and growth being revised up for 2024 and 2025.
UK retail sales in May were much stronger than expected as consumers took advantage of heavy discounting.
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Financial markets bounced back in May, following heavy falls in April. At the beginning of the month, the US Federal Reserve (the Fed) signalled that interest rates would likely stay higher for longer because of sticky inflation but dismissed any chance of a rate rise this year. Bonds and equities responded favourably, which set the scene for positive returns in May.
Bond yields fell sharply, easing some of the sharemarket valuation pressures built throughout the year. Investors also focused on first-quarter US corporate earnings during the month, which continued to surprise to the upside but by less than historical averages. The upside was led by the Magnificent 7—however, the remaining S&P 500 stocks displayed a negative blended earnings growth rate. This has raised concerns around so-called ‘market internals’ such as market breadth, with some commentators warning about increased risks to future returns. Interestingly, FactSet pointed out that 38% of S&P 500 companies mentioned “AI” on their earnings calls.
US indices performed strongly. The S&P 500 closed 4.8% higher in US dollar terms, more than reversing its April losses. The Dow Jones Industrial Average gained 2.3%, while the Nasdaq Composite jumped 7% in May, with these indices also posting record highs during the month. Tech gained 10%, and Utilities rose 9%, both on the back of the AI trade and strong earnings. At the opposite end of the spectrum, Energy declined by 0.4% due to falling oil prices, and consumer discretionary was broadly flat as Consumer Spending concerns were highlighted on multiple corporate earnings calls. Of note, Nvidia +26%, Apple +13%, Microsoft +6.8% and Alphabet +6%, accounted for more than half of the S&P 500’s 4.8% monthly gain.
The MSCI ACWI ex-Australia index posted a gain of 1.7% in April, with unhedged domestic investors impacted by a stronger Australian dollar over the month. While emerging markets were one of the few bright spots during the April sell-off, their fortunes turned negative in May as Chinese equities underperformed despite better-than-expected economic data releases. Markets remain unconvinced that China can stage a sustainable turnaround until it resolves the malaise surrounding its property sector. Elsewhere, Japan also posted a negative return in May as rising yields began to impact sentiment. The Japanese 10-year government bond traded above a 1% yield for the first time in over a decade.
Gains on the domestic front were more modest. The ASX 200 Accumulation Index gained 0.9% in May, well ahead of its small-cap peers, which fell 0.1% during the month. The AREIT sector returned 1.9%, as long-term bond yields moved lower. On the ASX, Utilities, Staples and Financials (including property stocks) performed the strongest in May. However, Materials (which includes large resources companies) weighed on returns and drove underperformance relative to most developed market peers.
For fixed-interest markets, falling yields allowed investors to breathe a sigh of relief. Credit markets fared best as corporate borrowing costs moved lower during the month, benefiting returns. The broader global and domestic fixed interest benchmarks also posted gains. Cash returns continued to inch higher. Over the last twelve months, cash has easily outperformed most defensive asset classes and is just 20 basis points behind investment-grade credit returns. Elsewhere, gold, copper and iron ore were slightly higher in May, while crude oil finished in the red. Bitcoin jumped 12.5%, as crypto behaved like a proxy for geared sharemarket exposure and maintained its volatile return profile.
On the economic front, Australia’s April monthly CPI printed well above expectations, with markets and economists revising their cash rate outlook. Markets expected the monthly CPI to slow to 3.4% annually, but it instead rose to 3.6%, driven by food and housing costs. This was the second month in a row where annual inflation posted a small increase. The monthly CPI indicator, excluding volatile items and holiday travel, remained unchanged at 4.1% in April. Money markets responded by pushing back the timing of any interest rate cuts until July 2025, while several economists called for the RBA to raise interest rates to close to 5% (currently 4.35%) to tame inflation.
Earlier in the month, domestic labour market data was weaker than expected, with unemployment rising as more workers entered the jobs market. However, the data may have been a statistical quirk that could unwind due to an unusually large increase in the number of unemployed people waiting to start a new job.
Turning to the US, the Fed kept interest rates steady at its May meeting and was relatively dovish in its language but noted that inflation was not slowing as quickly as expected. US economic growth slid to just 1.3% on an annualised basis during the March quarter, below the expectations of analysts and the Fed’s economic projections. As the month progressed, the April CPI data exceeded expectations for the third consecutive month, highlighting that inflation was indeed sticky. However, retail sales figures provided more evidence of moderating activity and that households were becoming increasingly stressed.
In Europe, the European Central Bank (ECB) paved the way for an interest rate cut over the next few months, noting that wage growth had slowed and inflation was likely to moderate further, notwithstanding a stronger-than-expected CPI read in May. UK inflation is also moderating, but the services component remains close to 6%, potentially stifling any plans the Bank of England might have to cut interest rates.
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Treasurer Jim Chalmers delivered the Labor Government’s 2024-2025 Federal Budget and we have summarised what we feel are the key points which impact financial planning strategies.
For our ongoing service package clients, your adviser will be in contact to provide guidance on changes which may impact your strategy.
IMPORTANT: Please remember that these measures are subject to becoming law, so be sure to confirm this before taking any action.
Starting 1 July 2024 Stage 3 tax cuts will deliver savings of $4,529 per annum for those in the highest tax bracket. The average taxpayer will save $1,888 a year.
The Stage 3 tax cuts will make the following changes from 2024/25:
The table below shows the changes to tax brackets. Note, these amounts do not include Medicare levy.
The table below compares the amount of tax payable in 2023/24 to the amount payable under the new tax rates from 2024/25. The last column shows the amount of tax saved.
The Government has increased the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from 1 July 2023 to provide cost-of-living relief. The increase to the thresholds ensures that low-income individuals continue to be exempt from paying the Medicare levy or pay a reduced levy rate.
The family income thresholds will now increase by $4,027 for each dependent child, up from $3,760.
This measure has already been provisioned for by the Government and will apply retrospectively from 1 July 2023.
The Government has announced that it will pay super on the Government funded Paid Parental Leave for babies born or adopted on or after 1 July 2025.
Eligible parents will receive an additional 12% of their Government-funded Paid Parental Leave as a contribution to their superannuation fund.
Starting from July 1, 2026, employers must pay superannuation at the same time they pay salary and wages to employees. Currently, employers are required to pay their employees’ superannuation guarantee contributions on a quarterly basis.
Energy bill relief will be extended to every Australian household, with $300 automatically credited to their electricity bills next financial year. This is not means tested.
HELP/HECS debt will now be indexed either to the Consumer Price Index (CPI) or the Wage Price Index (WPI), whichever is lower, and that change will be backdated to 1 June 2023.
This means that about 3 million Australians with student loans are set to receive an average $1,200 reduction in their HELP, HECS, VET Student Loan, Australian Apprenticeship Support Loan and other student support loan accounts that existed on 1 June last year.
The reduction aims to offset steep increases in student debt last year when student loans were indexed to inflation at the rate of 7.1%, but wage growth remained low. The 2023 indexation rate based on WPI would only have been 3.2 per cent.
The Government has announced a one-year freeze on the maximum Pharmaceutical Benefits Scheme (PBS) patient co-payment for everyone with a Medicare card and a five-year freeze for pensioners and other concession cardholders.
This change means that no pensioner or concession card holder will pay more than $7.70 (plus any applicable manufacturer premiums) for up to five years.
The current freeze on deeming rates, which are used to determine the amount of income a person is deemed to earn from their financial investments, will be extended for another year. This means that the deeming rate will stay at 0.25% for the lower rate and 2.25% for the higher rate.
This will ensure income support recipients, such as age pension recipients, will not see a reduction to their payments due to an increase in the deeming rates over the next year. It also means there will be no negative impact for Commonwealth Seniors Health Card holders and means-tested aged care recipients.
Commonwealth Rent Assistance maximum rates will be increased by 10% from September 2024, with the aim of helping address rental affordability in the housing market.
The Government has announced that from 20 September 2024, it will extend eligibility for the existing higher rate of JobSeeker Payment to single recipients with a partial capacity to work of between zero and 14 hours per week.
The higher JobSeeker Payment rate is currently provided to single recipients with dependent children and those aged 55 and over who have been on payment for nine continuous months or more. This measure extends the higher payment rate to those with a partial capacity to work.
The higher JobSeeker Payment rate is currently $833.20 per fortnight (compared to the standard rate for single recipients without dependant children of $771.50 per fortnight).
From 20 March 2025, the existing 25 hour per week participation limit for Carer Payment recipients will be amended to 100 hours over four weeks. The participation limit will no longer capture study, volunteering activities and travel time and will only apply to employment.
The Government has also announced that Carer Payment recipients who exceed the participation limit or their allowable temporary cessation of care days, will have their payments suspended for up to six months instead of cancelled. Recipients will also be able to use single temporary cessation of care days where they exceed the participation limit, rather than the current seven day minimum.
The Government has now announced a new start date of 1 July 2025 for the new Aged Care Act, however no details have yet been provided as to how fees and charges for aged care residents and home care recipients will work under the new Aged Care Act.
Also, the Government has announced it will provide funding over five years from 2023–24 to deliver a range of key aged care reforms and to continue to implement the recommendations from the Royal Commission into Aged Care Quality and Safety. These measures are proposed to include:
The Government has announced it will extend the $20,000 small business instant asset write-off by a further 12 months until 30 June 2025.
Under these rules, small businesses with aggregated annual turnover of less than $10 million will continue to be able to immediately deduct the full cost of eligible assets costing less than $20,000 that are first used or installed ready for use between 1 July 2023 and 30 June 2025. The Government also confirmed the $20,000 asset threshold will continue to apply on a per asset basis, allowing small businesses to instantly write off multiple assets.
Similar to households, the Government announced it will provide direct energy bill relief for small businesses.
The government will provide additional energy bill relief of $325 to eligible small business in 2024-25. Rebates will automatically be applied to electricity bills and will be rolled out in quarterly instalments.
If you have any questions or would like further clarification in regards to any of the above measures outlined in the 2024-25 Federal Budget, please feel free to book a chat with your adviser.
Sticky inflation data spooked markets in April, reversing much of the momentum seen in recent months. Strong US payrolls data, followed by higher-than-expected consumer and producer inflation data caught investors off guard and led money markets to unwind any positioning for a US rate cut before July. Australia was not spared from disappointing inflation data, with a higher than expected March quarter CPI result seeing markets remove all expectations of a cut to the official cash rate in 2024 and intensifying pressure on the federal government to rein in spending. The upside inflation surprises hurt both bonds and equities, with most asset classes printing negative returns in April.
In US dollar terms and after accounting for dividends, the benchmark US S&P 500 lost 4.1% in April, the Dow Jones Industrial Average lost 4.9%, while the Nasdaq lost 4.4% during the month. In broad terms, this was the first month since October that key indices printed in the red. On the domestic front, the ASX 200 accumulation index dropped 2.9% in April, slightly outperforming its small-cap peers, which fell 3.1% during the month. Following its stellar performance in March, the A-REIT sector slumped 7.8% but retained an impressive 33.3% 6-month return.
The MSCI ACWI ex-Australia index posted a loss of 2.8% in April, with unhedged domestic investors helped by a slightly weaker Australian dollar over the month. The negative news came thick and fast, as macro data continued to defy weaker expectations and geopolitical tensions reached boiling point between Israel and Iran. Iran directly launched a drone and missile attack on Israel in response to Israel’s bombing of its embassy in Syria. Israel shot down most of the missiles and later launched a focused attack of its own. Iran failed to respond and tensions quickly moderated.
While developed market equities lurched lower in April, emerging markets equities were a bright spot. In Australian dollar terms, the MSCI Emerging Markets index returned nearly 1%, helped by a modest lift in the China Shanghai Composite Stock Market Index. Higher copper and iron ore prices also boosted returns in emerging market commodity exporters. Meanwhile, the macro landscape remained supportive to corporate earnings and the US Q1 earnings season largely saw companies beat relatively low expectations. By the same token, companies that missed estimates were severely punished unless management painted a hopeful picture of the future. Tesla did precisely this – easily missing revenue expectations but announcing an exciting new initiative.
For fixed interest markets, it was a case of ‘here we go again’ as yields surged higher and credit spreads widened from relatively tight levels. In late April, the implied yield on a US 10-yr Treasury exceeded 4.7%, with the entire yield curve shifting higher throughout the month. It was a similar story in Australia, with 10-year Commonwealth government bond yields briefly exceeding 4.6%.
Meanwhile, cash, gold, copper and iron ore posted positive returns in April. In contrast, Bitcoin lost 15% but was still more than double its price from a year ago. Crude oil prices also finished slightly in the red by month’s end after tensions between Israel and Iran were ultimately restrained, as wiser heads look to have prevailed.
On the economic front, Australia’s March quarter CPI printed well above expectations across headline and underlying measures, as government-linked service items jumped. Childcare, education and pharmaceutical prices tend to reset at the start of the year and were sharply higher in 2024. Meanwhile, rents and personal services were much stronger than expected, rising by more than 2% during the quarter. The underlying measure of trimmed mean inflation rose 1% in the quarter, prompting some economists to call for a rate rise before inflation became further entrenched. The disappointing inflation print further questioned the potential impact of the upcoming Stage 3 tax cuts.
In the US, a hot CPI print came soon after strong employment and retail sales data. Nonfarm payrolls topped 300k in March and retail sales posted strong consumer spending over consecutive months. But it was the CPI that drew the most attention, rising 0.4% in March. The composition of the rise was of particular concern. ‘Supercore’ inflation is a measure of services inflation that excludes shelter and rent costs. This closely-watched measure rose by 4.8% over twelve months and has moved higher since October to be at its highest level since March 2023. Later in the month, some investors breathed a sigh of relief as March quarter US economic growth was lower than projected. However, this led more bearish market commentators to suggest that a period of ‘stagflation’ was now beginning to take shape.
Elsewhere, the Eurozone’s flash composite PMI (Purchasing Managers’ Index) rose to 51.4 in April, well above the contractionary levels seen at the end of 2023. The UK composite PMI indicated even stronger expansion. Meanwhile, Eurozone inflation in April remained at 2.4% over the year, with some signs of slowing services inflation. This increased investor confidence around the prospects for a rate cut from the European Central Bank, possibly in July, and a second rate cut by year end.
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February saw global markets deliver much stronger returns in risk assets than domestically, thanks to positive economic data and stronger-than-expected earnings reports, particularly select mega tech names linked to the generative AI revolution. A prime example was Nvidia, which delivered another strong profit result, beating consensus expectations for earnings and sales, which resulted in another round of upgrades.
In Australian dollar terms, the MSCI All Country World Index returned 6%, including dividends, in February, while the MSCI Emerging Markets index performed slightly better, gaining 6.4%, including dividends, helped by a late rebound in China. In developed markets, Japan continued to outperform, with the Nikkei 225 Index forging a new all-time high for the first time in over three decades. Meanwhile, European stock markets underperformed on disappointing economic data releases.
On the domestic front, despite a solid interim reporting season, the ASX had a weaker month, underperforming global peers. While the Tech sector followed its global peers upwards, weaker commodity prices weighed on the Resources sector. The ASX Metals and Mining sub-index declined by almost 6%. The Energy sector was also weaker.
Key themes during the ASX February reporting season included a greater focus on cost control helping drive more earnings beats than misses (Health Care and Resource firms the main exceptions where cost increases were more problematic). ASX 200 companies spent 55% of their free cash flow on capital expenditure (capex), up from 40% a year ago. Meanwhile, the domestic market’s cash conversion cycle continues to improve, thanks to lower inventory and receivables. Finally, older and wealthier cohorts benefiting from higher rates are spending and saving more, while younger and more indebted cohorts have pulled back on spending, having exhausted most of their savings.
On the interest rate front, traders pared back interest rate bets for a sharp reduction in the US Fed Funds Rate, as inflation and labour market data continued to surprise to the upside. At the beginning of the month, as many as six 0.25% cuts were being positioned for by Christmas 2024, but this was halved by month end. As yields rose, fixed interest returns again came under pressure, with most key benchmarks finishing February in the red. Meanwhile, the average rate on a US 30-year fixed mortgage rose to 6.94% at month end, its highest level in over two months. Elsewhere, oil prices continued to creep higher, while gold was virtually unchanged. The rally in crypto accelerated as Bitcoin spiked by 44% during the month, with speculation in numerous ‘coins’ reaching a fever pitch.
On the economic front, the Reserve Bank of Australia (RBA) maintained a hawkish tone in its February board meeting. The RBA held the official cash rate steady at 4.35%, in line with expectations. While inflation continues to show signs of slowing due to weaker goods and energy prices, it remains well above the target 2-3% range. January labour market data was again relatively weak, with employment growth and hours worked trending downward. Elsewhere, preliminary retail sales data for January increased by 1.1% versus December, missing the market consensus of a 1.5% rise. Manufacturing data was also below expectations, as the industry contracted at the beginning of the year.
In the US, the economy added 353k jobs in January, well ahead of expectations. Wage growth was also unexpectedly firmer. Average hourly earnings growth has now picked up steadily since October, reaching 4.5% over the prior year. The GDP figures for the December quarter were also strong, growing by 3.2% annualised, while productivity growth was up 2.7% over the twelve-month period. However, January inflation data came in hotter than market consensus. Core CPI (which excludes food and energy) rose by 1% over the quarter, and producer prices were also stronger than investors were hoping for. Services inflation has remained sticky, and so-called ‘super core services’ inflation, which strips out rental costs, jumped 0.9% in January, the largest monthly increase since April 2022.
Euro Area inflation inched lower to 2.8% in the year to January, and annual core inflation continued to ease to 3.3%. The result was above consensus but still reached its lowest level since March 2022. Finally, official UK data revealed its economy entered a shallow technical recession at the end of 2023 amid a broad-based decline in output. Despite consecutive quarters of negative growth, UK mortgage approvals and house prices are now rising strongly, while the unemployment rate fell to 3.8% at the end of 2023, led by progress in full-time employment.
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Following a searing December quarter rally, returns moderated in January. Ongoing economic data strength led to bond yields retracing recent falls. These moves muted fixed interest returns and impacted bond proxies, including infrastructure, where returns turned negative. Global government bonds were also down over the month, led by UK Gilts, as sticky services inflation and elevated wage growth made the prospect of imminent rate cuts from the Bank of England more unlikely. Meanwhile, the US Fed’s commentary at its January meeting was less dovish than markets had anticipated, and this led to reduced expectations of a US rate cut in March. Despite removing references to further rate rises, the Fed noted that it was prepared to adjust monetary policy if risks emerged that could impede the attainment of its employment and inflation goals.
The Australian dollar weakened in January on weaker-than-expected domestic data, which boosted global returns for unhedged investors. For example, the MSCI ACWI ex Australia index delivered a 3.9% return during the month. In Emerging Market equities, returns finished in the red following a further sell-off in China. In US dollar terms, the MSCI China Index has lost about 1%, including dividends, since the end of 2013. During the same period, the US and Indian sharemarkets have returned more than 200%.
In domestic equities, the Energy and financial sectors performed strongly in January. Returns in Energy were boosted by a rise in oil prices on the back of heightened geopolitical tensions in the Middle East. The bank and insurance sub-sectors drove higher returns in Financials, while the Healthcare sector rallied following a period of underperformance. Overall, the ASX 200 finished January at 7680 and reached an all-time high of 7682 (which was eclipsed in early February when the market rallied to 7703).
Australia
On the economic front, the disinflation narrative gained further momentum in Australia, after inflation cooled at a faster-than-expected rate in the December quarter. The consumer price index (CPI) data showed inflation had slowed to 0.6% in the three months through December, lower than the consensus estimate of 0.8%. Over 12 months, the CPI fell to 4.1% from 5.4% in the September quarter. It is the fourth consecutive quarter of lower annual inflation and down from the peak of 7.8% in the December 2022 quarter. An underlying inflation measure, known as the trimmed mean, also slowed to 4.2% in 2023. In other news, retail sales declined 2.7% in December and rose by just 0.8% in 2023, failing to keep up with inflation. It was the biggest monthly decline in retail sales since pandemic lockdowns in mid-2020 and, before that, the introduction of the GST in July 2000. Elsewhere, a volatile labour market shed 65,100 jobs in December from previous record levels, and the unemployment rate held steady at 3.9% as the workforce participation rate slumped.
United States
In the US, a host of data releases pointed to the ongoing strength of the US economy. The December jobs report exceeded expectations and wage growth remained firm, with the unemployment rate steady at 3.7%. Despite stronger wage growth in late 2023, inflation continues to moderate, with some data suggesting that a productivity boom may be underway in the US. Also of note was the strong December quarter GDP print of 3.3% annualised, smashing market expectations for 2% annual growth. Consumer spending on goods slowed, while consumption of services rose faster. Non-residential investment accelerated, led by a rebound in equipment spending.
China
Finally, in China, manufacturing contracted in December, against consensus expectations of a slight expansion. More broadly, China’s economy has seemingly failed to regain sustainable momentum, even after the government introduced some stimulus measures throughout 2023. A lack of confidence is behind the weakness, with poor property sentiment (consumer and corporate) a key driver. To help address the issue, in late 2023, the government proposed to expand some major urbanisation projects, including the redevelopment of so-called ‘urban villages’, which are clusters of self-built residential constructs in its major cities.
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Risk-on investor sentiment continued into December as markets rallied across the major asset classes. Investors gained more confidence that the Fed was done with its rate hiking cycle and that the first of many rate reductions in 2024 could be just months away. The ‘higher for longer’ narrative that had prevailed as recently as October had given way to a more dovish outlook. Inflation data has continued to improve, and central banks are showing increasing signs that price pressures would likely continue to abate in 2024. This resulted in equities moving sharply higher into year-end, with most sectors participating in the gains.
Domestic shares were especially strong, having lagged global markets for much of 2023. Listed property and healthcare stocks staged a thumping recovery during the month, closely followed by materials (including resources) as iron ore climbed above USD 140/t. Small caps also had a strong month, with some investors adding to positions based on attractive relative valuations. Energy was the weakest performing sector, but still finished well in the black. Developed market shares rallied strongly, but the rise of the Australian dollar took the polish off returns for domestic investors. Emerging market equities underperformed their developed market peers as China continued to pose vexing questions around the structural headwinds facing its economy.
Bond markets rallied as risk-free rates moved back to levels last seen in July 2023 on hopes that global central banks would begin to cut rates in the first half of 2024. Credit markets were also strong, but different regions experienced widely varying spread outcomes due to idiosyncratic factors. The US 10-year Treasury reached 3.8% late in the month, while the yield for the domestic 10-year bond moved to as low as 3.9%. As recently as October, these instruments were yielding as much as 5%. By month’s end, money markets were positioning for six interest rate cuts in the US over the next twelve months.
Of note was the resurgence of crypto returns, with Bitcoin adding more than 13% in December in anticipation of the approval of an exchange-traded fund investing directly in the biggest token.
On the economic front, the disinflation narrative gained further momentum during the month. The US headline CPI for November slowed to 3.1% from a year ago. Falling energy prices were the main driver. Excluding volatile food and energy prices, the core CPI was up 4% from a year ago. Both numbers were in line with estimates and had little change from October. Shelter prices, which comprise about one-third of the CPI weighting, were up 6.5% on a 12-month basis, having peaked in early 2023. The December Fed meeting again kept rates on hold, but committee members now expected three rate cuts in 2024. That’s less than what the market had been pricing, but more aggressive than what officials had previously indicated. The committee’s “dot plot” of individual members’ expectations indicates another four cuts in 2025.
In Australia, the September quarter GDP numbers confirmed that a per capita recession was persisting and that the high cost of living was eating into household savings. The Australian economy expanded by 0.2% during the quarter, below market forecasts, as household consumption stalled and net trade detracted from growth. The household savings ratio dropped to 1.1%, the lowest since 2007. Meanwhile, government spending rose more quickly, preventing an overall weaker result. The unemployment rate increased to 3.9% in November 2023, while monthly inflation data pointed to slower price increases late in the year.
Elsewhere, the UK growth rate came in below consensus for October, while the German economy contracted by 0.4% year-on-year in the third quarter of 2023. Finally, in China, retail sales expanded by 10.1% year-on-year in November 2023, but below the market consensus estimate of 12.5%. Meanwhile, property prices in China posted a fifth consecutive month of decline in November, despite Beijing having issued a series of measures to boost demand.
We hope you find the information useful, and if you want to discuss any details further or discuss your personal investment strategy, please book a chat here.
Investors had reasons to rejoice in November as economic data showed that inflation was moderating and interest rates had likely peaked. As inflation rates slowed, the global financial landscape witnessed more moderate economic conditions, particularly in the US, where the labour market is softening. The outlook renewed confidence in the ‘soft landing’ narrative and buoyed equity markets.
Bond markets staged an incredible recovery in November as US long bond yields experienced the largest monthly decline since December 2008. The 10-yr US Treasury yield plummeted to 4.35% from a peak of 5% in October, boosting the US aggregate bond index by almost 5%, for its biggest monthly gain in over 35 years. In Australia, 10-year yields fell by over 50 basis points to help the Ausbond Composite All Maturities index return close to 3%.
The bond market rally pushed yields significantly lower in most regions, which gave a valuation boost to growth stocks and the technology sector. In terms of style, growth outperformed value during the month, and small caps outperformed their large cap peers.
The VIX volatility indicator fell to its lowest levels since before the pandemic, and equities posted their best month in over a year. November traditionally sees the beginning of the strongest six months of the year for US equities as share buybacks increase, while mutual fund tax-loss selling typically ends in October.
The S&P 500 Index is now up more than 20% year-to-date, including dividends. In contrast, the ASX 200 has returned 4.8%, including dividends, and just 0.7% in nominal price terms. On the continent, European indices moved higher despite the subdued economic environment. Japan continued its outperformance in 2023, posting a 5% increase in November.
In emerging markets, the MSCI Emerging Markets Index grew strongly over the month in local currency terms despite China continuing to underperform the broader index.
On the economic front, the disinflation narrative reigned supreme during the month. The US CPI for October was cooler than expected. Annual headline and core inflation dropped to 3.2% and 4%, respectively. The biggest driver of the decline in the headline data was a fall in energy and gasoline prices, along with lower travel and accommodation costs. In the labour market, the US economy added only half as many jobs in October, compared to September’s strong print. The below consensus data provided a much-needed sign that the labour market is slowly cooling.
In Australia, the October unemployment rate increased to 3.7%, driven by stronger workforce participation. Meanwhile, following a four-month pause, the RBA hiked official interest rates by 25 basis points to 4.35% at its November board meeting. This was in line with expectations and saw many economists predict that further hikes were to come. The quarterly Statement on Monetary Policy confirmed that the RBA had raised forecasts for GDP and inflation while deferring forecasts of a jobless rise until next year.
Elsewhere, the UK saw a larger-than-expected fall in inflation as the services sector cooled despite strong wage growth. The November services Purchasing Managers’ Index (PMI) posted a small expansion, surprising some analysts. In Europe, the CPI release for November also showed inflation is slowing, driven by lower energy prices. European manufacturing activity remains poor, mainly due to weak data from Germany and France. However, employment growth was robust over the previous quarter. Finally, macro data out of China exceeded consensus estimates, as retail sales jumped in October. However, new home sales continued to fall, seeing the People’s Bank of China (PBC) once again injecting liquidity into the banking system and further reducing the required reserve ratio.
We hope you find the information useful, and if you want to discuss any details further or discuss your personal investment strategy, please book a chat here.
Just like any other parenting choice, the topic of pocket money is one that chocks up the online forums, and everyone has an opinion.
Our kids are now at the age where pocket money has entered the chat, and the extra pressure to get it right as we are both financial advisers always weighs heavy! I thought it would be worth sharing my thinking about this, and maybe you can take some ideas away for your own family.
It is essential to first form your family philosophy—the actual mechanics can be very simple, but as we know, the emotional and psychological underpinnings of money are far from it. Some questions to think of as a family:
On the topic of kids starting an income producing business, I would put it outside the realm of “pocket money”, but it is also worth discussing.
I know personally, I would like my kids to learn they need to put in work to be able to earn money, but I also don’t want them asking for each basic household task, ‘Will I get money for this?’ (This actually happened, and it horrified me).
I love the bucket strategy of spend, save, invest, donate – as this mindset can carry them right through to adulthood and spawns many subsequent lessons along the way. I will also try to mimic the different real life implications of saving, investing and donating—the earnings and tax deductions—that the dopamine hit of extra money or helping people can be just as strong as the instant gratification of spending immediately.
Another concept I love is getting older kids involved in your household budget to help look for savings that they can get a piece of/benefit out of. I have heard a great story about a teen shopping around the internet and utilities and creating a family meal plan that saved enough for them in bills and groceries to take a family holiday. Great lessons in budgeting, but also saving money on commodity-style items to direct to things that bring you joy.
Would love to hear any tips from readers as to things you felt work with your kids or grandkids or something maybe your parents did that sticks with you, and please email them through to rhiannon@pekada.com.au!
I recently turned 30. It’s a strange age. Some of your friends have settled down and have children, whilst others are backpacking around southeast Asia. Some are looking to purchase an investment property, whilst others are hosting big parties in their shared house of ten. Regardless of which stage you are at, the thirties are an excellent chance to take some of that ‘grown-up medicine’ and to look to start to get our finances in order; here are some places to start.
1. Set some goals:
Money is just the vehicle towards helping you live your best life. Everyone will have different goals, so your financial plan should be different. If you’re the type of person who wants to live overseas, then buying a house because you feel like you should and others are telling you to may not be the best option. Once we have goals, it’s easier to know what we must do to achieve them. Otherwise, we can continue on a road to nowhere.
2. Review what you currently have:
Personal finances are usually left or pushed into the too-hard basket. You may not be as passionate about it as I am and, therefore, lack the motivation to think about it (completely normal). Simple things like reviewing what you currently have can pay big dividends.
Review your superannuation and make sure that your fund is appropriate. Check about how your fund has been performing compared to others. Please have a look at your investment options within your super and make sure that it’s appropriate for you. Think about whether or not you would like to be invested in an ethical and environmentally friendly manner and see if your current investments align with that.
You should also review what insurance you have. If you have young children or some debt with a partner, such as a home loan, then life cover could be critical. If you’re working and rely on your income to live, then you need income protection. Insurances aren’t sexy, and not many people like paying for them, but if something goes wrong and you don’t have them, it can create financial pain that can be hard to recover from.
3. Build an emergency fund:
Life is unpredictable, and unexpected expenses can arise at any time. Aim to build an emergency fund with three to six months’ living expenses. This financial cushion will provide peace of mind and help you avoid dipping into your savings or investments during tough times.
4. Look towards the future:
Investing is a powerful tool for building wealth over time. It can be slow to start with, but compound interest is the eighth wonder of the world; the earlier you start, the more rewards you reap. Putting some surplus cash towards investments that have growth potential can help you fund some future goals you may have as well. There are options for all different starting balances, so you don’t need to wait and put it off any longer.
5. Stop paying the lazy tax:
Only some people love to have a strict budget in place, and if that’s you, there are things we can do to get our cash flow under control. Reviewing your expenses is essential; a lot of little savings can add up, especially when everything is getting more expensive.
Have a particular look at your subscriptions, whether they be streaming services or gym memberships and make sure you’re using them and getting value out of them. If not, look at ending them or looking at alternatives.
The lazy tax can also apply to your banking. We often choose a bank early on in life and stick to it. Review your interest rate and ensure that what you are getting stacks up. This can also apply to your home loan if you have one. It can pay to do some research, as there are often no rewards for loyalty in this area.
7. Estate Planning:
It’s never too early to think about estate planning, especially if you have dependents. Setting up a will now can last until your situation changes and doesn’t need to be too difficult or costly. It will mean that your wishes will be carried out if something happens to you.
8. Reach out if you’re unsure:
For some people, discussing personal finances is like speaking another language, but seeking guidance from a good adviser can help simplify the situation. A good adviser should also be able to educate you along the way. Using your money in the best way possible is important, so don’t let it fall by the wayside just because you’re unsure where to start.
As always, we are here to help. If you have any questions, feel free to email me at zac@pekada.com.au