The S&P 500 was also down by -4.9% over September. In contrast, the London FTSE was up +2.3% but all the other major indices we follow fell by a similar quantum to the ASX 200 and S&P 500 for the month.
Over the year-to-date, the Japanese Nikkei has rocketed ahead by +22.1%; the S&P 500 (+11.7%) and the DAX (+10.5%) have made creditable gains. The other major indices are more or less flat over 2023 to date but, at least, showing small positive gains.
Bonds and Interest Rates
The Fed did not raise interest rates at their 20 September 2023 meeting but the chair, Jerome Powell, made a hawkish statement in the press conference that followed. The Fed dot plots chart, showing participants forecasts for the US cash interest rate for the end of this year and several following, show a broad divergence in opinion.
More members than not saw another hike in rates this year with the CME Fedwatch tool which measures the Feds interest rate changes that are implied by movements in the bond market, show only modest support for that view.
The US Government bond market has experienced some volatility with the 10-year bond yield closing at 4.57% being markedly ahead of the 4.10% at the end of August.
The RBA now has a new governor, Michele Bullock, and she has not ushered in a rate hike at her first meeting, especially as the market had not pricing one in. Indeed, the market had priced in a small chance of a cut!
We consider Australian inflation largely under control with some doubts about the strength of the economy. We are in a per capita recession and chinks are appearing in the labour market which until recently has proven to be quite resilient.
The Bank of England kept its interest rates on hold in September despite a market prediction of an increase and inflation coming in at over 6%.
The European Central Bank (ECB), Norway, and Sweden all raised their official cash rate by 0.25% and hinted at the prospect of more to come. Switzerland’s central bank held rates steady instead of increasing them, the first pause since March 2022.
Japan is still maintaining its negative interest rate of -0.1% although there is growing commentary about the need for the Bank of Japan (BoJ) to change its stance. Japan’s latest GDP growth is 4.8% (after a revision from 6.0%) and inflation is running at just over 3%.
The price of oil was up by nearly 10% in September following OPEC+ (essentially Saudia Arabia plus Russia) supply cuts.
The price of iron ore rose 2.1%. The prices of copper (-2.8%) and gold (-4.4%) were both weaker. The Australian Dollar depreciated fractionally (-0.4%) against the US Dollar over September.
The VIX (US Share market) volatility index rose to 17.7 at the end of September after being in the normal range (at around 13) for some time.
CPI inflation came in at 5.2% (for the year) from 4.9% the month before. Core inflation was reported to be 5.5% and down from the previous month of 5.8%. We also compute a quarterly (annualised) inflation rate to follow new trends in a timely fashion.
Our headline quarterly inflation rate was in the RBA’s target range (2% to 3%) for three consecutive months but then a massive increase in petrol/fuel prices in August took that measure to 6.4%. The core equivalent quarterly rate was falling steadily into June and close to the RBA’s target but drifted a little higher in the latest two months possibly on the back of a depreciating Australian dollar which makes imports more expensive.
GDP growth came in at 0.4% for the June quarter and 2.1% for the year. However, when population growth is taken into account, per capita GDP shrank by -0.3% in the June quarter following on from a -0.3% fall in the March quarter.
Although the definition of a recession in this country is usually ascribed in terms of GDP, and not per capita GDP, we cannot ignore that, on average, the Australian economy in a viable metric (per capital GDP) has been going backwards and the OECD predicts that behaviour to continue into 2024.
The household savings ratio fell modestly from 3.6% to 3.2% in the June quarter but this ratio is well below ‘normal’ levels. It seems unlikely that saving will fall much more making it less likely for consumption to maintain current levels unless consumers increasingly use debt facilities.
The ‘mortgage cliff’ is almost on our doorstep when hundreds of thousands of mortgages previously fixed on low interest rates in the unusually low interest rate era will need to be rolled over to interest rates significantly higher. However, data from Domain.com suggest that stress in the form of ‘forced sales’ has been falling after a very recent peak. Hopefully the worst of that sort of stress has passed.
At first sight, the latest jobs report seemed promising with 64,900 jobs created – about three times what would normally be considered good. However, only 2,800 of these were for full-time work – the rest being for part-time work. The unemployment rate was unchanged at 3.7% but the number of hours worked fell by 9 million. That loss is equivalent to losing about 60,000 full-time jobs, which is further evidence that the labour market is weakening.
Unsurprisingly, therefore, the Westpac MI consumer sentiment index fell to 79.7 (with 100 being the breakeven point between optimism and pessimism). The index has been around 80 for several months; this level is usually associated with a recession or at least a serious downturn. Business sentiment indices from NAB, however, were more positive. Both the confidence and conditions measures were marginally up and in positive territory.
China holds a major government conference, the quinquennium, every five years to realign policies and, possibly announce new stimulus. It is due to start on 16 October 2023.
There have been many reported problems within China’s property sector including the massive Country Garden failing to pay coupon payments on some of its debt securities on time. Other data have been more encouraging.
Retail sales were up 4.6% against an expectation of 3.0% and industrial output was up 4.5% against an expected 3.5%.
China is reviewing some of the tariffs applied to imports from Australia imposed in 2020 and several of them have already been lowered or removed.
US inflation statistics continued to improve. Indeed, the monthly rate of the Fed’s preferred ‘core PCE variant’ came in at 0.1% which is below the Fed target of 2% pa. That measure rose 3.9% over the year. Headline PCE inflation rose 0.4% for the month and 3.5% for the year.
US CPI headline inflation rose 0.6% for the month and 3.7% for the year. The core variant rose 0.2% for the month and 4.3% for the year.
In our view US inflation is nearly there but, if the Fed holds interest rates higher for longer, there is a big danger of overshooting i.e. a recession ensues due to restrictive interest rate policy settings.
The headline jobs number was good but, as our preceding analysis shows, there are cracks appearing as the composition of the numbers shows employment growth is occurring in government and care sectors which are less positive for economic growth.
The Bank of England (BoE) paused its interest rate tightening cycle. CPI inflation fell to 6.7% from 6.8% (over the year). Core inflation fell to 6.2% from 6.9%.
On the other hand, the ECB hiked 25 bps to 4.0%.
Rest of the World
The New Zealand economy bounced back with 0.9% growth for the latest quarter and 1.8% for the year. Only 1.2% growth had been expected.