Reality check

Global markets

Global equities fell for the second week in a row following the ‘hawkish cut’ by the US Federal Reserve.

As alluded to last week, the major global highlight of the past week was the Fed meeting. Although the Fed cut rates by 0.25% as widely anticipated, the scaling back of expected 0.25% rates cuts in 2025 via the ‘dot plot’ from four to two rocked markets – even though this only validated where the market had already moved to.

Also jarring was the Fed’s upgrade to its inflation forecasts, with core PCE inflation expected to end next year at 2.5% rather than 2.2%. Again, this acknowledges the reality that US inflation has held up longer than expected in recent months, despite a softening in wage growth.

Blunting the pain somewhat was Friday’s better than expected PCE inflation result, with core prices up only 0.1% in November (market +0.2%). This allowed annual core inflation to hold steady at a still uncomfortably high 2.8%, and US stocks to recover some lost ground on Friday. The great hope now is that the US disinflation process re-commences in the new year, especially through reduced housing inflation.

Either way, the Fed is slowing rate cuts for a good reason – resilient growth – rather than out of concern for the downside risks to the economy. As such there’s no reason to suggest recent market weakness will be anything other than a healthy market correction, especially given the still bullish outlook for corporate earnings.

In other news, both the Bank of Japan and Bank of England held rates steady – in line with expectations.

Global week ahead

There’s only second-tier data and no central bank activity scheduled for the week ahead, which should allow markets to ease into their holiday slumber. The one wild card remains any further unpredictable threats from US President-elect Trump.

Australian market

The S&P/ASX 200 dropped 2.8% last week as part of the global sell-off, but was enjoying a 0.8% bounce in Monday morning trading at the time of writing – in line with Wall Street’s recovery on Friday.

The $A remains on the back foot at US62.5c, after having touched US69c in late September. Long-term bond yields still appear to be broadly topping out – they remain below their peak of October 2023 but have moved into a choppy sideways range.

The local highlight last week was the Federal Government’s Mid-Year Economic and Fiscal Outlook. This only served to highlight the strength in both Federal and State Government spending over the past year, with a large upgrade to public demand’s contribution to economic growth yet a downgrade to that from the private sector.

The Federal Government would like us to excuse their runaway spending in a range of social care areas. From a public fairness viewpoint this may be fair enough, but the Government still has a macro responsibility to fund its priorities responsibly – with budget cuts or tax increases elsewhere. Instead, there is little evidence of any fiscal restraint at a time of limited economy-wide spare capacity and still high inflation – leaving the RBA no choice but to squeeze out private demand through high interest rates.

The only local highlight this week will be the minutes to the RBA December meeting tomorrow. This will be of interest given markets – and likely even the RBA – are still debating whether rates should be cut in February if the Q4 CPI in late January is fairly benign. On balance I still think the RBA will wait longer.

Note this is the last Bites of the year and we will return on Monday 20 January – the day of Trump’s re-inauguration as US President. It will be a fascinating week!

I wish readers all the best for the holiday season and may markets be kind.