A more detailed discussion
What's happening in world economies?
Inflation has been gradually falling around the world, and the hope of a soft landing, rather than a recession, helped buoy markets over the December quarter. When central banks lift rates with the aim of curbing inflation, as they did in 2022 and 2023, their goal is to raise rates just enough to slow the economy enough to reduce inflation, rather than raising too much and causing an economic downturn. Getting the balance right is challenging, because there is a lag between rates going up and the economy slowing, so it can be difficult to predict with accuracy whether too little, too much, or just enough has been done.
In the December quarter, the belief that inflation would continue to fall gave rise to an increasingly widespread expectation that central banks could ease policy, or in other words, cut rates, sooner rather than later. As a result, we saw a swift rally in risk assets, particularly international shares, which made significant gains over the quarter and ended the year strongly positive.
Geopolitical tensions continued to weigh on investor sentiment and cause periods of volatility. Still, oil prices remained contained and actually fell during the December quarter.
The main economic event of the December quarter was the meeting of the US central bank, the US Federal Reserve, which kept interest rates on hold. In the statement accompanying the decision, as well as subsequent press conferences, the Fed’s language contained dovish undertones. In other words, they implied that they are inclined towards an easier stance in terms of interest rates and are likely to cut rates during 2024.
In fact, the Fed Committee has been discussing when it might be appropriate to begin cutting rates, and their own forecasts show three 0.25% rate cuts in 2024. The market, on the other hand, is pricing in deeper cuts.
In Australia, September quarter GDP data was released in December. It showed our economy hitting a wall, with growth of just 0.2% quarter-on-quarter, and annual growth of 2.1% year-on-year. This sluggish economic growth is starting to flow through into employment data. The labour market remains firm but is showing definite signs of weakening. Unemployment hit an 18-month high of 3.9% at the end of December.
Restraining economic growth is exactly what the RBA has been aiming for and inflation has been coming down as a result. However, with inflation still above its target range of 2-3%, the Reserve Bank of Australia (RBA) lifted rates to 4.35% in November and then held steady in December, to “allow time to assess the impact” of prior rate hikes. In other words, they want to be sure that inflation will continue to fall to acceptable levels before making further moves.