Westpac Market Outlook July 2024
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook July 2024' (PDF 2MB)
In Australia, recent inflation data came as a surprise to many participants, seeing market expectations for year–end shift from a fully priced–in rate cut just over two months ago to a 50% chance of a rate hike. However, the RBA is unlikely to share the same viewpoint. Recent communications from the Bank have instead emphasised the restrictiveness of current policy settings and its commitment to the strategy of ‘protecting the employment gains’ set out by the previous Governor.
Globally, market circumspection has also emerged with the near–term focus shifting from policy to politics. While prospects vary, elections in the UK, France and the US look set to deliver some significant leadership changes. For Europe, this is highlighting high government debt levels which will require significant fiscal effort to rein in against what is an increasingly fractious political backdrop. For the US, the presidential election poses different challenges but the wider ‘risk–off’ mood is providing temporary support to the US dollar.
Market focus will soon return to the economic situation, particularly with respect to the US FOMC where officials’ cautious optimism over disinflation and recognition of downside growth risks point to an imminent start to policy easing. That the RBA is unlikely to start until later in the year, and the RBNZ not until next year, highlights the variation in inflation experiences across developed economies and the distinct monetary policy approaches being taken.
Australia: The Australian economy is navigating a complex landscape of inflation and growth challenges. Recent data are unlikely to have materially shifted the outlook for interest rates, as the RBA aims to continue down its narrow path of balancing the risks between inflation and employment. Fiscal relief, and an eventual rate cutting cycle, are expected to support growth going forward. How consumers respond to fiscal measures will be critical to assessing the near–term outlook.
Commodities: Commodities remain mixed, forcing some market to market in different directions. Brent is 6% higher in the month, nickel is down 5% while iron ore responded to better news from China. However, our export commodities index was flat in the month and we have left our medium term forecasts unchanged.
Global FX markets: The US dollar has received additional support this month, not from inflation but politics. Uncertainty around Europe and the potential trade consequences of the US elections are both at play. Underlying economics meanwhile argue for a slow but sustained US dollar downtrend.
New Zealand: Data suggests New Zealand’s economy continues to track sideways. Prospects for a return to low inflation are improving, although at this stage no sooner than we had anticipated. We expect the RBNZ will maintain its hawkish stance at the July policy review. Further ahead, CPI and labour market data will play a key role in driving any revisions that might have been contemplated at the next forecast update in August.
United States: An increasingly symmetric risk distribution is beginning to give FOMC members cause to discuss how much more confidence in disinflation is necessary before cuts commence. September is likely to see the first step of a moderate easing cycle to mid–2026 that will ward off emerging downside risks.
China: Opportunity continues to be found in investment (ex property) and trade, but residential property remains a heavy headwind for the consumer and domestic business. Active support that kick–starts the sales is necessary to reset the consumer mood. This is just the start of the supportive change households need.
Europe: Debt growth has accelerated since 2021, raising financial stability concerns. Despite low interest costs, reforms are necessary to control deficits. Without significant changes, only Germany might meet the 60% target in a reasonable time period, while other countries may take decades longer.
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