Westpac Market Outlook August 2024
Our latest thinking on Australia, markets and the global economy.
Read full report 'Westpac Market Outlook August 2024' (PDF 2MB)
It has been a turbulent month since our last report with ‘whipsaw’ moves across politics, the economy and financial markets.
US presidential election prospects have swung wildly following an attempted assassination of former President Trump in mid-July and a switch of candidate from President Biden to Vice President Harris a week later – the net effect putting November’s poll back on a knife edge. The last month has also seen elections in France and the UK deliver results that have added some uncertainty around fiscal policy, while the Israel-Hamas conflict has been threatening to escalate to a wider regional war.
For the economy, growth and policy cycles still look to be turning but at different speeds. A weak set of labour market data has given a more decisive guide to the US growth situation and policy outlook. The FOMC is set to begin lowering rates next month, but we now expect a faster initial pace with back-to-back 25bp cuts through to March. At the time of our last report, markets were not even convinced a September rate cut was a done deal. The growth and policy cycle is also coming through slightly faster in New Zealand – we now expect the RBNZ to commence cuts in October rather than November. The opposite is happening in Australia, the RBA Governor going out of its way to essentially rule out a near-term easing. The Bank of Japan’s July hike was running the other way as well; although it was less of a surprise, it has had a knock-on effect making ‘yen carry trade’ activity much less attractive.
Needless to say, financial markets have had a lot to absorb. Global equity markets have traded a 9% range over the month (the Nikkei swinging a whopping 34%), US 10yr bonds have fallen 0.5ppt, currency markets have been unsettled with a particularly big move in USD/JPY, and volatility has spiked to post-COVID highs. Jarring as some of the moves have been they are unlikely to be generating negative spillovers to the wider economy or influencing policy considerations.
Australia: Growth remains sluggish as the economy moves through a ‘soft landing’ that should see a recovery gain traction slowly from here. Consumers are at the centre of the cycle and key risks. Fiscal policy is providing support but the RBA is looking more tentative. We now expect the interest rate easing to start a little later, in February 2025 rather than late 2024.
Commodities: Prices saw a meaningful correction in July, Westpac’s commodity index down –3%. Met coal corrected –15%, with crude down –11%, iron ore down –8% and base metals down –7% overall. Partly offsetting this was a 7% rally in thermal coal and a 2% lift in gold.
Global FX Markets: The US dollar was hit by a string of unfavourable events late in the month. It has since stabilised, but this is likely to prove a brief reprieve. In the short-term, risks will remain two-sided as rate differentials, growth expectations and politics all impact, most likely resulting in a steady downtrend quarter to quarter. Into the medium-term, growth expectations should assert as the dominant factor in FX valuation.
New Zealand: We have pulled forward our forecast for rate reductions from the RBNZ, with cuts now expected to start in October. The slow ‘rolling maul’ recession over the past two years appears to have given way to a steeper downturn in recent months. At the same time, inflation has been easing and is on course to return to the RBNZ’s target band in the September quarter.
United States: The market has finally recognised the downside risks for the labour market that have built up over the past year. But now it is overreacting. We remain confident in the underlying health of the economy but agree evolving risks warrant a moderate acceleration in policy easing. We look for a 25bp cut at each meeting through to March, and an unchanged terminal rate of 3.375% by end-2025. We view 50bp cuts as very unlikely.
China: The private sector continues to expand capacity at pace and is finding a diverse array of markets for its output. Gains are more than offsetting persistent weakness in household demand, particularly the property sector. Inevitably though, growth in the new economy will slow. So authorities need to boost confidence and spending amongst households now. July’s Politburo meeting provided constructive signals, though initiatives announced to date are still too long-term in nature.
Asia: Yen weakness will persist despite a large net foreign asset position as much of the income is reinvested abroad. Reluctance to hedge currency risk and a lack of investment only further weaken yen demand.
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