CFS Market Update: November - December 2023

• Major central banks paused in their final interest rate decision of the year, as global inflation falls faster than expected from its highest levels in decades
• The RBA left rates on hold at 4.35%
• The US Federal Reserve (Fed) and the European Central Bank (ECB) also kept rates steady with no change
• The Fed signals rate cuts in 2024
• China’s manufacturing back in positive territory, economy on track to meet growth target. 

Some market experts believed a pre-Christmas interest rate pause from the RBA was almost certain. However, others remained mindful of the central bank’s messaging over the possibility of more rate increases.

On 5 December, the RBA provided welcome relief by leaving rates on hold at 4.35%.

Australia’s inflation fell to 4.9% for October ahead of this month’s rate call, versus expectations of 5.2%.

RBA Governor Michele Bullock stated that the economy was performing better than expected and was optimistic about the gains achieved in the labour market. She said holding the rate steady this month will allow the RBA time to assess the impact of the increases in interest rates on demand, inflation and the labour market.

The last rate call of the year from The Fed on 13 December followed the forecast of no change, leaving interest rates at the current range of 5.25% to 5.50%.

The Fed said the US banking system is sound and resilient, although tighter financial and credit conditions for households and businesses were likely to weigh on economic activity, hiring and inflation. It said the extent of these effects remain uncertain and the committee remained highly attentive to inflation risks. As always, its assessments will take into account data and readings on labour conditions, inflation pressures and expectations, and financial and international events and developments.

Some economists are now predicting that there will be no further hikes off the Fed’s recent signalling that it may be appropriate to now start dialling rates back in 2024.

As widely expected, the ECB made the call on 14 December to leave rates as they are, at the range of 4 – 4.75%. This was in light of the sharp fall seen in the Eurozone’s inflation rate, which fell to 2.9% in October, down from 4.3% in September. The central bank warned that while inflation has dropped in recent months, it was likely to pick up again in the near-term and did not hint at the possibility of cutting rates.

In 2024, the ECB will announce its first monetary policy decision of the year on 25 January, followed by The Fed making its announcement on 31 January. The RBA is scheduled to meet over 5-6 February, when it officially cuts down its monetary policy decisions from 11 times a year to  eight, allowing the Board more time to gather more information and assess how its decisions are affecting the economy.

Need a refresher? Here’s what happened in markets back in October, September, August and July.

Rewinding back to the start of the year, the collapse of three US banks and a major Swiss bank, plus the high inflation environment and the conflict in the Middle East, should have put markets in serious trouble.

However, things turned out better than feared, thanks to resilient consumer spending resulting in better-than-expected earnings to shareholders. Equity markets were perhaps the biggest surprise and were able to shake off the negative news, delivering unexpectedly positive returns particularly in the US.

China’s Caixin/S&P Global manufacturing purchasing manager’s index (PMI) increased to 50.7 in November, beating expectations of 49.6 and the 49.5 result in the prior month. A PMI result above the 50-point mark considers activity to be in growth or expansion.

This puts the country’s manufacturing sector, one of its biggest growth drivers, back in expansionary territory, and the highest since August, signalling renewed improvements in activity and conditions.

Furthermore, in an effort to help support economic growth, the People’s Bank of China (PBOC) is likely to fund pledged supplementary lending (PSL) as a tool to aid its housing market and expand its balance sheet.

PBOC Governor Pan Gongsheng said it would continue to keep its monetary policy accommodative and believes China is on track to achieve its official growth target of 5%. He also pledged to strengthen productive global macroeconomic policy dialogues.

There are 40 countries voting in 2024, starting with Taiwan’s election in January and ending with the US election in November. Navigating through new governments coming in and any subsequent policy changes – plus any other market surprises, as 2023 has taught us – will require continued vigilance and portfolio diversification across higher quality asset allocations.

Meanwhile, a US recession did not eventuate in 2023, however economists believe it’s not out of the woods and remains a possibility next year. Market experts are split between a recession occurring in the first half of 2024 and the second half of 2024, closer to September and October. Some still believe a soft landing is possible and that an optimistic stance is reasonable, given the substantial progress that the US economy has achieved despite the challenges of 2023.

During a business event in Sydney on 22 November, RBA Governor Michele Bullock addressed the nature of Australia’s continuing inflation challenge.

“It took only three quarters for inflation to fall from 8% to 5.5%, as the supply-side issues eased and there is some more to go there. But we expect it to take another two years for inflation to fall that much again and move below 3 per cent,” she said.

Bullock said the coming year is going to be challenging for the RBA, as it looks to bring inflation back down to target while also preserving as much of the gains made in the labour market over the past few years as possible.

She said the RBA board remains resolute in its determination to return inflation to target – a 2% to 3% range by the end of 2025 – and will do what is necessary to achieve that outcome.

With the ongoing fallout from current geopolitical events playing out in 2024 – that is, political activity relating to geography, such as the conflict in the Middle East – we’ve unpacked what they mean in How do global events affect my super and investments?

If you’re wondering about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary. 

If you don’t have an adviser, you can find an adviser near you using our Find an Adviser service at cfs.findadviser.com.au. Call us with any general queries on 13 13 36, Monday to Friday, 8:30am to 6pm Sydney time (+612 8397 1100 from outside of Australia).