In the US we saw February non-farm payrolls and the Job Openings and Labor Turnover Survey (JOLTS) released which, overall, were supportive of inflationary pressure continuing to ease.

 

Meanwhile, in his testimony to Congress Fed Chair Powell noted that easing will probably be appropriate “at some point this year” and that the number of cuts depend on the data. The market took Powell’s comments positively, with US Treasury yields falling and gold rising. 

 

Australian economic data painted a picture of an economy which is slowing, but still growing – albeit with some softer pockets. Australia’s GDP increased 0.24% in Q4 2023, which was largely in line with expectations. The economy grew 1.55% year-on-year. Consumer spending was positive but subdued, rising 0.1% for the quarter. As a component, spending on discretionary items fell 0.9% quarter-on-quarter. Housing construction activity fell, but this was offset by non-housing construction. Importantly, labour productivity is improving following last year’s plunge, with the six-month annualised growth in productivity rising back towards 3%. The current account surplus rose to $11.8 billion, which was well ahead of the $5-6 billion expected by the market due to a larger-than-expected rebound in net exports.

 

There were few surprises from the opening days of China’s National People’s Congress sessions. The 2024 GDP growth target has been set at “around 5%”, which was largely as expected.

 

With stretched valuations and positive investor sentiment share markets remain at risk of a short term pull back but are still managing to grind higher helped by a combination of mostly ok economic and earnings news, ongoing expectations for rate cuts and enthusiasm for AI. While Australian shares are lagging partly because of their little exposure to AI they are still managing to benefit from stronger global markets, prospects for RBA rate cuts later this year and the earnings reporting season being out of the way without major mishaps.

 

The Australian December half earnings reporting season is complete and actually improved over the final week with companies beating earnings expectations clearly exceeding those missing. That said, consensus expectations remain for a 5.5% or so fall in profits this financial year (down from -4.9% a month ago) with a big fall in energy sector profits on the back of lower energy prices and a small fall in bank profits but most other sectors seeing flat to up profits. The bad news has been that revenue growth has slowed and high interest expenses are a problem, but the good news has been that the peak in cost growth may be near, labour market pressure appears to be starting to normalise, cost control remains strong and guidance has been stable. So, the bottom line has been that results have been better than feared, but profits are still likely to be down this financial year. The share market focussed on results being better than feared and rose above the record high it saw early in February on hopes that better conditions might be ahead once interest rates start to fall.

 

Easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025 should make for okay investment returns this year. However, with shares historically tending to fall during the initial phase of rate cuts, a very high risk of recession and investors and share market valuations no longer positioned for recession and geopolitical risks, it’s likely to be a rougher and more constrained ride than in 2023.

 

Australian home prices are likely to see more constrained gains compared to 2023 as still high interest rates constrain demand and unemployment rises. The supply shortfall should provide support though and rate cuts from mid-year should help boost price growth later in the year.

 

Cash and bank deposits are expected to provide returns of over 4%, reflecting the back up in interest rates.