However, the risk of a correction at some point along the way remains high: share market valuations are stretched with low risk premiums against bonds; there are reasonable concerns about public debt sustainability in the US, France, UK and Japan; US tariff uncertainty remains high particularly in terms of their impact over time;  geopolitical risks are high including around the possibility of escalating tensions between Russia and NATO countries and the risk of US secondary tariffs on countries importing Russian oil; it’s unclear how long the US government shutdown will last; the US jobs market is continuing to slow posing risks for US economic growth; the Fed may not cut as much as the 4-5 cuts that the US money market expects; and in Australia there is now increased uncertainty around the outlook for interest rates.

 

The RBA left rates on hold with a more hawkish tone – we continue to see more rate cuts but there is a high risk that they will be delayed into next year and that we are at or nearer the bottom than we thought. After a run of somewhat higher than expected inflation readings and stronger economic data the RBA’s more hawkish commentary wasn’t really that surprising. But it adds to the uncertainty regarding when and by how much rates will fall.

 

US jobs data generally remained soft, supporting the case for a Fed rate cut this month. The Japanese Tankan business survey for the September quarter showed business conditions little changed at around mostly solid levels with firm business investment plans. This is consistent with a rate hike soon by the BoJ. Chinese composite business conditions PMIs improved, with services down but manufacturing up by more. They remain consistent with growth around or just below 5%.

 

Reflecting the combination of falling interest rates, rising real wages, improved consumer confidence and the shortage of housing, national average home price growth remained solid in September at 0.8% MoM and accelerated to 0.9% MoM for capital city prices. Uncertainty about the timing and extent of future rate cuts along with poor affordability will act as a constraint, but with FOMO ramping up again and demand now getting a boost from the expanded 5% deposit scheme for first home buyers we expect average prices to rise around 7% this year, accelerating to 8-10% next year.

 

Share markets remain at risk of a correction given stretched valuations, risks around US tariffs and the softening US jobs market. But with Trump pivoting towards more market friendly policies and central banks, including the Fed and RBA, likely to cut rates further, shares should provide reasonable gains on a 6-12 month horizon.

 

Bonds are likely to provide returns around running yield as central banks cut rates.

 

Unlisted commercial property returns are likely to improve as office prices have already had sharp falls in response to working from home.

 

Cash and bank deposits are expected to provide returns of around 3.5%, but they are likely to slow.