Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 551

Will the RBA cut rates before the Fed?

Everyone is fixated on when the US Federal Reserve will cut rates. The discussion isn’t if, but when, and by how much. This is welcome news for a bond market that, so far in 2024, is treading water when one considers the year-to-date negative returns for the major benchmarks – the Bloomberg Ausbond Composite Index and Bloomberg Global Aggregate.

A big part of bond market skittishness has been the reluctance of US data to endorse a chunky easing cycle in 2024, which has seen Fed easing expectations slashed from >175bps to around 75bps for the year, as we write this. The chart below shows the roller coaster ride of markets trying to anticipate what the Fed Funds rate will be in December 2024 versus its current 5.25%. Call it ~100bps of rate cuts removed in a matter of weeks.

Market Implied US Federal Reserve Funds Rate December 2024


Source: Franklin Templeton; Bloomberg Data

Few think the RBA will cut before the Fed. That could get challenged. The Fed has the complication of a US election, which heightens sensitivity around the timing of the first cut. Commencing an easing cycle in May or June is still far enough away from the Presidential election in November to be ‘arm’s length’. It’s unlikely to us they start in September, which is the last meeting prior to the election, if they can avoid it. The clock is ticking for the data to give the Fed permission to start the cycle comfortably ahead of a key political contest. The RBA is unlikely to face a federal election until 2025.

What could drive the RBA to move before the Fed?

Three things stand out to us:

1. Inflation

The stop start volatility in US markets reflects disappointing inflation data, which has failed to endorse the 'rate cuts are coming soon' narrative. Fed chairman Powell’s favourite measure the ‘super core’ CPI has ticked up recently, which is likely a setback rather than the start of a reacceleration, but it’s enough to keep nerves frayed. The super core is services ex-shelter inflation and a favoured measure because it is most sensitive to wages. Year-over-year it has ticked above 4%, so the next few months are key to see a decline resume.

US Bloomberg BLS CPI Core Services Less Shelter Inflation


Source: Franklin Templeton; Bloomberg Data

Meanwhile, inflation in Australia has been falling more quickly than the RBA forecast. The chart below shows the evolution of RBA forecasts for underlying trimmed mean CPI.


Source: Franklin Templeton; ABS; RBA; Macquarie Group

In addition, market consensus for CPI continues to undershoot the RBA out to mid-2025. It looks like at the next update the RBA will downgrade their forecasts. One major US investment bank now sees both headline and core back in the 2-3% band by the end of 2024, well ahead of current RBA thinking.


Source: Franklin Templeton; Bloomberg

2. The employment market

In contrast with the US, the Australian labour market looks to be softening more quickly. The RBA forecasts unemployment at 4.3% by Dec 24. We are at 4.1% now. If this moves higher in the next few months and challenges their forecasts, it’s quite likely they could find an excuse to cut by mid-year.

Our favourite indicator in Australia, the monthly SEEK Job ads index, continues to point to weakness in the official unemployment rate.

In the US, the monthly non-farm payrolls release has been reaccelerating in recent months. The official unemployment rate in the US has had a 3-handle since early 2022, and still sits at 3.7%.

US Employees on Nonfarm Payrolls Total MoM Change


Source: Franklin Templeton; Bloomberg

3. Households remain under intense pressure

The Q4 Australia GDP data requires a microscope to find economic growth, coming in at a puny 0.2% on the quarter. In annual terms, the economy grew 1.5% for 2023, a year where population growth was ~2.4%. The ABS points out that per capita growth for the year was -1%, and that government spending and business investment were the drivers with the household barely retaining a spending pulse.

Indeed, household discretionary spending growth continues to be non-existent. Aside from a tiny +0.1% in the September quarter, every single quarter of 2023 saw discretionary consumption shrink.

Quarterly Change in discretionary household spending (%)


Source: Franklin Templeton; ABS

By contrast, US GDP grew at more than double the pace of Australia’s in the year to December 2023, at ~3.2%, with personal consumption up 3%. Right now, at least, the US consumer hasn’t been slugged as hard with rate hikes as the Australian consumer has.

What does it all mean? Duration looks modestly attractive in Australia but it’s not a pile-in opportunity. The market has already priced approximately two 25bp cuts locally by around December but implies these will occur in the latter months of the year. On balance, we think these could be brought forward a little, and the amount of easing could be a little more than that. We like being long but absent an accident, it’s hard to see the RBA, or the Fed, slashing rates in a way that would send bond yields plunging.

 

Andrew Canobi, CFA is a Director within the Franklin Templeton Fixed Income team and a Portfolio Manager for the Franklin Australian Absolute Return Bond Fund (ASRN 601 662 631). Franklin Templeton is a sponsor of Firstlinks. This article is for information purposes only and does not constitute investment or financial product advice. It does not consider the individual circumstances, objectives, financial situation, or needs of any individual.

For more articles and papers from Franklin Templeton and specialist investment managers, please click here.

 

RELATED ARTICLES

ASX tool for interest rates bets needs an overhaul

Australia’s economic outlook robust, but risks are rising

Five reasons Australian rates unlikely to follow US

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

Welcome to Firstlinks Edition 584 with weekend update

A new report shows Australian fund managers performed better in the first half of the year, with most outperforming indices in local equities, small and mid-caps, and bonds. Their results are less impressive over longer periods.

  • 31 October 2024

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Latest Updates

Retirement

Is the Retirement Income Covenant really the right answer?

The world and Australia’s retirement landscape have changed a lot since 2020. If the RIC is to achieve its goals, a wider spread of responsibility and a rethink across all five pillars of retirement planning are needed.

Superannuation

Are mega super funds’ returns set to fall?

While the performance of the largest super funds has been admirable, they’ve become so big that it will make it difficult for them to outperform their benchmarks in future. It will be important for you to pick your fund wisely.

Superannuation

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

Shares

How will stocks fare with a smaller US government?

Less government involvement in the economy and markets is long overdue. But investors need to consider what a reduced government role may mean for the profitability of businesses that are unable to offset rising cost pressures.

Exchange traded products

Where is peak ETF?

The market share for Exchange Traded Funds and index trackers may increase past optimal levels and stay there for many years. There seems very little if anything that active managers can do to reverse that.

Insurance

Solvency risk with lifetime annuity providers

Any discussion on annuities needs to address the credit risk associated with relying on the solvency of a single insurer. Here's a guide on the regulation of annuities and the best ways to assess solvency risk. 

Planning

Can a crime invalidate a will?

A person's criminal record can impact whether they can benefit under a will or remain as an executor, trustee or testamentary guardian. A lot depends on the nature of the crime. 

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.