Economic Update - July 2024

Continuing good inflation data in the US has sent markets into the “great rotation”. However, the Federal Reserve still needs a little more good news before it decides to cut. In Australia, the all-important June quarter CPI print was a mixed result and may see the RBA continue to spin its wheels and words until there is a more decisive change in inflation, in either direction.

What happened in Australia?

Ever since the Reserve Bank Board’s last meeting on 9 June, the RBA and markets have been waiting with trepidation for the release of June quarter CPI on 31 July. 

After moving to a more balanced position earlier in the year, recent monthly inflation data had pushed the RBA back into a hawkish stance. The talk of rate cuts had turned to talk of a possible rate rise. With the RBA’s narrow path on a knife edge, all eyes turned to the release of the June CPI. 

As suggested by the April and May monthly inflation indicators, CPI ran high in the June quarter, increasing from 3.6% to 3.8% (see chart below). But it ran no hotter than market expectations and the RBA’s own forecast from May. Further, the RBA’s preferred measure, the trimmed CPI, actually fell from 4% to 3.9%. 

Some may say that this puts the RBA into a quandary. However, it appears it has gotten enough information to stay the current course and will feel it wise to wait until the next major data release. 

The main sticking point is that the RBA’s own models show that the economy is still running too 

hot with strong supply-side growth keeping production above sustainable levels (see chart below). The RBA would like to see the output gap continue to fall and even fall a little below zero, at least for a little while. 

The RBA’s Deputy Governor recently opined that the RBA does not have a decisive influence over everything in the CPI basket, however, interest rates have always been a blunt instrument and it is still the only one the RBA has got. 

Good news continues on the labour front. Unemployment ticked up from 4% in May to 4.1% in June seasonally adjusted while job vacancies continue their fall. Job mobility (or the percentage of workers who changed jobs during the year) fell to 8%, its lowest level since before the pandemic (see chart below).

What happened around the world?

USA

Inflation continues to fall as does the Fed’s favourite measure, the Personal Consumption Expenditures (PCE) price index. The Fed is feeling more comfortable about inflation and the labour market. While it didn’t cut rates at its July meeting, the probability of a September rate cut has now increased to nearly 100% from around 65% a month ago, according to the CME FedWatch tool. 

The stock market has been feeling a little unbalanced however. The dizzying charge of the magnificent seven faltered on 11 July as another good PCE print triggered a great stock rotation from big tech to small caps. Rate cuts generally lead to higher returns for small caps because they are typically more highly leveraged. The chart below shows that between July 10 and 29, the NASDAQ has fallen 7.82% while the Russell 2000 (small cap index) has increased by 9.26%.

The only factor causing markets greater whipsaw is the changing odds in the US Presidential race. We’ve moved from a lame Biden, to an indestructible Trump, to a meme-emergent Kamala Harris firing up the Democratic base.

China

China is growing even slower than feared. GDP increased just 0.7% compared to the first quarter and 4.7% compared to the June quarter last year. Q1’s growth figure was also revised down slightly. The Chinese government has set a target of around 5% for 2024.

Retail spending only grew 2% in June while home sales have fallen to 2009 levels (see chart below).v

On a positive note, China’s Caixin Manufacturing PMI increased for the eighth consecutive month and has now reached a 3-year high. The official PMI measure is flat. 

However, China is facing increasing opposition to its increasing exports; anti-dumping investigations by other countries are already up 166% compared to last year. 

EU

After the 25 bps cut in June, the ECB kept rates steady in July. After euro area inflation increased from 2.4% in April to 2.6% in May, it decreased to 2.5% in June. 

Euro area GDP increased 0.6% in the June quarter compared to the previous year, up from the 0.5% in the March quarter.

Japan

With inflation running a little too high, 2.8% in June, and a falling yen-dollar cross rate, the BOJ increased interest rates on 31 July from 0-0.1% to 0.25% (see chart below). The move surprised markets but is inline with market sentiment. BOJ Governor Kazuo Ueda also did not rule out another rate rise this year. The BOJ is keen to return interest rates to a neutral setting.

UK

Inflation was unchanged in June at 2.8%. The new Labor government is set on increasing growth and is hoping that the Bank of England is becoming convinced that inflation is now under control. Better late than never, unless you are the Tories. 

Source: ONS

New Zealand

The Reserve Bank of New Zealand kept the cash rate unchanged in July for the eighth meeting in a row.

CPI decreased from 4% in May to 3.3% in June on an annual basis, its lowest level since June 2021 (see chart below). It needs to keep falling before the RBNZ looks to change rates.

What this means for Australian Private Debt