Inflation eases in Australia. Is the end of the RBA’s rate-hiking cycle near?

Executive summary:

  • Price pressures eased in Australia and Europe
  • China's manufacturing and non-manufacturing PMI surveys missed expectations in November
  • OPEC+ announced production cuts for early 2024

On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and ESG and Active Ownership Analyst Zoe Warganz discussed recent inflation numbers from Australia, the U.S. and Europe. They also reviewed the latest economic headlines from China and chatted about the recently announced oil production cuts by OPEC+ (Organisation of the Petroleum Exporting Countries Plus).

Is the Reserve Bank of Australia finished with rate increases?

Warganz and Cousley started the conversation by looking at the latest inflation data from the U.S., Europe and Australia, which Cousley said was generally positive throughout. In the U.S., he noted that the core personal consumption expenditures (PCE) price index—the Federal Reserve (Fed)’s preferred inflation gauge—increased by 0.2% in October, matching consensus expectations.

Meanwhile, both the eurozone and Australia experienced downward surprises in inflation, Cousley said. “In the eurozone, preliminary headline inflation cooled to 2.4% in November on a year-over-year basis—which was down from October’s 2.9% rate and below industry expectations,” he remarked, calling the news very encouraging for the European Central Bank. A similar story played out in Australia, with the nation’s consumer price index (CPI) easing to 4.9% in October, versus 5.6% in September, Cousley said.

“The decline in Australia’s inflation rate is very good news for the Reserve Bank of Australia (RBA), as the central bank has become an outlier among others in continuing to raise rates the last few months,” he observed. Looking ahead, Cousley said he believes rates at most major central banks are very close to peak levels. This includes the RBA, which has probably reached the end of its rate-hiking cycle, he stated.

So, what might this mean for government bonds? Cousley said that from his vantage point, they remain an attractive opportunity, with bond yields trading well above expected inflation. As the calendar turns to 2024, he said markets might start pricing in more rate cuts than currently anticipated due to elevated recession risks.

More fiscal stimulus expected in China in the year ahead

Switching to China, Cousley said the latest PMI (purchasing managers’ index) surveys from the world’s second-largest economy fell short of expectations in November. The country’s official manufacturing PMI registered a reading of 49.4, while its non-manufacturing PMI slipped to a level of 50.2. A reading above 50 indicates expansionary conditions, and a reading below 50 indicates contractionary conditions, he explained.

“These surveys are reflective of the start-stop pattern that’s dominated the Chinese economy for much of 2023,” Cousley said, explaining that over the course of the year, China has experienced periods of better-than-expected economic news, followed by periods of worse-than-expected news.

Importantly, in the past few months, the Chinese government has started reacting more to the weaker-than-anticipated numbers by increasingly announcing more incremental stimulus measures, Cousley said. “We’ve seen more support for property developers and a desire to push more credit to the real economy, among other measures,” he stated.

With the government expected to continue stepping up fiscal stimulus measures, Cousley said he anticipates GDP (gross domestic product) growth of around 4.5% to 5% in 2024. If that pans out, it would be a pretty healthy outcome for China, he said. “I still expect risks to remain, especially around the country’s embattled property market, but 2024 should feature a more active fiscal policy backdrop, which is encouraging,” Cousley stated.

Markets react to OPEC+ announcement on oil production cuts

He explained that oil demand has been falling for the last six months, and is expected to continue to decline due to the slowing global economic environment. “Even if the world can avoid a recession next year, 2024 will still likely feature below-trend growth, which will weigh on demand for oil,” Cousley said. He noted that risks also remain on the supply side, whether it’s additional cuts from OPEC+ or an unexpected geopolitical event. However, in Cousley’s opinion, slightly lower oil prices are more likely next year, given that further declines in demand are likely.

“It’s possible that oil markets could rally on the news of any future production cuts in the short-term, as they did earlier this year. However, I believe that with softening demand, any rally would likely be short-lived,” he concluded.