Weekly recap
What happened in markets
The Australian sharemarket climbed 1.4% last week, with a broad rally across majority of the sectors. Optimism around the globe also helped the index later in the week after the US delivered a 50 basis point rate reduction. The ASX 200 hit a fresh record high every session last week, closing at 8,210 on Friday. The Financials (2.4%) sector was the standout, as the four major banks all rallied, with Commonwealth Bank (1.7%) setting a record high, to close the week at $144.50. In commodities, oil (3.3%) managed to claw back above US$70 per barrel, while iron ore fell 0.3%.
US sharemarkets also finished higher last week, with all eyes on the US Federal Reserve (Fed), who delivered a 50-basis point rate reduction on Wednesday, the first rate cut in four years. Notably, the Fed’s latest projections, known as the dot plot, showed a further 50 basis points of reductions this year, followed by 100 basis points in 2025. Furthermore, the possibility of achieving a soft landing were heightened throughout the week, as economic data including August Retail Sales and the Manufacturing index were both positive, in addition to weekly initial jobless claims, which fell to their lowest level since May. As a result, markets rotated out of defensive stocks, such as Health Care (-0.6%) and Consumer Staples (-1.2%).
European sharemarkets were mostly lower last week, with the STOXX Europe 600 (-0.3%) and the UK FTSE 100 (-0.5%) both down. Markets hoped European Central Bank’s would follow suit with the US Fed's aggressive rate reduction, however, The Bank of England left key interest rates on hold at 5.00%. Additionally, officials maintained their cautious stance, saying they will continue to be data driven, reiterating there is still persistent heightened inflation. Defensive sectors were among the key underperformers last week, as expectations of a market rally loom, off the back of talks of a possible ceasefire between Ukraine and Russia.
Stock & sector movements
What caught our eye
Last week, the US Federal Reserve made the historic move to start easing monetary policy and take its foot off the proverbial brake of the US economy. Interestingly, the Fed opted to begin big, rather than start small, with a 0.50% interest rate reduction to the new target range of 4.75%-5.00%.
While a rate cut was well telegraphed, the potential for the larger move was still up in the air and surprised some investors. The more typical and conservative approach has been to adjust the policy rate by increments of 0.25%, allowing time for policymakers to assess the impact of the decision. As a result, the larger 0.50% interest rate cut was a signal to some that perhaps policymakers had waited too long and needed to ‘catch up’ to safeguard the US labour market. The Fed dismissed this claim and reassured market participants the labour market remained healthy and that their decision was more a reflection of their conviction that inflation was on a sustainable trajectory. With that being said, the September meeting projections did include notable upward revisions to the unemployment rate and downward revisions to the required cash rate (see below).
Key takeaways from US Fed Chair Jerome Powell’s speech included the central bank’s move toward a neutral stance. The Fed acknowledged that inflation has fallen and the labour market has cooled, such that the upside risk to inflation was becoming less concerning when compared to the downside risk to employment. Powell summed this up by recognising, “we know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing restraint too slowly could unduly weaken economic activity and employment”.
Sharemarkets around the globe reacted positively to the news, particularly the US S&P 500 and Dow Jones, which set fresh record highs in the following trading session. Unsurprisingly, the market’s mood favored risk-on investments like those in the Technology and Real Estate sectors, while more defensive names in the Utilities and Health Care space were largely left out of investor exuberance.
So, where to from here? History paints a rosy picture for the US sharemarket. Of the 14 interest rate hike cycles seen over the past 100 or so years, 12 have experienced gains in the 12-months following a rate cut. The caveat being that past cycles have typically seen more pain in equity markets than we’ve seen in this cycle, where valuations have remained largely in-tact.
The week ahead
Locally, inflation data and the latest monetary policy decision will be the focus this week. The Reserve Bank of Australia will announce their latest interest rate decision on Tuesday, which is largely expected to keep rates on hold. August inflation data is expected to ease to 3.4%.
Overseas, the US will also get an insight into the current level of inflation, with the Core Personal Consumption Expenditure Index, the Fed’s preferred measure, expected to lift 0.2% for August. US new home sales are predicted to fall 6.6%, while economic growth for the US is expected to be 2.9%.
