Monthly Economic Commentary

By Conrad Burge, Head of Investment

February 2024

The global economy remains sluggish as a result of severe measures taken over the past 2 years by most of the world’s major central banks to counter inflationary pressures.  However, as the International Monetary Fund (IMF) noted in its 31 January 2024 report, ‘amid favourable global supply developments, inflation has been falling faster than expected’.  Furthermore, the IMF is expecting inflation to continue to steadily decline, especially in the advanced economies, where the average inflation rate is now forecast to drop to 2.3% by the end of this year and 2.0% in 2025.  This implies that not only are further increases in interest rates unlikely, but that in the IMF’s words, its ‘projections are for policy rates to remain at current levels for the Federal Reserve (the US), the European Central Bank and the Bank of England until the second half of 2024, before gradually declining as inflation moves closer to targets’.  This is a positive development that has been supporting key markets over recent months.  However, the IMF also emphasises that ‘fiscal consolidation (less government spending) is needed’.  Nevertheless, ‘the path to a soft landing’ has been opened.

In the case of the US, the central bank (the ‘Fed’) last raised rates on 25 July 2023 to a minimum of 5.25% and it now appears that the next move in US interest rates will be down.  ‘Fed’ Chairman, Jerome Powell, stated on 31 January that ‘our policy rate is likely at its peak for this tightening cycle’.  He added though that rate cuts would not be appropriate until there was ‘greater confidence that inflation is moving’ towards the 2% target.  More broadly, tight monetary policy has been effective in slowing activity and the IMF is forecasting global growth of 3.1% this year and 3.2% for 2025 and only 1.5% and 1.8% for the advanced economies, noting that ‘with the likelihood of a hard landing receding, risks to the global outlook are broadly balanced’.

The Australian economy was weak again in the September quarter, growing by only 0.2%.  On a per capita basis, it actually contracted (by 0.5%), indicating that the country remains in a per capita recession, with output also likely to have been weak in more recent months.  The key factor driving this slowdown has been rate rises by the Reserve Bank.  These have weighed on household spending (flat over the quarter) but have reduced inflation (up 3.6% over the year to the month of January and up 0.7% for the quarter).

Most share markets have been volatile over the past year, at first enjoying a strong upwards trend from October 2022 to late July last year before trending mildly downwards until rebounding again from last October.  This year, over the period to 27 February, market movements have included rises of 6% for the broad US market (S&P500), 7% for the technology-focused Nasdaq, Germany 5%, France 5%, Japan 17%, China 1% and Australia 1%, while the UK fell by 1%.  The US market appears fully valued but most others still appear attractively priced, especially small caps, assuming that interest rates soon begin to decline.

Major sovereign bond markets saw yields reach record lows in March 2020 as central banks sought to push rates down due to the pandemic. However, sovereign bond yields trended up as economies re-opened. The US 10-year Treasury bond yield fell to an historic low of 0.54% on 9 March 2020 but touched 5.0% in October last year before sliding down again.  On 27 February this year, it was 4.31%.  Similarly, the Australian 10-year bond yield was 0.57% on 8 March 2020 but was 4.13% on 27 February 2024. Some bond markets could experience lower yields (and higher prices) over coming months if growth remains soft.

Fiducian’s diversified funds are currently slightly above benchmark for international shares, domestic shares and listed property. Exposure to bond markets was lifted last year to around benchmark, while cash holdings have been lowered.

Disclaimer: The information in this document is given in good faith and we believe it to be reliable and accurate at the date of publication. Fiducian Investment Management Services Limited (Fiducian) ABN 28 602 441 814 and its officers give no warranty as to the reliability or accuracy of any information and accept no responsibility for errors or omissions. The information is provided for general information only. It does not have regard to any investor objectives, financial situation or needs. It does not purport to be advice and should not be relied on as such. Investment and tax advice should be sought in respect of individual circumstances. Except to the extent that it cannot be excluded, Fiducian accepts no liability for any loss or damage suffered by anyone who has acted on any information in this document. Past performance is not a reliable indicator of future performance and we do not guarantee the performance of the Funds or any specific rate of return. Potential investors should also obtain and consider the relevant Target Market Determination (TMD) and Product Disclosure Statement (PDS) (available from your financial adviser and via before making a decision about whether to acquire or continue to hold any financial product. Fiducian Investment Management Services Limited is an Australian Financial Services Licensee (AFS Licence No. 468211)._


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