Charlie Jamieson, Chief Investment Officer

As we reach mid-year and the winter solstice, it’s an opportune time to assess the macroeconomic and policy developments in major markets. This includes re-evaluating some long-established market narratives concerning political volatility, global inflation targets, and real economic growth. Additionally, we should explore current prevailing themes and their rapid evolution amid significant political, societal and market shifts.

We have witnessed a range-bound environment this year in fixed income, much lower bond volatility, but inside that the markets have had higher “micro” volatility with every economic data print subject to intense scrutiny as a reflexive function in anticipation of the near-term expectations for central banks who are ‘’data dependent’’.

We are in effect, busy going nowhere (for now), which is a welcome respite after the volatility of 2022. The volatility ghosts of 2016 in Brexit and the arrival of Donald Trump into the White House could be set to return and we have had a small entree in the last few weeks on the political stage from Mexico, India, France, and the US.

It will be fine, until it isn’t.

Mexican and Indian elections resulted in violent asset market repricing – a 2 per cent decline in the Mexican peso in June and a wipe-out in Indian equities. The rising anti-EU sentiment in France and subsequent uncertainty from the snap election from Macron demonstrated that the chasm opening in society will continue to permeate through risk markets.

The lead up to the US election has already created angst in markets following the presidential debate and this remains the wildcard for 2024 as market participants dust off their Trump playbook following the woeful showing from Joe Biden. The danger of further fiscal stimulus and tariffs against his attempts to bully the US Federal Reserve into keeping rates low, all provide uncertainty that feeds into volatility and unknown outcomes.

This uncertainty could also collide with the tightening of global interest rates over the last few years which appears to be feeding into global economies as growth is essentially anaemic around the G7, Australia and New Zealand, with many countries reliant on heavy migration flow to prop up nominal GDP numbers.

The US “exceptionalism” theme of the first quarter of 2024 is starting to lose its lustre with a spate of economic data rolling in weaker than expected over the last month as second quarter economic growth is anticipated to be marked down appreciably. Is the higher base rate from the US Federal Reserve beginning to bite?

We have maintained the view that we will experience a non-stimulatory global rate-cutting cycle over 2024, matching the realised victories from the peak of inflation experienced in 2022. This year, inflation progress has been significant in all markets, however, the timing to achieve the “last mile’’ of the inflation band has been frustrating in both the US and Australia.

In the US, we have anticipated that the 23 per cent drop in used car prices, along with continued decline in owners’ equivalent rent (OER), which constitutes 26 per cent of the CPI basket, will aid in completing the disinflation process. These factors are expected to balance out some stickier services prices and offset gains in commodities and energy. Recent validation has emerged as core personal consumption expenditure (PCE) inflation, the Fed’s preferred measure, is weakening. This trend is approaching a potential “green light” for rate cuts, particularly if growth data continues to weaken. While unlikely, a rate cut at the next meeting is possible, whereas a September cut is plausible if data remains on the softer side. Let’s not forget if the Fed cuts rates to 4.5 per cent against a 3.25 per cent CPI, the policy stance is still restrictive.

Domestically, the RBA is having a harder time slaying the inflation beast as it remains on the fence ahead of the next interest rate meeting. While they need to (and do) acknowledge inflation being stickier than they’d like through hawkish discussions, they are acting dovish because they know the economy is on a knife edge.

Despite the pessimism over the last year, bond markets have performed admirably which should be expected to continue and provide investors with stability, as the chances of a “black swan” event rise into year end. Given the sheer volume of difficult to predict change we have coming up, the political changes we are facing will deeply impact medium-term themes, making it crucial to stay informed and ready to adjust strategies promptly. Medium term can become short term in the blink of an eye.

Diversification and a cautious approach might help mitigate risks associated with sudden market shifts.