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Latest developments across the globe
As we progress through 2024, a soft landing of the global economy looks increasingly probable. Global inflation rates are falling more rapidly than expected and significant easing of monetary policy by central banks is being priced by the market.
At the same time, the US economy is displaying a resilience that continues to exceed expectations, particularly in the labour market. So, can the US, Federal Reserve and other central banks deliver the fabled soft landing?
The possibility of a soft landing was certainly met with scepticism by many commentators, largely due to the inability of central banks to tighten monetary policy while simultaneously avoiding a recession. But as the saying goes, “past performance is not a good indicator of future performance” and it is certainly the case that the conditions underpinning the global macroeconomy are very different to past slowdowns such as the GFC, the dot com bubble and the early 1990s recession.
This time around, central banks were able to raise rates to fight inflation leaning into the recovery from Covid, and the strong underlying demand built by accumulated excess savings of the household sectors. In contrast, demand was faltering badly leading into the GFC, but inflation lagged the slowdown, which kept pressure on the central banks to maintain high rates even as economic growth was slowing sharply.
The soft-landing scenario, combined with a 60 basis point fall in US real 10 year bond yields since November (from 2.5% to 1.9%) put a rocket under equity markets, with the US market up by 20%. Supporting the bullish equity outlook are analysts’ expectations of double-digit corporate earnings growth over the coming 12 months.
While a soft landing is likely, it is hardly a buoyant outlook. The euro area economy barely grew through the December quarter, China’s economy is in the doldrums, the UK’s economy is nearly in recession, and US growth is expected to slow to a sub-trend crawl in the first half of the year. With the recent rally in equity markets further stretching valuations, the actual economic performance of the US, rather than analysts’ earnings expectations, must deliver a lot more than we and most commentators are expecting over the next 6 months if current valuations are to be justified.
And although the US equity market has lifted by 20% since the recent low point in late October, we shouldn’t forget that the US market is just 4% higher than its peak of two years ago in December 2021. Hence, despite US equity prices having roughly moved sideways for over two years they remain expensive on most valuation metrics, thereby rendering them vulnerable to any earnings disappointment.
Turning to domestic markets, this Monday and Tuesday, the RBA met for the first time in 2024 under its revised two-day format, including the release of the Statement on Monetary Policy (in the past released on the Friday following the Tuesday Board meeting) and a press conference on Tuesday following the conclusion of the Board’s meeting (previously there was no requirement to hold press conferences). As widely anticipated by most commentators and the market, the RBA chose to leave the cash rate at 4.35%.
So, was there anything of note in this new approach to communicating RBA cash rate decisions? The answer is yes.
One of the key criticisms of the previous format was that there was too little communication given about the reasons why a decision was made and the outlook for rates. Previously, the communication of the Bank’s assessment of current conditions, their reasons for their rate decision and the outlook for monetary policy were all contained in the one-page Statement by the Reserve Bank Board: Monetary Policy Decision, released after the conclusion of the Tuesday Board meeting.
The power of a post-meeting press conference is that it allows the Governor to provide more nuanced comments on the Bank’s thinking and future direction of policy. And this was evident at the first outing of the new format as while the Statement maintained the strong narrative of inflation risk, leading to an interpretation that the Bank maintained a tightening bias in its monetary policy, Governor Bullock communicated a more balanced view of policy during her press conference, thereby acknowledging the faster than expected slowing in inflation of recent months.
At the same time, however, the Governor was also able to dampen speculation of an imminent cut in rates by the RBA. In summary, the new format has passed its first test and we look forward to ongoing improvement in RBA communication, and hence efficacy, of monetary policy.