Market Key Points
- The Australian equity market finished the month lower with uncertainty from overseas and local economic data playing a role as the month progressed.
- International markets were similarly impacted, with the exception of Japan which finished the month stronger. Consumer Staples were the notable weak spots.
Australian equities
The ASX 200 Accumulation Index fell 1.3% in October. Despite hitting a new record high (8,355.9 points) midway through October, by month-end the Index had recorded its worst month since April. Economic data strengthened the view that there will be no interest rate cuts from the RBA before year-end. Uncertainty abroad, particularly prior to the US Presidential election, also weighed on the market.
Sector returns were broadly negative, with only Financials (+3.3%), Health Care (+0.9%), and Communications (+0.8%) recording gains. Of the eight negative sectors, Utilities (-7.2%), Consumer Staples (-7.0%), and Materials (-5.2%) were the greatest laggards.
Monthly retail sales data came in below expectations, indicating a cautious consumer. Underlying inflation remained sticky, and strong employment numbers diminished the likelihood of the RBA cutting interest rates in 2024. This news benefitted Financials, with all ‘Big Four’ banks posting positive returns.
AGL Energy (ASX: AGL) led the declines in the Utilities sector, as broker downgrades led to a sell-off of the company’s shares. Meanwhile, weakening profit guidance from Woolworths (ASX: WOW) led to a decline in its share price, dragging down Consumer Staples returns.
After a run of gains, uncertainty overseas and data from the local economy led to a weak month for the ASX 200.
Global Equities
Developed Markets outperformed Emerging markets in October as global equity markets slowed down ahead of US election results and interest rate announcements. Developed markets gained 3.9% (MSCI World Ex-Australia Index (AUD)) versus a 1.2% return (MSCI Emerging Markets Index (AUD)).
US markets fell in October as the S&P500 and NSADAQ Composite ended a five and three-month run respectively. Despite the continued expansion of US economic growth and moderation in inflation, increased political uncertainty from the upcoming election played on investor sentiment, with increased scrutiny being placed on policy stances from both parties.
Market volatility increased as a result of the uncertainty and the S&P500 declined -0.9% and the Nasdaq Composite lost -0.50% (in local currency terms).
Japan was an exception to the general market decline across develop nations. The Nikkei 225 Index recorded a 3.1% increase (in local currency terms) as Bank stocks rose on the back of rising interest rates, while a weaker Yen helped boost exporting sectors of the market. However, Semiconductor manufacturers dropped as weaker earnings prospects dampened sentiment.
China’s recent gains retreated as stimulus-driven momentum dissipated. The CSI 300 Index fell -3.0% and the Hang Seng Index fell -3.8% (in local currency terms).
Property
The S&P/ASX 200 A-REIT Accumulation Index TR moderated in October, finishing the month down 2.5%. Despite this, the index is up 23.0% YTD. Global real estate equities continued the slowing trend observed in September (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) falling 3.75%.
Australian infrastructure also declined, with the S&P/ASX Infrastructure Index TR falling 4.3%. October saw muted activity in Australia on the M&A front across the A-REIT sector.
Takeover talks continue for Hotel Property Investments after a $3.65-per-share offer from Charter Hall Retail REIT (CQR) was rejected in September.
Charter Hall is bidding alongside pension fund, Hostplus, and HPI has advised shareholders to reject the latest offer of $3.85-per-share, which is 10.6% higher than its close on Sept. 6, a day before its first offer. Centuria Capital Group (CNI) has secured a $34.85 million subregional shopping centre for a new single-asset, closed-ended wholesale fund, Centuria Manning Mall Fund (CMMF).
The Australian residential property market experienced an increase of +0.3% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth continued its strong run and was the biggest riser (+1.4%, 22.6% YoY), followed by Adelaide (+1.1%) and Hobart (+0.8%), which reversed its negative trend. In contrast, Melbourne continued to experience a fall in value (-0.2%) alongside Canberra (-0.3%) and Sydney (-0.1%) while Darwin (-1.0%) was the worst performer.
Fixed Income
In September, the Australian bond market remained stable, while globally, falling yields resulting from investor reactions to central banks cutting interest rates led to positive returns for the month.
Bond investors experienced a less favourable month than anticipated, as global market risk perceptions declined, driven by upcoming U.S. elections and easing inflation figures.
October’s CPI results showed a decrease in the annual inflation rate, which was welcome news for the RBA in its efforts to keep headline inflation within target bands. However, core inflation, which excludes volatile items that could distort the data (including recent adjustments for government subsidies), indicated that underlying inflation remains relatively high. The RBA feels no immediate pressure to alter monetary policy, as inflation trends appear favourable, though they believe further action may be necessary if adjustments are warranted. U.S. market developments affected the Australian market, leading to increases in the 10-year and 2-year government bond yields by 50 basis points and 40 basis points, respectively.
With US being a big driver of the global bond market, investors began shifting from fixed income to riskier asset classes, influenced by post-election expectations for more inflationary policies. Following a 50 basis point rate cut in the October FOMC meeting, markets anticipate a possible additional cut in November, given the ongoing year-over-year decline in inflation and a softening labour market. Against this backdrop, yields on U.S. government bonds rose by 50 basis points for the 10-year and 54 basis points for the 2-year.
Currencies & Commodities
The Australian dollar (AUD) depreciated over the month of October, closing 2.1% lower in trade weighted terms to 61.5, depreciating against the US Dollar (USD), Pound Sterling (GBP) and Euro (EUR), whilst appreciating against the Japanese Yen (JPY).
The Australian dollar weakened against the USD in October, as the election cycle finalised whilst also having interest rates cut recently. Against other currencies, the AUD performed poorly, experiencing a depreciation against the Pound Sterling and the Euro as economic data experiences a gradual increase across Europe.
Relative to the AUD, the JPY depreciated the most in October, depreciating by 0.6%. Conversely, the USD was the highest performer of the month, appreciating in relative terms by 5.4% against the AUD. Year-on-year, the AUD remains ahead of the USD, EUR and JPY by 3.6%, 0.9% and 4.1% respectively, whilst the GBP is ahead by 2.1% in relative terms
Economic key points
- Australian annual inflation eased to 2.8% for Q3 2024, below expectations of 2.9%
- The ECB cut interest rates to 3.25% in a bid to prevent a sharp economic slowdown.
Australia
Australia Australia's annual inflation rate dropped to 2.8% in Q3 from 3.8% in Q2, steeper than market expectations of 2.9%. It was the lowest reading since Q1 2021, with goods inflation sharply slowing (1.4% vs 3.2% in Q2), mainly due to declines in electricity and fuel prices amid the continued impact of Energy Bill Relief Fund rebates.
The unemployment rate dropped to 4.1% in September, just below the anticipated 4.2%.
Retail sales rose 0.1% in September, missing market forecasts and slowing sharply from the 0.7% increase recorded in August as the bump from unseasonal warmer weather waned. Annual sales increased 2.3% for the same period.
The Westpac-Melbourne Institute Consumer Sentiment Index increased to 89.8 in October as consumers appear no longer fearful that the RBA will increase interest rates higher and can see more promising signs that inflation is moderating.
Composite PMI fell to rose to 50.2 in October, as services activity balanced out the decline in manufacturing production. The trade surplus narrowed to $4.61bn in September, below the expected $5.3bn.
US
The US economy grew 2.8% year on year in Q3 , according to the advance estimates, slowing slightly from the 3.0% of the previous quarter. Non-farm payroll added 12,000 jobs in October, well below the previous month and the market expectations of 113,000 jobs. The unemployment rate for the same period was 4.1%, meeting market expectations, and unchanged from the previous month.
Retail sales for September rose 0.4%, beating forecasts of a 0.3% increase and well ahead of the August 0.1% rise. Sales excluding food services, auto dealers, building materials stores and gasoline stations, which are used to calculate GDP, jumped 0.7%, the most in three months. Consumer sentiment rose slightly to 70.5 in October, above the expected 69.3.
Composite PMI rose marginally to 54.1, short of the preliminary estimate of 54.3. Strong gains were recorded for Services activity that offset the fall in manufacturing.
The trade deficit widened in September to $84.4bn, above the forecast $84.1bn.
Eurozone
The European Central Bank (ECB) cut interest rates to 3.25% at its October meeting in a bid to prevent a sharp slowdown in the eurozone economy. ECB president Christine Lagarde said September’s unexpected fall in inflation had surprised the central bank and therefore a cut was needed to ensure a soft landing for the economy.
The inflation rate crept up to 2.0% in October, above the forecast 1.9%.
Retail sales increased 0.5% in September, meeting market expectations, while annual sales rose 2.9%, well ahead of the anticipated +1.3%. October saw consumer confidence rise to -12.5, buoyed by an interest rate cut, but still trending below the long-term average. The unemployment rate came in at 6.3% in September, in line with market forecasts.
The Composite PMI rose to 50 in October, with manufacturing slowing to 46 and services growing to 51.6.
Shrinking levels of activity in Germany and France offset expansion in Spain, Ireland and Italy. The month also saw a further weakening of demand conditions and the sharpest drop in employment since December 2020.
UK
UK GDP rose 0.2% in August, as expected, with the three-month average falling slightly from 0.3% to 0.2% growth.
Inflation flattened in September, below the forecast of 0.1%, taking the annual inflation rate to 1.7%. This is below the expected 1.9% and the lowest rate for since April 2021. The unemployment rate fell to 4.0% for the three months to August, matching market estimates.
Consumer confidence fell to -21 in October as potential tax increases in the upcoming Budget weighed on households and businesses.
Composite PMI fell to 51.8 in October, reflecting weaker growth in both manufacturing and services.
China
In China, benchmark lending rates were reduced by 0.25%, one of several layers of incremental monetary stimulus announced during October by the People’s Bank of China. This also raised expectations for significant measures for new government spending.
The National Development and Reform Commission’s proposals to bring forward 100 billion yuan from next year’s budget to boost local government investment fell far short of hopes for as much as 1 trillion yuan of incremental funding.
Annual inflation came in at 0.3% in October, suggesting rising deflation risks despite Beijing’s stimulus measures in late September to support the slowing economy.
Composite PMI fell rose to 51.9 in October amid a rebound in factory activity and faster growth in the service sector in response to the stimulus measure rolled out in late September to bolster an economic turnaround. China’s unemployment rate fell to 5.1% in September, below expectations of 5.3%.
Retail sales grew 3.2% year on year in September, easily beating market expectations of +2.5%. The strong result was mainly driven by increased sales in food, personal care, and sports and entertainment.
Japan
Japan’s annual inflation rate fell to 2.5% in September as energy, food and transport prices moderated. PPI increased 2.8%, above the market forecast of 2.3%.
Retail sales dropped 2.3% in September, the first decline in six months. Annual sales increased 0.5%, well below the market expectations of 2.3% and significantly below the August increase of 3.1%.
Consumer confidence came in at 36.2 in October, below the market forecast of 37 as sentiment weakened across all categories.
Composite PMI fell to 49.6 in October, marking the first contraction of private activity in four months and well down on last month’s figure of 52. The manufacturing activity continued to deteriorate, and the services sector shrank for the first time since June.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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