Market Key Points
- The Australian equity market had a strong month rising 3.0%, supported by a rally in the Materials sector. More defensive sectors, for example Health Care and Consumer Staples were the notable weak spots.
Of note globally was the rally in Chinese equities with the CSI 300 Index (CNY) jumping 21.1%.
Australian equities
The ASX 200 closed September at a new record high, reaching 8269 points. The Index finished up 3.0%, buoyed by the US Federal Reserve’s first interest rate cut and the Chinese government’s stimulus package.
Sector returns were relatively concentrated. Materials led with a gain of 13.1%, followed by Information Technology (7.4%) and Property (6.6%). Health Care (-3.2%) and Consumer Staples (-1.7%) were the worst-performing sectors, with Communications (-0.9%) also in the red.
China’s announcement of a substantial stimulus package boosted Australian mining stocks. The notable rebound in commodity prices was a welcome positive for struggling names such as Rio Tinto, BHP, and Fortescue, all of which posted double-digit monthly returns.
Health Care was dragged down by CSL, the largest company in the sector, whose share price ended the month lower after issuing softer guidance for the 2025 financial year. Meanwhile, in Consumer Staples, Woolworths and Coles shares dipped on news that the ACCC is taking the companies to court over allegedly misleading consumers on pricing discounts.
Overall, September was a positive month for the Index, driven by encouraging news from the US and China.
Global Equities
Emerging Markets outperformed developed markets in September with Developed markets losing -0.47% (MSCI World Ex-Australia Index (AUD)) versus a 4.33% return (MSCI Emerging Markets Index (AUD)) as appetite for Chinese companies continues to rebound.
US markets continued to hit new all-time highs in September with the Federal Reserve cutting rates by 50 basis points, the first cut in four years, as economic data remained upbeat.
The S&P 500 had the best performing September in eleven years with a gain of 2.02% (in local currency terms) as companies recorded strong earnings growth of 11.3%, the best performing quarter since Q4 2021. US-mega-cap stocks boosted markets, with the Nasdaq 100 Index gaining 2.5% (in local currency terms) recovering from a lacklustre July and August.
Chinese equities were among the best performing markets in September with the CSI 300 Index gaining a massive 21.11% (in local currency terms) as authorities announced new stimulus measures to help boost the economy, specifically the property sector and equities markets. The Chinese central bank cut key interest rates and continued to pledge further support and inject liquidity into the financial system.
The news of new stimulus measures pushed the Hang Seng Index up 18.32% (in local currency terms).
Property
The S&P/ASX 200 A-REIT Accumulation Index TR accelerated significantly in September, with the index finishing the month 6.58% higher and up 47.00% YTD.
Global real estate equities moderated (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) advancing 2.32% for the month. Australian infrastructure continued its the trend seen in July, with the S&P/ASX Infrastructure Index TR returning 1.52% for the month and up 9.08% YTD.
September saw increased activity relative to August on the M&A front across the A-REIT sector. Six Growthpoint Properties Australia (GOZ) industrial properties will be acquired (up to an 80% interest) by TPG Angelo Gordan, a US based global alternative investment manager.
Hotel Property Investments has rejected a $3.65-per-share offer from Charter Hall Retail REIT (CQR), which presently has a 15% stake in the firm. They have cited an undervalued offer as grounds for the rejection.
Stockland Group (SGP) has received ACCC clearance for the acquisition of Lendlease’s MPC projects, which will require divestment of its master planned community project in Illawarra, NSW. National Storage REIT (NSR) has settled the issue of AUD$300m 3.625% guaranteed exchangeable notes due in 2029, listed on the Singapore Exchange (ST: SGX).
The Australian residential property market experienced an increase of +0.5% Month on Month (as represented by CoreLogic’s five capital city aggregate). Perth continued its strong run and was the biggest riser (+1.6%, 24.1% YoY), followed by Adelaide (+1.3%) and Brisbane (+0.9%). In contrast, Melbourne continued to experience a fall in value (-0.1%) alongside Canberra (-0.3%) while Hobart (-0.4%) 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.
The monthly Consumer Price Index (CPI) data revealed no surprises, with the headline inflation rate declining from 3.5% to 2.7% year on year, marking its lowest level in three years.
However, at the recent Reserve Bank of Australia (RBA) meeting, the cash rate was held steady at 4.35%, with a clear message that the RBA wants to see more positive movement in core inflation before considering any interest rate cuts. Amidst this backdrop, the Australian bond market remained stable, with the yield on the 10-year Australian bond unchanged, while the 2-year bond yield decreased by only 3 basis points.
In the U.S., the Federal Reserve implemented a 50-basis point rate cut this month in response to concerning signals in the labour market and a persistent decline in inflation. This initiation of a rate cutting cycle resulted in lower yields and reversed the initial inversion of the U.S. yield curve. The shorter end of the curve fell at a faster rate than the long end, indicating an optimistic outlook for long-term economic growth.
However, despite the Fed's dovish stance on monetary policy, uncertainty remains regarding the pace of future rate cuts, as a quicker reduction in rates could potentially reignite inflation. As a result, U.S. 2-year and 10-year Treasury bond yields decreased by 28 basis points and 12 basis points, respectively, contributing to a further steepening of the yield curve.
Currencies & Commodities
The Australian dollar (AUD) appreciated over the month of September, closing 0.3% higher in trade weighted terms to 62.8, appreciating against the US Dollar (USD), Pound Sterling (GBP), Euro (EUR) and the Japanese Yen (JPY).
The Australian dollar strengthened against the USD in September, supported by maintained higher interest rates. The major difference in outlook being around interest rate expectations, with the RBA continuing to hold rates whilst the US experienced a rate cut in September. Against other currencies, the AUD performed moderately, experiencing an appreciation against the Japanese Yen as Japan have a newly elected Prime Minister.
Relative to the AUD, the JPY depreciated the most in September, depreciating by 0.4%. Conversely, the USD was the laggard of the month, depreciating in relative terms by 2.6% against the AUD.
Year-on-year, the AUD remains ahead of the USD, EUR and JPY by 7.8%, 2.3% and 3.4% respectively, whilst the GBP is ahead by 1.8% in relative terms.
Economic key points
- The RBA kept rates at 4.35% as inflation remains too high and flagged that policy would continue to be restrictive for some time.
- Australian annual inflation eased to 2.7%, below expectations.
- The Fed and ECB cut interest rates to 5.0% and 3.65% respectively. The BoE held the rate at 5.0%.
Australia
The RBA kept interest rates on hold at 4.35% at the September meeting, as widely expected, keeping borrowing costs unchanged now for the seventh consecutive meeting.
The Central Bank continue to view inflation as being too high, continuing to rely on data to influence decision making and stating that policy would need to continue to be restrictive for some time. RBA to release minutes from its September meeting where it kept rates on hold at 12-year high of 4.35%. Following the meeting RBA governor Michele Bullock said the board did not explicitly consider a rate hike for the first time since Mar 2024.
The monthly CPI indicator rose 2.7 per cent in the 12 months to August down from 3.5 per cent in July. This fall largely reflected a record 17.9 per cent annual drop in the price of electricity on the back of the combined impact of Commonwealth Energy Bill Relief Fund rebates and state government rebates in Queensland, Western Australia and Tasmania.
Retail sales rose 0.7% in August, above the forecast 0.4% as spending was boosted by warmer than usual weather. Annual sales increased 3.1% in the same period.
The unemployment rate remained steady in August, coming in at 4.2 per cent, but employment growth remained ahead of market expectations at 47,000.The Westpac-Melbourne Institute Consumer Sentiment Index decreased to 84.6 in September on renewed concerns that the economy is headed for a hard landing, Consumers were less fearful of interest rate rises but more unsettled about their job security.
Composite PMI fell to 49.6 in September, driven by a sharp drop in goods production that outweighed moderate services growth. The NAB business confidence came in at -2 in September, up from -5 in August with notable improvements in retail and recreation and personal services.
The trade surplus came in at $5.64 billion in August, ahead of the expected $5.5 billion
US
The Fed reduced its cash rate by 0.5% to 5.0% in September, intending to demonstrate the board’s commitment “not to get behind” on supporting the labour market, now that inflation was moving sustainably back towards the 2% target. Fed Chair Jerome Powell emphasised that he did not perceive a likelihood of recession for the US economy.
The Fed also released an update to its quarterly “dot plot” of economic projections, which revealed significant changes since June to the board’s expectations for unemployment (now slightly higher), inflation (now easing more quickly) and interest rates (now lower) over the next 2 years.
The median policymaker now anticipates 1.0% in total rate cuts by December 2024 (i.e. a further 0.5% beyond this September change), and then another 1.0% to reach 3.25-3.5% by the end of 2025.
Non-farm payroll added 245,000 jobs in September, well above the expected 140,000. July and August figures were also revised upwards by a combined 72,000.
Retail sales for August rose 0.1%, beating forecasts of a 0.2% contraction but below a revised 1.1% lift for July. Overall, consumer spending remains broadly solid, with increase across miscellaneous stores, non-store retailers, health & personal care stores and sporting goods, hobby, musical instrument and bookstores. . Consumer sentiment rose to 70.1 in September, beating market expectations of 69.3.
Composite PMI dropped to 54 in September, but continued to point to robust growth. Growth centred on services activity (55.2) as manufacturing continued its downturn (47.3).
The trade deficit narrowed in August to $70.4bn in line with expectations.
Eurozone
The European Central Bank (ECB) cut interest rates September to 3.65% and signalled a "declining path" for borrowing costs in the months ahead as inflation slows and economic growth in the euro zone falters.
The inflation rate fell to 1.8% in September, lower than the expected 1.9% and below the ECB target rate of 2%.
Retail sales increased 0.3% in August, ahead of the anticipated 0.2%, , while annual sales rose 0.8%, below the expected 1% increase. %. Consumer confidence rose to -12.9 in September as consumers were markedly more optimistic about the economic outlook. The unemployment rate remained at 6.4% in August, matching market forecasts.
The Composite PMI fell to 49.6 in September, signally a decrease in private sector activity for the first time since February. Services activity slowed to 51.4 and the manufacturing contraction depended, going from 45.8 in August to 45 this month.
UK
The Bank of England left interest rates unchanged at 5.0%, in line with market expectations, following a 25bp cut in July.
Inflation for August came in at 0.3%, in line with market expectations but ahead of a 0.2% contraction in the prior month, taking the annual inflation rate to 2.2%.
Consumer fell sharply to -20 in September amid growing concerns the upcoming budget will contain tax and welfare changes that has the potential to hit consumer spending.
Data from the British Retail Consortium shows retail sales in September bounced back strongly, increasing 2% year on year, driven by back to school sales and purchase of tickets for the Oasis reunion tour.
Composite PMI rose to fell to 52.6 in September, below the expected 53.5, but still in expansion territory.
China
This month, Chinese authorities unveiled a series of measures to address the prolonged downturn in its property market, which continues to weigh heavily on the world’s second-largest economy. Additionally, the central bank announced a reduction in interest rates on loans to commercial banks and pledged further actions to stimulate the slowing economy.
It remains to be seen if these measures will provide the necessary boost to confidence required to get the economy back on track to mee the target growth rate of 5%.Composite PMI fell to 50.3 in September, down from 51.2 in August and missing the anticipated 50.5 as the manufacturing sector unexpectedly contracted.
China’s unemployment rate rose to 5.3% in August, ahead of expectations of 5.2%.
Retail sales grew 2.1% year in year in August, below market expectations of 2.5%. Sales over the summer have been impacted by unusual weather events, with scorching heat and torrential rain seen across the country.
Japan
Japan’s inflation rate rose to 3.0% in August as electricity and gas prices rose steeply. PPI increased 2.5%, slower than the market forecast of 2.8%.
Retail sales increased 0.8% in August, with the annual rate rising 2.8%, above the anticipated 2.3% as rising wages continue to support consumption.
Composite PMI fell to 52 in September as services activity grew at a softer pace than previous months and manufacturing activity continued to contract.
The ruling Liberal Democratic party elected Shigeru Ishiba as leader and therefore Prime Minister following the resignation of Fumio Kishida.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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