The global economy has continued to sustain solid growth despite the persistence, until now, of tight monetary policy being implemented by most of the world’s major central banks in an effort to push inflation lower and back into target ranges. Tight monetary policy has largely been successful in reducing inflation, with the International Monetary Fund (IMF) indicating in its latest report (October) that ‘the global battle against inflation has largely been won’. As a result, monetary policy is now in the process of being loosened, with interest rates having been cut twice since June by the European Central Bank and once in September by the US central bank (the ‘Fed’). The IMF notes that this ’will support activity at a time when many advanced economies’ labour markets are showing signs of weakness, with rising unemployment rates’. The IMF would also like to see a pivot towards tighter fiscal policy (less government spending) as well as the implementation of ‘ambitious domestic reforms that boost technology and innovation, improve competition and resource allocation, further economic integration and stimulate productive private investment’.

In the case of the US, on 18 September, the ‘Fed’ implemented its first rate reduction since early 2020 with a 0.5% cut, taking the range to 4.75% to 5.0%. ‘Fed’ Chairman, Jerome Powell, stated that the ‘Fed’ had ‘gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance’. Earlier, Powell had noted that ‘it seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon’. More broadly, the IMF is forecasting global growth of 3.2% this year and again in 2025 but only 1.8% in each year for the advanced economies. Growth in the developing world is forecast to be stronger (4.2% this year and in 2025).

The Australian economy remains weak, growing by only 0.2% in the June quarter. On a per capita basis, it remained in recession, contracting for the fifth quarter in a row (by 0.4%), with the economy unlikely to have gained momentum since then. The key factor driving this slowdown has been tight interest rate policy by the Reserve Bank. This has weighed on household spending, with discretionary spending contracting. In September, the Reserve Bank’s preferred measure of annual inflation remained above target at 3.2%.

Most share markets have been on a broadly upwards trend since October 2023 on the assumption that interest rates had peaked and would soon begin to be reduced. This has been particularly supportive of the more interest rate sensitive sectors of the market, including the technology and property sectors. This year, up to 31 October, market movements have included rises of 20% for the broad US market (S&P500), 21% for the technology-focused Nasdaq, 14% for Germany, the UK 5%, Japan 17%, China and India each 10% and Australia 8%. Most markets still appear attractively priced, assuming that recession can be avoided.

Major sovereign bond markets have been volatile this year, with yields (interest rates) rising and falling in line with the outlook for inflation. The US 10-year Treasury bond yield fell to a record low of 0.54% on 9 March 2020 during the pandemic but touched 5.0% in October last year before sliding down, then rising again to reach 4.28% on 31 October this year. Similarly, the Australian 10-year bond yield was 0.57% on 8 March 2020 but was 4.50% on 31 October 2024. Some bond markets could see yields fall (and prices rise) over coming months if growth remains soft and if inflation continues to fall back towards targets.

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

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