Risk assets were mostly much stronger in November with some share markets, including Australia’s ASX 200, making record highs. A combination of a decisive US election win for Donald Trump, continuing signs of above trend US economic growth, more stimulus measures in China and further reductions in official interest rates by some central banks, all contributed towards investors confidence to keep buying risk assets, even those that seemed over-valued on many measures.
The selling in major government bond markets evident in September and October paused in November notwithstanding concerns that progress reducing inflation was showing signs of stalling. Moving into 2025 we see a risk of a correction to mostly richly priced risk assets as relatively resilient global economic growth comes with the sting of rekindling inflation ramped up by President-elect Trump’s policy program.
In the US, Q3 GDP growth at 2.8% annualised pace and strongly supported by real consumer spending at 3.7% means the economy is continuing to grow at a higher than long-term trend pace. Economic releases in November show the US economy is still growing at an annualised pace around 2.7% in Q4 (the Atlanta Fed’s GDP now survey), still well supported by consumer spending. The US labour market remains tight with the unemployment rate at 4.1% in October and wage growth running on all measures at 4% and higher. Inflation is showing signs of stickiness with CPI inflation lifting to 2.6% y-o-y in October from 2.4% in September. President-elect Trump’s promises of stricter immigration control, higher tariffs and lower taxes are likely to add to the pressures rekindling US inflation later in 2025 and beyond.
The US Federal Reserve has leeway to lower the Funds rate, sitting at 4.75% after the first two cuts. The Funds rate is still restrictive compared with headline inflation at 2.6% or underling inflation at 3.3%. But the leeway to cut rates further is diminishing as the US inflation outlook turns stickier. Fed Chairman, Jerome Powell, is starting to warn that there is no rush to keep cutting rates.
The US bond market reacted to the changing outlook for US official rates back in September and October, pushing yields up sharply. In November those higher bond yields initially pushed even higher before attracting buyers. In November, the US 2-year bond yield fell by 6bps to 4.15%, while the 10-year and 30-year yields each fell by 11bps to respectively 4.17% and 4.36%. We see an increasing risk of higher US inflation ahead, limiting further reductions in US bond yields and likely to push up bond yields over the next few months.
Bond yields also fell in Australia in November after the sharp increases in September and October. The 2-year bond yield fell by 12bps to 3.95% while the 10-year yield fell by 22bps to 4.34%. The rally in Australian bond occurred in the face of continuing guidance from the RBA that a reduction in the 4.35% official cash rate is becoming a more distant prospect because of stubbornly high underlying inflation. The RBA’s November Monetary Policy Statement continued to forecast no consistent reduction in inflation within 2-3% target band until late 2026.
Australian economic releases in November continued to show a tight labour market and the beginnings of a lift in private consumption spending likely to be reflected in the Q3 GDP report this week and expected to show growth around 0.5% q-o-q and above 1% y-o-y. While growth is hardly strong it is maintaining excess demand and the risk of slow progress reducing inflation. Based on incoming data reports relating to the tightness of the labour market, growth and inflation The RBA is unlikely to be comfortable delivering a rate cut until the middle of 2025 and even when it starts cutting rates the capacity to cut rates looks very limited with the cash rate unlikely to be lower than 3.50% in 2026 and 2027.
Returning to risk assets, most major share markets rose strongly in November with the standouts, the US S&P 500, up 5.3%, and Australia’s ASX 200, up 3.9%. On the weak side, Hong Kong’s Hang Seng fell by 5.3% in November. For the time being the US share market is factoring in the good news for US companies from Donald Trump’s election victory – likely lower company taxes, lighter regulation and more protection against foreign competitors – but not the bad – likely higher input costs, weaker global markets for US goods and diminishing lower interest rate relief on borrowings.
Credit markets also remained strong in November with spreads over government yields pushed down to the lowest this century. In Australia, defaults are slowly rising but are still low by historical standards. Household debt in Australia is very high by international standards but debt servicing remains manageable for most while employment growth stays strong, and the unemployment rate stays low.
In summary, we see signs of inflation becoming stickier and that may limit the scope of those central banks that have started to cut rates from cutting rates much further. The RBA facing one of the highest and stickiest inflation rates by international comparison may not be able to start cutting the cash rate until mid-2025 and will have limited scope to cut rates much more beyond mid-2025. Bond yields in the US and Australia are likely to lift again over the next few months and richly valued share and credit markets are ripe to give up ground, maybe not before Christmas but probably not long after.