While an outright end to the hiking cycle was not announced, neither was it suggested that another hike should be expected. Instead, Chair Jay Powell noted future decisions would be data-dependent and the September meeting remained “live”. The market is now pricing in an 80% chance that the Fed holds in September and a 67% chance of a hold in November too. 

 

Ratings agency Fitch downgraded the US from AAA to AA+ because of an expected deterioration in the fiscal position in the next 3 years, a high and increasing government debt load and an erosion of governance related to AA and AAA rated peers. The credit rating downgrade could increase market nervousness at time when recession concerns are already high and result in a risk-off tone in markets, especially as equities are already at risk of a near-term pullback.

 

US second quarter earnings continue to come in better than expected. Around 83% of companies have reported and 80% have beaten earnings expectations (the historical norm is 76%). Expectations are that earnings will fall by around 5.2% over the year to June, which is not consistent with a recession.

 

US ADP employment (a leading indicator for non-farm payrolls) rose more than expected in July, but job openings fell in June and the ratio of job openings to the number of people unemployed remained at 1.6 which is down from its high of ~2% in the post-pandemic cycle but still very elevated compared to history indicating that there the labour market is still tight. The labour market is cooling, but it’s occurring gradually which is positive in terms of keeping the unemployment rate but also means that there is upward pressure on wages.

 

The RBA left the cash rate on hold at 4.1% for the second month in a row, which was in line with our own view that thought it would be a close call between a hike and a pause but the hold from the central bank surprised consensus economist views. The RBA retained its tightening bias, citing the still high inflation backdrop and tight labour market, but mentioned the downside risks to the economic outlook flowing from the lags with monetary policy. The recent June quarter inflation data was lower than expected and it was consistent with the RBA’s projections of inflation being back in the 2-3% target range in 2025. Given the increasing signals that rate hikes are working to slow economic growth including falling retail spending, declines in building approvals, slowing GDP growth, declining business confidence, negative consumer confidence, indications of a slowing jobs market and the decline in inflation it makes sense for the RBA to sit back over the next few months to assess the impacts of prior rate hikes.

 

China continues to struggle with the Chinese housing bubble continuing to burst. Youth unemployment is high.  Whilst household savings are high but consumers not keen to spend.

 

The next 12 months are likely to see a further easing in inflation pressures and central banks moving to get off the brakes. This should make for reasonable share market returns, provided any recession is mild. But the next few months could still see a correction given the risk of recession and earnings risks. There is also the risk of further hikes from central banks and poor seasonality out to around September -October.

 

Bonds are likely to provide returns above running yields, as growth and inflation slow and central banks become dovish.

 

Unlisted commercial property and infrastructure are expected to see soft returns, reflecting the lagged impact of last year’s rise in bond yields on valuations. Commercial property returns are likely to be negative as “work from home” hits space demand as leases expire.

 

Cash and bank deposits are expected to provide returns of around 4%, reflecting the back up in interest rates.