December was an excellent month for risky assets as the prospect of lower cash and interest rates in 2024 gained traction. With recent inflation data coming out earlier this month at 4.3%, markets may be vindicated with last month’s rally. We look to see the focus start to shift from fighting inflation to navigating a soft landing for the economy. Significant volatility should still be expected, as the thought of earlier rate cuts than expected may be optimistic.
Bond yields continued to fall through December off the back of a better than anticipated view for the economy and interest rates having almost certainly peaked across the developed world. The Australian 10-year government bond rate has now fallen below the RBA cash rate, which may further validate equity markets in believing rates will be cut sooner than anticipated. The Australian dollar continued to strengthen against the USD, Pound and Euro through December as Australia seems to be in a better economic position. However, these currencies have clawed back the majority of December’s movement to start the new year.
December’s equity market rally was not only held to Australia, with US and European equities also benefiting from confidence in the economy. Although there is confidence in central banks ability to navigate a soft landing, significant caution needs to be maintained due to how expensive US equities remain. Similarly to November, only the Hang Seng decreased as the Chinese government continues to stimulate it’s economy.
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