CFS Market Update: September 2023

After aggressive interest rate hiking campaigns, the central banks are showing alignment in signalling the end of their tightening cycle. Does this mean certainty is on the horizon? And what else drove financial markets in September?

Why did these things happen?

On 3 October, Michele Bullock delivered her first interest rate announcement as the new RBA Governor, holding rates steady at 4.10% for the fourth consecutive month in a row. This decision was in line with economist and market expectations, as the latest economic data reflected the central bank’s monetary policy was succeeding in reducing inflation. While the cash rate has remained untouched since July 2023, experts believe there could be one further rate rise before the year is out.

The latest rate call from the US Federal Reserve (Fed) on 20 September followed expectations, with no changes to the cash rate. The range remains at 5.25-5.50%. In markets, US stocks had a poor month, with the S&P 500 and the Nasdaq falling by 5% and 6%, respectively.

The European Central Bank (ECB) made its monetary policy decision on 14 September and stayed on track to deliver an interest rate hike of 25 basis points, moving the marginal lending rate to 4.75%. It hinted at the possibility of a pause as the Eurozone’s core inflation had finally eased – its lowest level in a year, leading economists to believe the ECB is unlikely to hike any further.

There was good news out of China’s manufacturing sector. The country’s Purchasing Managers Index (PMI) showed a return to growth in September, a sign that momentum could be picking up again. This was also supported by the domestic travel boom in the last quarter, which surpassed 1.8 billion trips, representing revenue of CNY 1.2 trillion. The boost to its tourism sector is expected to continue for China’s National Day and Golden Week holiday, another reason for optimism.

Is there good news?

Market experts are seeing alignment across the central banks in terms of the end of their tightening cycle. While this means they are closer to the end of cash rate hikes, the expectation is for a 'higher for longer' interest rate environment.

There have been some glimmers of hope for consumers, seen in lower fruit and vegetables prices, for example. Following massive annual profits reported by the major supermarkets during the cost-of-living crisis, consumers have been given relief in the form of spring discounts. But is this temporary? The two supermarket giants have stated that certain discounts will stay in place until late November.

While cost of living pressures will take time to ease, it’s heading in the right direction for certain categories. Meanwhile, the cost of petrol, energy and rent are likely to stay on the higher side amid this longer-term period of inflation.

What could lie ahead?

Concerns around the impact of China’s slowdown on the rest of the world have understandably dominated market discussions.

Some commentators have stated that while China’s property market continues to struggle, it is not linked to their financial infrastructure – a key difference to the US subprime mortgage crisis, which ultimately led to the global financial crisis.

Others have cautioned to expect the unexpected.

China’s manufacturing PMI will be one to watch to see if the Chinese economy is turning the corner.

Economists still expect one interest rate hike from the RBA this year, as inflation continues to moderate, albeit in a bumpy fashion. Australia’s Consumer Price Index (CPI) rose to 5.2% in the 12 months to August, up from 4.9%. This was a small increase in annual inflation, driven by fuel prices. 

The RBA’s target inflation rate range is 2% to 3%.

Need a refresher? Here’s what happened in markets back in August and July.

What should I do if I’m concerned about my investments?

If you’re wondering about whether you should make changes to your investments, we recommend connecting with your financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary. 

If you don’t have an adviser, you can find an adviser near you using our Find an Adviser service at cfs.findadviser.com.au. Call us with any general queries on 13 13 36, Monday to Friday, 8:30am to 6pm Sydney time (+612 8397 1100 from outside of Australia).  

What’s happened recently? 

• The Reserve Bank of Australia (RBA) held rates at 4.10% for the fourth consecutive month, marking Michele Bullock’s first meeting  as RBA Governor
• Central banks signal the end of tightening rates
• Spring discounts help with cost-of-living issues
• China’s manufacturing back in positive territory.