CFS Market Update: July 2023

The Reserve Bank of Australia (RBA) chose to hold interest rates in July at 4.10% and then paused for a second month in August. Meanwhile, the US Federal Reserve and European Central Bank increased its rates. China’s manufacturing slowdown continued.

What’s happened recently? 

• RBA paused held rates for July and August
• Changing of the guard at the RBA
• The Fed divides economists on next moves, following July rate increase
• ECB holds firm as Eurozone growth data exceeds forecast
• Increased expectations for China government stimulus.
   

Why did these things happen?

Following the slowing rate of inflation and its aim to pull off a soft economic landing, the Reserve Bank of Australia (RBA) held interest rates for July and August at 4.10%. A sharp fall in Australian retail sales added to the case for the latest pause.

On 14 July, the RBA announced that Michele Bullock will succeed current governor Philip Lowe on 18 September, the latter unsuccessful in securing a second term. Along with this appointment was the news that the RBA will adopt a new strategy in 2024 to better inform the public about rate decisions, publishing more of the data that it bases its rate decisions off. There will also be a new meeting time and the number of meetings each year will be cut from 11 to 8.

With core inflation still elevated and following a rate pause in June, the US Federal Reserve (The Fed) raised its interest rate by 25 basis points to a range of 5.25-5.50%, bringing interest rates to their highest level in 22 years. The Fed’s policymakers offered no clear sign on future decisions. The US economy grew at a rate of 2.4% during the second quarter, surprising many economists. July also brought on the start of the Q2 earnings season in the United States. About 80% of S&P 500 companies have reported positive earnings results so far.

A hike was also widely expected for the European Central Bank (ECB), as sticks to its plan to stay tighter for longer. It mirrored the Fed with a 25 basis point increase to 3.75%. From a macro lens, Eurozone growth data for Q2 was better than forecast amid cooling inflation. However, worries about underlying weakness remain. 

China’s manufacturing sector, one of the country’s biggest growth drivers, has contracted for the fourth month in a row, with data reflecting the decrease in both international and local demand. Markets are now expecting stimulus measures to be announced by the government to help combat weakening growth.

Is there good news?

Australian borrowers breathed a sigh of relief with the double rate pause, while the announcement of Michele Bullock taking over as RBA governor was well-received. She will become Australia’s first female central bank leader in the RBA’s 63-year history and will serve a 7-year term. 

Some economists are suggesting that interest rates have now reached their peak. Others remain uncertain, however it certainly signals a slowdown in pace and lessening rate hike pressures.

What could lie ahead?

The Fed’s economists are no longer forecasting a recession in 2023 and market experts have expressed a more optimistic view on the US economy – at least for now.

Earlier in the year, economists predicted the ECB should reach its peak rate by September so it may not be far off.

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).