Expecting the US economy to grow moderately but remain resilient, T. Rowe Price has said that Australia’s comparatively hawkish rate cycle will soon create a “lag” effect.
This has been bolstered by the Fed recently signalling a pivot towards rate cuts at some point this year, while the RBA has been slower to move due to elevated wage inflation.
“The Australian economy should be sluggish as the lag effects of the Reserve Bank of Australia (RBA) tightening start to bite,” the firm insisted.
As such, T. Rowe price projects that the Australian market will be in for another volatile year, with both positives and negatives to come out of the short-term.
Namely, wage growth remaining elevated above historic levels may support consumer confidence, but earnings are likely to disappoint due to lack of pricing power from companies.
The investment manager explained: “Commodity prices have held up fairly well so far, providing support to Australia. But with most regions expecting slower growth in 2024, they may be close to the top of their range.”
“Turning to the earnings outlook, consensus forecasts for 2024 are for a decline of 5 per cent to 10 per cent. In our view, earnings risks are skewed to the downside.
“We continue to maintain a defensive posture as we expect the more cyclical parts of the Australian share market to come under greater earnings pressure in 2024. This should see quality, defensive, and growth companies benefit as their earnings could prove more resilient.”
T. Rowe Price added that equities have similarly presented as a double-edged sword, observing that resilience in economic activity and employment may have supported the asset class in 2023, but presents the risk of central banks disappointing market expectations of interest rate cuts.
“We initiated an underweight Australian equity relative to global stocks due to earning disappointment risks, elevated valuation after the late year rally and headwind from a stronger AUD.”
Fed changes its tune
On the other side of the world, US stock and bond markets soared at the end of 2023 following Fed chairman Jerome Powell’s surprise pivot in policy late last year.
With chairman Powell having spent most of 2023 reiterating the Fed’s intention of prioritising fighting inflation over supporting the economy for the foreseeable future, T. Rowe Price noted that investors were left “scrambling” to adjust their 2024 rates forecasts.
“His message at the press conference appeared to be an about face as he laid out expectations for lower rates next year. While not taking a victory lap, Powell acknowledged that their aggressive policies were indeed having the intended impacts of helping rein in inflation, while to their and the market’s surprise, has had little impact thus far on employment,” the firm said.
“With the markets celebrating the ‘soft landing’, they quickly priced in six rate cuts, double what the Fed has laid out.”
“Given the wide divergence in views, every data point ahead is likely to drive volatility. With US economic growth having proved so resilient and the consumer and unemployment still far from broken, upside surprises to growth or inflation could have markets running back their rate cut views,” it concluded.
