The market has eyes only for Trump

Pendal

November 2024

SEPTEMBER quarter wages data (the Wage Price Index) was released today and, for the third quarter in a row, sat at 0.8%.

This sees a 3.2% annualised pace, though the 1.1% outcome from the 2023 December quarter keeps the annual rate at 3.5% for now.

All sector WPI, quarterly and annual movement (%), seasonally adjusted (a)

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

Both private and public wages rose 0.8%. A key factor was awards and minimum wage outcomes, which were set at 3.75% in June, down from 5.75% the previous year.

This would be very welcome news for the RBA.

Wage growth and underlying inflation are now heading back towards 3%. Given the two feed into one another, it reflects a more sustainable path for the medium term.

Recent RBA forecasts have underlying inflation at 3% and wages at 3.4% by June next year.

If the RBA has more confidence in reaching these levels sooner, it opens the door for rate cuts in the first half of next year.

Outlook

In another time or place, this data would have seen a decent market rally. But the market has eyes only for the future of Trump's presidency.

This future is viewed as one of increasing government debt and higher tariff-led inflation in the US, feeding out into the globe.

As a result, markets now have only 30% chance of an RBA February rate cut and less than one cut by mid-year.

On domestic factors alone, this is very cheap, but reconciling it with Trump is proving the problem.

We think the Trump impact will be more mixed outside the US.

Australia's trade deficit with the US should see us well down the list of targets, but key trading partners are at the top of the list.

Either way, Trump's policies are unlikely to hit hard data until the back half of 2025 at the earliest, making central banks' jobs more difficult for now.

We maintain the view that upcoming data leaves a February rate cut wide open.

At only 30% priced in, the risk/reward is becoming attractive, and we will use the sell-off as an opportunity to enter positions.

Further out the curve remains at the mercy of US bonds which, even at 4.5%, don't seem to be finding widespread support.

Australia should outperform but yields may still move higher.

Author: Tim Hext

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