Decelerating inflationary expectations plus a limited increase in unemployment
The good news on the recent deceleration in inflationary expectations is many major central banks have likely finished tightening their official cash rates. The five English-speaking central banks tabled below have, on average, tightened on 12 separate occasions to 5.07 per cent. Australia is the outlier, at 4.35 per cent.
|
Country |
Date of first tightening |
Number of “tightenings” |
Current Cash rate (%) |
Peak Inflation Reading (%) |
Most recent Unemployment rate (%) |
|
New Zealand |
6/10/21 |
12 |
5.50 |
7.3 |
3.9 |
|
USA |
17/3/22 |
11 |
5.25 |
9.1 |
3.7 |
|
UK |
16/12/21 |
14 |
5.25 |
11.1 |
4.3 |
|
Canada |
3/3/22 |
10 |
5.00 |
8.1 |
5.8 |
|
Australia |
6/5/22 |
13 |
4.35 |
7.8 |
3.7 |
|
Average |
|
12 |
5.07 |
8.7 |
4.3 |
After peaking at an “average” rate of inflation of 8.7 per cent, there has been good progress from each of the five English-speaking countries over recent quarters, with the average reading currently at around 4.0 per cent.
The encouraging news is the unemployment rate has risen mildly to an average 4.3 per cent, and if we take the outlier (Canada) out of the equation, this would be sub 4.0 per cent at the time of writing.
And these two factors – decelerating inflationary expectations and a minimal increase in unemployment – is driving the consensus view for a “soft economic landing” in 2024.
The current consensus view assumes a scenario whereby central banks don’t take their foot off the proverbial brake too “early”, inflationary expectations continue to decelerate, and there is a limited increase in the rate of unemployment. If this persists, the strong market rally late in the 2023 calendar year could easily continue over the medium-term.
Some argue the recent enthusiasm and relatively high market valuations imply the “soft landing” has been discounted. History shows official cash rate “tightening cycles”, which counter higher inflationary expectations, mostly end in a hard landing. And don’t forget, any significant move in the rate of unemployment is often a lagging indicator.
U.S. ten-year treasury bonds, after troughing at a record low of 0.5 per cent in mid-2020, backed up all the way to 5.0 per cent in mid-October 2023. In recent months, as the deceleration of inflationary expectations has become consensus, they have rallied back to sub 4.0 per cent. While it appears the U.S. budget deficit to GDP ratio is trending higher, keep an eye on the U.S. bond market for greater insights.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
