As we sit here and watch our overseas central bank counterparts move on interest rates. Our central bank gave us a new term, to explain why rate cuts are a long way off in their thinking. This term “sustainably” – that is “sustainably back to target”, “sustainable path”, and a hundred other zingers that basically point out that the central bank doesn’t think we are returning to the target band of its inflation mandate.

Yet despite this language and rhetoric, the movement in the market is – muted, bordering disobedient. The movement in the AUD has been strong as seen in the chart below. But that is basically down to the news out of China, (which we will come to later) and the US Fed finally pushing the trigger.

But domestically - the interbank and bond markets see rate cuts much sooner than the Board does, and if you look at the differentials between the RBA and the rest, there is a strong argument that the uptick in the AUD should be more than has occurred. What are we missing? So, what is it that the market sees that the RBA is missing?

Or more importantly – what does the RBA see that the market isn’t taking as seriously? First – we need to really drill into the August monthly inflation read, because there is some reasonable dispute between Board and Market. The headline monthly inflation rate fell to 2.7% and marks the first time in the post inflation era that Australia’s inflation has been back in the target 2% to 3% band.

Couple this with its decline from 3.5% in July and 4.0% in June. Thus, maybe the market has a point as it marks the lowest annual inflation rate since August 2021 and a sharp contrast to the 8.8% peak in December 2022. Which is why a lot are crowing about this chart from the ABS.

This may seem like a positive sign that inflation is under control and is ‘returning’ to a sustainable level, under the hood of the headlines, the data tells a different story. For example: The monthly index recorded a 0.24% decline between July and August, after a ‘no change’ from June to July. This decline is mainly down to a 0.58% increase in prices last August falling out of the 12-month calculation, so that is a one of and would be transitory and not sustainable.

We are also about to see another technicality happen this month when a similar 0.58% increase from September 2022 drops out. Even if we see a modest 0.2% rise between August and September, the headline inflation rate will likely fall further, potentially reaching 2.3% by September. This is a ‘seller beware’ issue for traders, bears will make a lot of noise about this but the RBA has made it clear here, it’s not for moving.

Next example: the August inflation drop is largely attributed to temporary relief measures. The whopping 14.6% decline in electricity prices in August was a direct result of the federal government’s $300 energy relief measure. The Queensland and WA state governments threw in $1000 and $400 respectively adding further downside in energy inflation.

Interestingly enough – since this has been pointed out the government has stated it might make the subsidy ‘semi-permanent’ again this is artificial and something the Governor has stated is transient. Finally August saw a 3.1% fall in petrol prices due to lower global oil prices – something that is likely to hold true for most of September but the increase tensions in the Middle East over the past week and China properly stimulating itself for the first time in the post COVID world coupled with the approaching Northern hemisphere winter that 3.1% reduction will be quickly returned. These highlight why the RBA never really pays much attention to headlines month-to-month quarter to quarter as it bounces around randomly.

And AUD traders in particular would be prudent to remember this. Stuck like a fly in a honey pot The catch with chasing the headline inflation figure is that although it may be back within the RBA’s target band the critical trimmed mean inflation rate, which excludes the most extreme price movers, is not. The trimmed mean rose by 3.4% over the year to August, down from 3.8% in July and 4.1% in June.

Now some will argue that is close to the band, but it’s still significantly above the RBA’s target range midpoint of 2.5% which is seen as the magical ‘sustainable’ point the RBA needs. For more context if we collate the first two months of the September quarter, the calculated annual underlying inflation rate sits at 3.6% even further away from the band and mid-point. The RBA’s most recent Statement of Monetary Policy forecast expects this to ease to 3.5% by the December quarter.

A full 1% above the midpoint illustrating just how stubborn inflation has been to budge. It’s even more of a headache when you look at where the stickiness sits Have a look at service-based inflation of education, health and financial services – these are all over 5% year on year. Then have a look at the housing.

Rent increases are still sitting at 6.8%, New dwellings 5.1%. These five things make up more than a third of the total CPI basket. There is nothing sustainable about these figures.

RBA versus the Market The RBA has been a pain to point out the issues of ‘purchasing power’, that long term issue of cost compounding on themselves and making essentials unattainable in the long run. This old adage is running through our heads: “short term pain for long term gain” thus from our views interest rates are staying on hold for the rest of 2024 as the RBA seems determined to make the inflation rate fall further before acting. Yet you wouldn't know it judging by the perception in the market - it is still pricing in a near enough to 75% chance of a rate cut at the December meeting.

How is that conclusion being reached? If we take what has been stated by the RBA as ‘baseline’ there is next to no information the RBA sees between November and December that would justify a cut especially if they do not cut in November. The only piece of additional information is the September quarter GDP figures (due first full week of December).

If that was to register a contraction and a recession is on the cards then maybe. That’s the only data that could trigger the RBA this year – but considering Government spending in this quarter is so large, the consumer will have had to really bottomed out and retail sales while poor are not that bad. With this in mind there is a real justification for the AUD to be higher than it currently is.

Each time we see another piece of data that is weak but not weak enough should be an upside mover for the currency. We are not normally ones to fight the market as the trend is your friend, and we are not considering the AUD has moved some 3.8% in September alone. It's more – we think the upside has more to go as the market realises it under-pricing a more hawkish RBA and it isn’t going to deliver Australian debtholders a Christmas present.

Will June be the turning point? The market thinks it is – and its reaction to the CPI data not only signalled how it will trade in the coming months. It also showed that traders are primed to rotate to even more bullish positions.

Because from the market’s perspective September is now more than live its near enough to a lock for the Fed to cut rates. The Data: Core CPI (excluding food and fuel) saw an anaemic rise of just 0.065% month on month falling well short of the 0.2% consensus. Key component of the slowdown was in owners’ equivalent rent (OER) to 0.28% month on month, with primary rents decreasing to 0.26%.

This is the first real piece of data that is shown shelter is finally bucking its upward trend and moving to the lower side. But it wasn't the only good news in the data. Core services prices, excluding rents and OER, dropped by 0.07% month on month.

Its lowest level in over 12 months. Hotel prices declined by 2%, while airfares saw a significant 5% drop. Recreation services decreased by 0.1%, while personal services rose by 0.9% month on month, driven by a 4% spike in legal services.

Core goods prices dipped by 0.12% month on month, with used car prices down 1.5% and new car prices falling 0.2%. Apparel prices crept up 0.1%, but furniture prices fell 0.2%. Overall the core CPI P data should give the Federal Reserve that bit more confidence that it's returning to target and that its rate cut cycle can begin sooner than probably forecasted.

Moving to headline CPI for the first time in more than four years monthly inflation dropped down 0.1% month on month and eased to just 3% year on year a 12-month low which also happens to be the three year low. There's a pretty good reasonable explanation for this we saw a 3.8% slide in petrol pricing which held inflation back and offset the 0.2% increase in food and shelter. So it's not completely clear cut The Fed can cut rates in September.

But we digress because the market is suggesting it will treasury yields tumbled off the back of this you only have to look at the three year and the 10 year to understand that right cuts not only are they coming but are coming in waves. It really dropped into further FX trading with the US dollar once again under real pressure. The US dollar Is something that we are still wary of there is definite downside in certain pairs.

AUDUSD, NZDUSD have pretty clear reasons to see the appreciation bullishness that has been transpiring. But we're not as confident in EURUSD GBPUSD or even USDCAD. The other trading reactions of note With the CPI slowdown being more pronounced than anticipated, especially in shelter prices, which saw a 0.27% increase in owners' equivalent rent, akin to pre-pandemic levels.

It does also put first quarter CPI into the box of being a blip rather than the trend. We think one of the more interesting trading movements off the back of the June CPI was the rotation out of mega caps and into small caps. One of the reasons the S&P 500 and the NASDAQ hoping so strong since October last year Has been on the premise the Fed would cut rates in 2024-2025.

However realistically has been driven by the magnificent 7 particularly NVIDIA, Apple, Meta and Microsoft. So much so that it's actually papered over issues in industrials another non tech exposed sectors that have move no idea the level that the tech sector has. There's a big question that’s been building what happens post the first rate cut?

Its been driving the bullishness in equities but once it becomes actual what next? There's been somewhat of an answer in the trading post the CPI data which showed the S&P 500 and the NASDAQ declining well the Russell 2000 jumped. The suggestion here is the market is looking to move into even more bullish positions in equities but also to cash in on the anticipated first rate cut that has been developed since October 2023.

We think that is a trade we need to be mindful of because what may appear to be good news with regards to the right cut cycle beginning is probably already priced in. Multiples in the US markets are high multiples in US tech stocks are incredibly high. Which reminds us of the old market adage buy the rumour sell the fact.

And maybe just maybe the trading post the June CPI data gave us a massive insight into what could happen in either the September or November Fed meeting months. But returning to the data we can't go past the other economic data that may have been missed that again muddy the calls for a September rate cut. The Labor Department reported that weekly jobless claims fell to 222,000 a further 17,000 decrease from the previous week.

Its the lowest level since June 1. Continuing claims dropped to 1.85 million. This suggests that although last week's nonfarm payrolls was much lower than expected the overall employment market is still firm.

Employment has been cited by the likes of San Francisco president Mary Daly as a reason to cut sooner rather than later. However if employment was to remain solid it could actually say a reverse of the trading that we've seen from the CPI data. It's why we remain vigilant and once again why we think the USD is a tricky denominator, and only have confidence in pairs that have clear central bank differentials as we explained last week.

We now await the data of the next two months heading into September 18 to confirm all these views.

We've held off making comments about the events of what happened last weekend. Everyone has seen it, everyone knows the horrible scenario that it was but it is probably also meant that we have missed really key economic and fundamental trading reasons U.S. markets are now in a very broad bull market scenario. Inflation It was only 10 weeks ago an unexpected surge in inflation meant the dominant question in markets was if the Fed would cut rates this year at all.

Some five weeks later it increased to one rate but is a distant memory of the three forecasted in January this year. That is now all changed downside surprises to the second quarter inflation and the continued rise in the unemployment rate have not only met cuts are likely but for the first time in 10 weeks the market is now forecasting 100% likelihood of a September rate cut. Seen here: Source: CME FedWatch In fact, as this chart shows there's even expectations that it may not just be a 25 basis point cut it could possibly be more.

Remember the current federal funds rate is 525 to 550 basis points. As we've said before in this trading US series, once the US Federal Reserve starts its right cutting cycle, it is unlikely to stop until it reaches the neutral rate. Expectations are building from investment houses that there could be a possible rate cut in 2024 that being September and December.

This is at least the consensus some are even suggesting that November could be included as well seeing the January forecast coming to fruition. Will understand this more tonight when governor Waller presents and adds a function but it's likely that he will back chair Powell's comments on Monday that ‘rights will need to be lower by the year end’. We think this is what is being missed over this week in relation to the bull market in equities and the change in FX and bond markets.

You only have to look at the Russell 2000 to understand this change. The industry is now up over 12.5 per cent in the last month alone and 7.5 percent of that has come in the last seven days. Compare that to the NASDAQ for example which actually sat still over the same period.

This is due to the rotation trade based on right cut expectations not the Trump trade. Remember small cap firms are much more reliant on capital borrowings and thus much more susceptible to interest rate movements. The index has been much unloved over the last trading period as small caps have been left in the dust due to their risk and exposure to rate.

But with the prospect of right cuts plural, the attraction to risk the attraction to rotate out of fully valued trades makes sense. Here is the performance of the Russell 2000 S&P 500 and the NASDAQ over the past seven days Source: Refinitiv - White: Russel 2000 Yellow: NASDAQ Blue: S&P 500 What will be very interesting to see is something like NVIDIA becoming a funding source as it is begun to show evidence of being. We see in NVIDIA, Meta and Microsoft falling into this funding category over the coming weeks, as traders move into higher risk.

What we think might catch them out is earnings. Earnings This brings us to the second part of what is driving U.S. markets. Earning season so far and yes, it's a small sample size, has been astounding.

All have been at the upper end or above the Street View. You only have to look at JP Morgan, Morgan Stanley and most of the other major banks to see this. The bellwether Caterpillar, a forgotten darling, showed just how well it is doing in this ‘soft landing’ economy and surged over 5 percent on its results.

Again explains the rotation out of the magnificent 7 and into other sectors something we foreshadowed in part one. How it is also a warning sign, the probability that NVIDIA and the others beat expectations is high. The question we need to ask is will it be high enough?

As if the markets rotating out now could it become reporting day traders have to catch up to better than expected numbers and miss out on a possible next leg? It is something to ponder yourselves as you look to position for what is clearly going to be a strong US earning season. This brings us to Apple.

News this week that it achieved $8 billion in sales in India is something that can't be ignored. India is a market that Apple has severely underperformed in over the last several decades as its main competitor in Samsung took hold with cheaper more compelling phones. However, all that has changed since COVID, the interruptions it experienced taking supply chains out of China have seen it diversify into the world's second largest populous country.

There is only upside for Apple in this space. Secondly data this week showed how well it is now integrating AI into the Apple ecosystems. The links between its watch, phone, eyewear, laptop and iOS systems are strengthening by the day.

It is clear that over the next five years AI will make the ecosystem more intuitive and more attuned to everyday use. Thus making apple products that much more attractive and that much more needed by its mature and evolving marketplaces. This explains why Morgan Stanley this week suggested that in the coming two years Apple could become a $5 trillion company.

Apple is up over 20 per cent in the last month, and it could be the one that confirms the bull market in the US he's going to be sustained. These two points alone explain why the Trump trade is not the trade driving markets. Yes there is an influence and yes it is something we will talk about over the coming months leading into the US presidential election.

But we want to be clear that what really is happening with the Trump trade is behavioural bias and it is blocking out the clear rational evidence that is driving things and thus don't be distracted by what you see. Concentrate on the concrete evidence that's in front of us.

Over the coming 48 hours and then over the coming 2 weeks, Fed speak and US data is going to be some of the best trading opportunities in 2024. It’s been a pretty low-vol year despite several events that would under normal circumstances be triggers for much larger fluxes in FX and bonds. But to date: that has not been the case.

Let's look at the first part of what will be a clear mover of the USD, bonds and US equities. Fed speak First off let’s review day one of Federal Reserve Chair Jerome Powell two-day semi-annual testimony to the Senate and the resultant reactions. To paraphrase the core, take outs from the testimony - Powell continued to spew out the lines around “inflation has significantly declined from its four-decade peak reached two years ago”.

Yet despite this improvement, “central bank officials require more progress before considering an interest rate reduction, while closely monitoring the job market.” Furthermore he also dropped this broken record line “We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Powell noted in his prepared testimony to Congress. During the hearing, he refrained from predicting a rate cut this year or specifying its timing, unlike previous comments. “The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%,” he added. All this is known knowns but what did create interest for us traders was this line that lit bond and FX markets up like a Christmas tree “Elevated inflation is not the only risk we face.

Reducing policy restraint too late or too little could unduly weaken economic activity and employment.” The reaction to this was clear, have a look at the impact this line had on the USD DXY – 1 minute chart AUD/USD at a 7-month high. It is chasing the 28 December high now of $0.687. From a trading perspective, the US CPI data on Thursday coupled with the employment data in Australia on July 18 and Australia’s CPI data on July 31 that could confirm if the pair do reach this point – on current forecasts – it’s probable.

The catch (seeming we will see over the coming day) is US inflation that has only just stabilised with last month’s data showing there wasn’t a price increase for the first time since November. It explains why it’s hard to argue that ‘we are not at a sustainable level’. It also explains why the dot plots for example are only one rate cut this year, down from the three forecasted in March.

But the dot plots do highlight that once cuts begin – there is likely to be a steady slide in the Federal funds rate. Thus, the start will signal the possibility of 6 rate cuts by the end of that said cycle. If we look at the Fed preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index.

It showed no monthly rise in consumer prices for the first time since November as well, with an annual rate of 2.6%, slightly down from 2.7% in May. But as New York Fed President John Williams highlighted just last week “Inflation is currently around 2.5%, indicating significant progress, but we still have work to reach our 2% target consistently,” said. This brings us to Thursday’s CPI data.

Core CPI data is expected to land at 3.4% unchanged from the May read, headline CPI is expected to fall to 3.1% from 3.3% and would be near the June 2023 low of 3%. Watch this space to anything below these two estimates and the USD will be off to the races. The other interesting part of Fed speak has been the pivot to employment and the risks of a ballooning unemployment rate.

Take for example Powell’s Senate testimony that the labour market has normalised but still faces risks. He compared the current job market to its pre-pandemic state, that being “strong, but not overheated.” This was backed up by showing that although the unemployment rate has risen to its highest level in over two years, employers continue to hire robustly. Couple this with the fact the gap between job openings and unemployed job seekers has significantly narrowed over the past year – a typical sign of a strong jobs market.

Senate Chair Sherrod Brown of Ohio however countered this with “I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the progress we’ve made in creating good-paying jobs,” Which brings us back once more to the statement the markets got most excited about – how long should it wait? Powell acknowledged the Fed’s challenge of balancing the risks of rekindling inflation by cutting rates too soon against the potential weakening of the labour market by waiting too long. The Fed’s dual mandate is to stabilise prices and maximize employment, noting a recent shift towards a balanced focus on both goals.

Is this a signal that September is live? Trading in the rates market now put the September meeting at an even chance of the first cut. Consumer behaviour suggest that the Fed might have lower borrowing costs.

US retailers have reported weaker-than-expected sales, and consumer demand has been tepid this summer compared to last year. So that is what the Fed is seeing – now we need to see the actuals backing this view – thus Part 2 of trading the US will be a deep dive into the CPI data and if there is enough evidence we are ‘sustainably returning to target’.

The basics: We are in the final weeks of the 2024 US presidential election. But what exactly are US citizens voting for and when will it actually take place? A US election always takes place on the first Tuesday of November – that means that for this year Tuesday, 5 November 2024, is when the election will be held, with the swearing of the next president of the United States of America taking place in the first week of January 2025 and will serve a 4-year term with the next election due in November 2028 for a swearing in in January 2029.

The electoral mechanics of a US election The President is not the candidate that gains the highest number of votes - known as the popular vote, just ask Hilary Cliton or Al Gore about this fact. The President is the candidate who wins the most ‘Electoral Colleges’. Each of the 50 US states and territories has a certain amount of electoral college votes allocated to it.

These votes are partly based on population densities and partly based on historical norms. The total number of electoral colleges across the country is 538 and thus the winner needs to gain 270 or more electoral college votes to win the Oval Office. Here is ‘Electoral College Map’ – each one of the numbers in each State is how many electoral college votes that State is allocated.

This is where it gets interesting, all but two states have a winner takes all rule. So even if the voting in Pennsylvania for example was 49.9% to 50.1% - the higher candidate would take all 19 votes for that State. There are two States that have a ‘split’ these being Maine and Nebraska.

As you can see in the map, these States have a split colour, in these two States some of the Electoral College votes can go to the lower voted candidate. However if there is a majority win all seats will go to the winner. These two have influenced elections in the past, however they are not expected to be in play this election.

The map currently shows five different scenarios. Those States that are solid towards one party or the other. Such as California (Democrats), and Texas (Republican).

Those States that are leaning towards one part of the other such as Colorado (Democrats) and Florida (Republican). Then there are those States that are the “Keys” to each election, the States that flip known as Swing States or battleground States. These have changed slightly over the years.

For example, the State of Ohio used to be known as the keystone State as every election up until 2012 which every party candidate Ohio voted for, won the oval office. It has now changed and is a lock for the Republican party. On the flipside States like Arizona and Nevada used to be locks for the Republican party; now they are swing States.

In 2024 there are 7 Swing States we see as the Keys to the election with one being the Keystone. They are: Wisconsin, Michigan, North Carolina, Georgia, Arizona, Nevada and the Keystone State of Pennsylvania. As things stand – Harris has solid and leaning State votes of 240, Trump has solid and leaning State votes of 225.

The seven Swing states have 93 so a combination of these will be needed for the candidate to cross the magical 270 mark. The Candidates Running as the Republican Party nominee is former president Donald Trump. He smashed his rivals in the primaries with a whopping majority and has been the presumptive nominee really since losing the 2020 election.

His vice-presidential running mate is Ohio senator JD Vance and is one of the youngest VP candidates in decades. Running as the Democrat nominee is current Vice-President Kamala Harris. Her road to the nominee has been unconventional as she joined the race after President Joe Biden dropped out and with no other Democrats standing against her no primaries were conducted.

Her vice-presidential running mate is Minnesota Governor Tim Walz, one of the oldest VP choices in decades although not as old as Trump himself. The Capitol The Oval Office is not the only thing up for grab on November 5, and although all of the attention will be on who wins the presidency. Congress which consists of both the House of Representatives and Senate will be up for grabs.

In the House of Representatives, all 435 seats are up for election. Currently the House is controlled by the Republicans, so a Trump Presidency with a Republican House would mean laws and spending directions would be easier to pass if the House status quo remained. But history shows that the house tends to swing every two years and having won the house in the Midterms the Republicans would be nervous of history repeating.

In the Senate 34 seats are being contested. There are 100 seats in the Senate rotating every 6 years. The Democrats currently control the Senate 51 seat to 49 and it's likely to also be hotly contested come November 5 and like the House anything is possible.

Trading the Day We think 2024 is likely to be similar to 2020 where the true result wasn’t known for several days. As the polls show 2024 is going to be one of the closest elections since WWII all votes will need to be counted before the winner is declared. We will be closely watching the seven Swing States for any signs one candidate is doing better than the other as this may provide a clearer picture of just how everything could play out.

But with postal votes and early voting slips in places like Michigan and Pennsylvania being counted last on the day they are likely to drag out the timeframes. We will also be watching key updates such as exit polls. The likes of Pennsylvania, North Carolina and Georgia have previously hit the newswire around 11am AEDT.

In 2016 these States moved in Trump’s favour and famously saw the betting agencies wiping their markets for several minutes before returning with Trump a favourite over Clinton having been outside odds all campaign. At around 2pm AEDT Midwest Central States will start to declare keep these times in your diaries. Watch for movements in DXY.

The dollar basket in the 2016 election was volatile as a Trump presidency was seen as an ‘unknown’ however very quickly after the event it was bid up as his policies and market friendly mantra lead to strong inflows. As he is a “known known” in 2024 this may not be as big a mover as 2016. However, it’s likely the USD will shift higher any perceived good ‘Trump news’.

Be aware of false dawns. All elections have false dawns with pre-emptive calls, biased interpretations, early ballot boxes showing big swings to one candidate due to small vote numbers. The list is long.

These are trader traps, remember the election will not be over inside the Australian business day as West Coast States only close as we finish the day. Take your time to do your research with reputable news outlets tuned in to players like Bloomberg, Politico, CNBC, 538.com and Silver Bullet. International media stations like the BBC and our own ABC are likely to be impartial and news only focused.

Over the coming weeks leading into the November 5 election, we will be here to give you as much information as we can as to what is moving markets from the US election 2024 with this as our dedicated landing page. (link or whatever you guys want). So welcome to trading the US Presidential Election with GO Markets.

We will do a deep dive into how to trade the upcoming US Federal Reserve meeting on Wednesday but for now we need to address the Fed and others from an Australian traders perspective as it is one of 3 plays we need to be mindful of. 1. Hard or Soft – Can we stick the landing? All central banks across the developed world are doing summersaults, with a one and half twist to land their respective economies with a soft landing.

And this is increasingly seeing them align towards coordinated easing – barring the RBA more on that later. The debate between soft and hard landings in the global economy is accelerating. For example, traders have begun to notice that there is a switch in trade from the previously held trade of bad economic data that was often seen as good for risk assets, as it increased the likelihood of monetary easing.

To the now, poor data is also being traded as negative for risk, reflecting growing fears that economic weakness could be deeper and more prolonged than anticipated. We have highlighted this point through the US employment data and the slowing numbers in GDP. Equity markets clearly believe they will stick the landing with record all -time high trading in the DOW, S&P and most other major bourses including the ASX 200.

But they have yet to fully account for the potential downside risks of a hard landing scenario. In fact, equities have a bigger divergence that could spell trouble if central banks get it wrong as it is really only a small group of high-performing sectors or stocks that are driving gains, while many others lag. This narrow leadership, combined with elevated valuations, raises concerns about the market's vulnerability should the hard landing scenario materialise.

This brings us to Thursday’s Federal Reserve meeting – it will cut the expectations for a 25-basis point cut at the upcoming September meeting sits at 42 percent the bigger 50-basis point cut sits at 62 per cent. This has led to increased debate around market positioning and sector rotation. The Fed’s recent communications have largely endorsed the beginning of an easing cycle at a slow pace.

But that hasn’t stopped traders putting in an upward repricing - the bull steepening of the yield curve, particularly led by short-term yields, as markets anticipate rate cuts. This steepening trend, which began in earnest in late June, is significant because it reflects a growing belief that the most acute phase of the economic slowdown, and the associated recession risk, may be over. Take the US 2-year and 10-year yield curve which has been inverted.

Traditionally, an inverted yield curve signals a looming recession, but the recent return to a more normal curve suggests that the period of waiting for a slowdown and/or recession may have passed, and markets are now pricing in the economic consequences of monetary easing. Historically, during periods of bull steepening, certain defensive sectors such as Healthcare, Utilities, Banks, and Staples have outperformed, as investors shift towards sectors that offer stability and reliability in times of economic uncertainty, but that hasn’t happened – suggesting a gap is forming. Looking closer to home - the typical sectoral performance associated with yield curve steepening has only partially played out.

Just have a look at the Tech sector, it has significantly outperformed this year, a divergence from its usual underperformance during such periods. This divergence is largely due to the impressive growth execution couple that with their larger capitalisations in this cycle has made them a substitute for the quality growth traditionally offered by Healthcare. Looking forward, should the yield curve move from bull steepening to bull flattening (where the long end of the curve leads the decline), leading sectors are expected to shift.

In a bull flattening trade, sectors such as Real Estate and Materials typically emerge as leaders, creating the potential for broader equity market gains. This scenario is currently the most plausible case for broadening equity returns and driving further upside in the market index. 2. Commodities: Mind the thud While financial markets are pricing in the possibility of a soft landing, commodity markets are facing a much more severe test of the hard landing so hard it might be considered a ‘thud’.

The cost curves for key Aussie commodities, such as Iron Ore and Metallurgical Coal, are being battered by soft global demand and oversupply dynamics particularly out of China. These cost curves are being tested as commodity prices struggle to find support amid concerns over an economic slowdown. This is certainly the scenario BHP and Rio are seeing and have factored this into their forward guidance numbers.

Then we look at global commodities - oil inventories have reached levels typically associated with recessions, further signalling the market's concern over weakening demand and OPEC’s recent communiques suggesting it will halt its planned increases in output. We also have a scenario not seen in the modern era, a China story that isn’t working. China’s economic policies are under intense scrutiny, and the country’s growth trajectory will significantly impact global demand for key commodities in the coming year.

The negative price signals in the commodities space stand in sharp contrast to the more optimistic outlook being priced into equity markets. While equities suggest a soft landing is still the base case, commodities are flashing red with alarm as price weakness implying deeper demand concerns and thus issues around growth. This divergence raises the risk of a sharper reversal in positioning, particularly in resource-linked equities.

The caveat to this is the ongoing capital constraints on supply, combined with the potential easing of demand concerns as monetary policy softens, could set the stage for a recovery in certain commodity markets. If this was to play out, broad exposure to large-cap Energy stocks, particularly in Oil and Uranium, as well as to large-cap diversified Materials and Gold could be beneficial, as these sectors are well-positioned to benefit from any eventual recovery in global demand. 3. RBA’s Easing Path – When not If The Reserve Bank of Australia (RBA) continues to chart its own path.

It’s cautious approach that prioritises inflation risks has been the core principle of RBA Governor Michele Bullock. And despite mounting expectations for a faster easing cycle, the RBA has so far resisted pressure to cut rates aggressively stating that controlling inflation is far more important than short term growth concerns. Investors are divided on how quickly the RBA will move to ease policy.

While the central bank has maintained a patient stance, market expectations are pricing in a full rate cut by February. The consensus view is that the RBA will ultimately follow the lead of other central banks and cut rates sooner than currently forecast, with some expecting the easing cycle to begin well before the RBA’s projected May 2025 timeline. But whenever it starts – all are of the same view, once they start it will signal a solid period of cuts.

The consensus is that come December 2025 – the cash rate will be 3 percent not the current 4.35 per cent we have. The RBA’s decision-making will come down to the economic landing all are facing. Should a hard landing materialise, the RBA may be forced to cut rates faster to support the domestic economy.

However, if a soft landing prevails, there is every incentive for the RBA to remain behind its global peers in cutting rates. This approach (which is the current one taken by the RBA) would help support the AUD. It would also help in reducing the inflationary pressures from imported goods, while also allowing the labour market to cool and consumption to weaken, preventing a rapid reacceleration of inflation once policy is eased.

For equity markets, the RBA’s cautious easing profile suggests a prolonged period of below-trend growth. This would delay the cyclical uplift in earnings that is needed to justify current market valuations. As a result, it can explain why the ASX keeps hitting resistance at around 8100 points, there is no catalyst to push it higher.

While the easing cycle will eventually provide a tailwind for equity valuations, the current environment of slow growth and cautious monetary policy implies that significant market gains are unlikely until later in the cycle.