by BeiChen Lin, Russell Investments
Executive summary:
- U.S. consumer-price increases during October matched consensus expectations
- The latest snapshot suggests a relatively healthy Australian labor market
- The S&P 500 Index hit another record high
On the latest edition of Market Week in Review, Investment Strategist BeiChen Lin examined the U.S. inflation numbers from October as well as the state of the Australian labor market. He also discussed what the recent strength in U.S. large cap equities might mean for investors.
The latest on U.S. inflation
Lin began with a look at two recently released U.S. inflation reports: the consumer price index (CPI) and the producer price index (PPI). Starting with the CPI, he said that the October numbers matched consensus expectations, with the core CPI rising 3.3% year-over-year and 0.3% month-over-month.
“Importantly, even though core inflation CPI rates are significantly lower now than in the 2022-23 timeframe, they’re not all the way down to the U.S. Federal Reserve’s (Fed) target rate of 2% just yet,” Lin remarked. On the producer side of things, he said that the PPI for October came in a bit hotter than consensus expectations.
Lin noted that the Fed’s preferred inflation gauge—the core PCE (personal consumption expenditures) price index—will be released on Nov. 27. This measure incorporates data from both the CPI and PPI reports, he explained. “Putting these two latest reports together suggests that the core PCE reading for October will likely come in still above the central bank’s 2% target,” he remarked.
Looking ahead to 2025, Lin said he thinks core inflation will eventually return to 2%, but noted that the path toward disinflation isn’t always going to be linear. “Just like we saw with the October numbers, there could be some months in the year ahead where the disinflation trend pauses for a bit,” he stated.
When could the Reserve Bank of Australia begin cutting rates?
Shifting to Australia, Lin said that job growth during October came in slightly under consensus expectations, with approximately 16,000 jobs added last month—compared to projections for 25,000 new positions. Overall, however, the Australian labor market still looks relatively healthy, he said, noting that the country’s unemployment rate stands at 4.1%.
“While this is above the recent low of 3.5% seen in June 2023, in a historical context, 4.1% is still a relatively low unemployment rate,” Lin stressed. He noted that wage pressures also moderated during the third quarter in comparison to the second quarter and were somewhat softer than anticipated.
So, what could all of this mean for potential Reserve Bank of Australia (RBA) rate cuts? Lin said that while the central bank hasn’t started easing just yet, these latest developments suggest that the rate-cutting process might begin in the near future. “I think the RBA could start lowering rates either later this year or in early 2025,” he remarked.
S&P 500 sets another record high
Lin finished by noting that U.S. large cap equities have once again been hovering near all-time highs, with the S&P 500 Index establishing a new closing record of 6,001 on Nov. 11 before dropping slightly later in the week.
With the benchmark index repeatedly setting new highs this year, Lin said it’s only natural for some investors to wonder if a pullback could be around the corner—and if they should consider underweighting U.S. equities in their portfolios. However, he stressed that he doesn’t believe now is an appropriate time to do so.
“It’s true that on most equity valuation measures, U.S. large cap equities look somewhat overbought—and it’s also true that they appear somewhat overbought from a sentiment perspective too. But I think it’s important for investors to remember the equity risk premium—the idea that in the long run, investors are generally compensated for taking on the risks associated with investing in stocks,” Lin said. He noted that although he sees some headwinds for equities from here on out, he doesn’t think that U.S. markets have reached an unsustainable extreme just yet.
“At Russell Investments, our philosophy is that unless markets reach this level, we don’t think investors should make large tactical tilts in their portfolios. Instead, in light of today’s market environment, we think investors might benefit from just rebalancing back to their strategic asset allocations in order to help preserve some of the gains in their equity portfolios,” Lin concluded.
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