After a strong finish to 2023, equity markets continued to push new highs in 2024 on the hope interest rates would reduce earlier than expected. By mid-April sentiment changed to cool the run on the back of strong economic data, continued strong government spending, ongoing high immigration (injecting extra demand) with the prices of goods and services (e.g. building costs/labor & home/car insurance >12% pa price rises) nullifying any hope inflation was reducing. A few years ago, a former RBA Governor said interest rates are a very blunt object to tame inflation and generally only effective when matched simultaneously with a tight Government fiscal (i.e. lower spending) policy. It seems we are seeing the Yin and Yang of this equation play out. In recent investment briefings, a few managers are suggesting inflation has only entered its first phase and there is every chance inflation will strengthen as we enter the next election phase (US and Australia) where there is unlikely to be any material spending restraint (and could be further expansionary). If this eventuates, asset prices may continue to run strongly for longer with the possibility the central banks need to use more of their ‘blunt tool’ in interest rates to do the heaving lifting. Turning to the short term and a few specifics, there is good news for many with Stage 3 tax cuts starting on 1 July 2024 which will put more money in people’s pockets and those who are fortunate to be asset rich are likely to be better off as has occurred in historical periods of high inflation.
