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Markets recalibrated expectations for the timing and extent of rate cuts in the US. Combined with greater circumspection on asset price valuations in the technology sector, the NASDAQ generated a more subdued return of 3.7%. Improved tariff outcomes for Japan and Korean reform of the Chaebols led to outperforming equity market returns of 12% and 23% respectively. The Australian market fell 1%. Surging Australian government bond yields and stronger commodity prices led by gold (up 12%), copper (up 18%) and coking coal (up 14.0%) contributed to a higher Australian dollar. Silver rose 52%!

 

At its October and November meetings the Federal Reserve Board (FED) cut interest rates 25bps on each occasion to 3.62%. The gradual cooling in the US labour market continues. Employment growth remains tepid compared to the first half of the year. Nevertheless, Chicago Fed president, Austin Goolsbee, said in November ‘I am nervous about the inflation side of the ledger, where you’ve seen inflation above the target for four and a half years and its trending the wrong way.’ There is concern that migration is constraining labour supply and that investment is pouring into AI instead of where it is needed, in logistics and power supply. There is the possibility that the Fed will be frozen by upside risks to inflation and downside risks to jobs.

 

A risk is emerging that Chinese GDP growth may fall below the 5% level in 2026. Home prices continue to decline leading to lower property investment. Other areas of investment are showing weakness. For example, electrical machinery and chemical manufacturing investment have seen falls. Exports remain strong even in the face of tariffs as alternative markets are targeted. The extent to which other geographies can continue to compensate for lost exports to the US market is questionable. In response to waning growth issues, the administration has announced its new 5-year plan. Focus is on technological development and the scaling up of related industry. Further, the administration is looking to boost the weak consumer sector through improvements in ‘people and livelihood’ and promoting the high-quality development of the real estate sector.

 

The Japanese economy declined less than expected in the third quarter, to be down 0.4%. Good domestic demand cushioned the impact of lower exports and investment. The Bank of Japan (BOJ) governor, Ueda raised rates in December by 0.25% to 0.75%. The economy is likely to benefit from a renegotiated trade agreement with the US. On the 21st of October, Sanae Takaichi was appointed Prime Minister of Japan.

 

The European economy remains stable and is growing at steady pace. Third quarter GDP was revised upwards to 0.3%. The UK economy grew at 0.1% in the third quarter and the Bank of England (BOE) cut rates by 0.25% to 3.75% with recent inflation readings subdued.

 

The third quarter GDP release for Australia masked stronger underlying growth with 0.4% recorded. Inventory drawdowns underscored stronger domestic demand, which rose 1.2%. Business investment was notable in its participation. The focus of that spend on data centres raises questions of sustainability. Nevertheless, the balance of probabilities point to a gradually building recovery in the Australian economy. Meanwhile, surprisingly strong inflation data in December points to the possibility of a more broadly based pickup in inflation. Combined with signs of stronger private investment, the Reserve Bank (RBA) decided to keep interest rates at 3.60% during their December meeting. Discussions on the outlook for short-term interest rates now include the possibility that the next movement in rates will be up.