Why 2024 could turn out to be the ‘Goldilocks’ year

The year 2024 may be shaping up to be the “Goldilocks” year for interest rates, house prices and the stock market: where everything turns out to be “just right”.

On the face of it, this year could be the one in which markets normalise after years of inflation-fuelled chaos.

US Federal Reserve chairman Jerome Powell is expected to start cutting rates this year.
US Federal Reserve chairman Jerome Powell is expected to start cutting rates this year.Credit: AP

That said, crystal ball gazing is a hazardous endeavour – with events such as two wars and a pandemic blowing up the status quo over the past five years.

And this normalisation is predicated on the international and Australian economies continuing to duck a recession and navigate a soft landing.

In most respects, 2022 was the year that inflation became the enemy and central banks fought using rising rates for ammunition – and equities markets and house values were collaterally damaged.

In 2023, sharemarkets whipsawed throughout the year, but experienced a rush of enthusiasm in November and December, and in Australia, nudged near to a record close as the Reserve Bank made solid strides towards taming inflation.

Australia has lagged the rest of the world in raising rates and will be one of the last to begin the easing cycle.

But it wasn’t until the end of 2023 we also got a glimpse of the possibility that rate rises in Australia might be finished.

Roughly three-quarters of major Australian economists believe the Reserve Bank will leave interest rates on hold in February, and the remainder are betting on a rate rise.

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And we will get a better feel for which of these competing views is more likely on Wednesday when the latest monthly inflation number is published.

Regardless, the consensus is that even if the Reserve Bank raises rates in February, it will be the last in this cycle.

The prospect of rates being cut in the US this year should drive further gains in the sharemarket in 2024 – despite the wobbly start in January as traders adjusted their expectations that the easing of interest rates might be more gradual than anticipated.

A rising US equity market sets the tone for the Australian market which will follow it directionally.

House prices were the big upset in 2023. Despite a rash of rate rises, house prices defied gravity and recovered the previous year’s losses and then some.

However, by the end of 2023 the house price momentum was losing steam and values nationally were limping along. In Melbourne, they have fallen marginally for a few months.

This year, the property market will again be the subject of competing forces – a shortage of housing that will act as a tailwind to prices and elevated interest rates that act as a headwind.

No more dog days: Prices heated up again in 2023, but seem now to be cooling off.
No more dog days: Prices heated up again in 2023, but seem now to be cooling off.Credit: Jason South

So in theory at least, property prices won’t move too much. If Australia continues to bring in record numbers of immigrants, prices could move up, but in all likelihood, migration intake will stabilise and values will drift down.

The majority of people with a mortgage have managed to handle higher interest rates in large part because they have held on to their jobs. If unemployment becomes a problem it will produce a domino effect – but to date, the jobs market has remained relatively strong despite a softer economy.

While markets in the US are confident that interest rates will fall this year, the timing is debatable. They had priced in six cuts during 2024, but the Federal Reserve has pushed back against this level of optimism and the expectation that the first cut will be delivered in March.

That said, rate cuts in the US are almost certain in the first half of calendar 2024.

But Australia has lagged the rest of the world in raising rates and will be one of the last to begin the easing cycle.

When the Reserve Bank does eventually begin to cut rates, it will provide further support to house prices, but this probably won’t take place until late in 2024. However, we could even see a long period of interest rates remaining where they are.

While markets and central banks don’t always follow the script, the foundations are in place for a positive 2024.

Let’s see how it plays out.

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Source: Thanks smh.com