Monthly Market Commentary

Last updated: June 2024

Economic overview 

Australia – Signs of CPI rising?  

Data released over the past month was broadly indicative of slowing in economic conditions. Q1’24 GDP was barely positive at +0.1% Quarter-on-Quarter (QoQ), bringing the Year-on-Year (YoY) pace to 1.1%. In comparison GDP per capita recorded its fourth consecutive fall (-0.4% QoQ) with population growth outpacing economic growth. Meanwhile, business surveys presented a mixed view with some surveys noting ongoing challenges for consumer-facing retail and recreational service sectors, whilst other surveys were more positive, particularly among services firms.

Inflation grabbed the most attention with the Monthly CPI Indicator for May rising to 4.0% YoY from 3.6% in April, with food, alcohol & tobacco, housing and petrol among the key drivers. Core measures of inflation remained elevated but broadly unchanged. Meanwhile, the Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% at its June meeting, reiterating to remain “vigilant to upside risks to inflation” but also “not ruling anything in or out”.

International – More developed market central banks cut rates

Data releases over the past month indicated slowing growth across most global economies. In terms of US expenditure, consumption appears to be slowing with retail sales weakening, especially among housing-related categories such as furniture. Within US production, the services sector continued to hold up despite some weakness in the manufacturing sector with anecdotes of slowing export orders emerging. Slower exports were also evident in the Eurozone, with manufacturing business surveys confirming these trends. There were further signs of inflation slowing in the US with the Federal Reserve (Fed)’s preferred measure of inflation declining to 2.6% year-on-year (YoY) compared to the Fed’s 2% p.a target. We are seeing a comfort to cut interest rates amongst other developed market central banks in June, with the European Central Bank (ECB), Bank of Canada (BoC) and the Swiss National Bank (SNB) cutting rates by 0.25%. The Fed meanwhile kept interest rates unchanged in June citing the need for further evidence of disinflation to cut interest rates.

In China, economic conditions have remained lacklustre. Retail sales in June improved, although broadly being downplayed given the timing of labour day holidays and an online sales event, whilst the property sector continues to weaken, contracting further over the past month. In contrast to the anecdotes from the US and Europe, businesses in China have noted exports as a source of strength, although this may partially be attributed to orders being brought forward ahead of potential tariffs that the Trump administration (if re-elected) may impose in the future. In Japan, there were signs of easing in business activity over the month, whilst the Bank of Japan (BoJ) kept interest rates unchanged, noting it would scale back purchases of Japanese government bonds with details to be announced in July.

Market review

Australia

The Australian equity market delivered positive returns, with investor sentiment improving following international developments. Our market underperformed global counterparts with the materials sector notably lagging following weakening demand and disappointing economic data from China. Meanwhile, Australian government bond markets performed well, despite some underperformance late in the month following the stronger local inflation data. The Australian dollar (AUD) ended the month higher against most major currencies, notably the Japanese Yen (JPY) and Euro (EUR) with the latter depreciating following disappointing guidance from the Bank of Japan (BoJ) and government budget concerns in France respectively.

International

International equity markets ended June higher as the US inflationary concerns abated further, with the largest US companies performing well. Not all regions however performed well with European markets ending the month lower with the announcement of an election in France raising concerns about discord in the region. International government bond markets produced positive returns as expectations strengthened for near-term interest rate cuts in the US, following the slow inflation data.

Market Insights

Australia – New tightening cycle unlikely

We expect growth to remain weak with the persistence of high interest rates and cost-of-living pressures   suppressing consumption. We continue to expect core inflation to decline more slowly than other developed economies driven by pressures from residential rental markets. The latest indicator of inflation has caused markets to price in a potential rate hikes this year. Whilst the RBA has pledged to be vigilant to upside risks of inflation, we do not believe they are about to embark on a new tightening cycle given the weak growth backdrop. It is more likely that interest rates have peaked this cycle.

From an asset class perspective, we favour Australian government bonds over cash, with interest rates likely to have peaked this cycle.

International – Resilient but regionally divergent growth expected

• We expect international economic growth to remain resilient in the quarter ahead but regionally divergent. We anticipate the US to slow gradually, driven by the impact of tighter monetary policy and credit conditions. However strong labour markets may lead to stronger than expected economic growth. China is expected to strengthen, aided by supportive policies to date, whilst other emerging economies are expected to benefit from their central banks easing monetary policy.

From an asset class perspective, we continue to favour emerging markets over developed markets due to their more favourable economic prospects and relatively more attractive valuations.

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