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Market Commentary

Last updated: May 2024

Economic overview 

Australia – Signs of consumer caution  

Economic data released over the past month broadly took a softer tone. The NAB business survey observed easing in conditions, whilst retail sales growth remained weak with the Australian Bureau of Statistics (ABS) observing “weak underlying spending in most parts of the retail industry”. Against this backdrop, the Albanese government handed down its third Federal budget, with cost-of-living measures such as changes to the stage 3 tax cuts and energy bill relief among its key initiatives. Another sign of a more cautious consumer was the Westpac survey, which indicated of those expecting to receive a tax cut, 30% plan to save it all and 50% will save at least half. Meanwhile April inflation has remained stubborn with the CPI Monthly Indicator rising slightly to 3.6% Year-on-Year (YoY) in April, driven by food, clothing and health items. The Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% p.a. continuing to “not ruling anything in or out” while remaining “vigilant to upside risks” for inflation.


International – US core inflation moderates

There have been signs of easing in US growth over the past month, with retail sales softening and some business survey indicators pointing to declining activity across both manufacturing and services sectors. Whilst strong by historical standards, the labour market has also shown signs of easing, with both the creation of new jobs and the number of job openings declining. Elsewhere, business conditions appear to be improving in the Eurozone led by the services sectors, although the pace of growth remains low. On inflation, the US Consumer Price Index (CPI) provided relief for economists and market participants alike with the core measure easing slightly, accompanied by encouraging signs for services inflation. The US Federal Reserve (the “Fed”) kept interest rates unchanged in May noting that the next change is unlikely to be a hike with interest rates viewed as being sufficiently high to bring inflation back to its 2% target. Members of the European Central Bank (ECB) have also continued to raise expectations for an interest rate cut at their June meeting.

China’s economic conditions have been lacklustre. Indicators of business activity have eased with manufacturing businesses citing weak demand and the property sector has remained a drag on consumer sentiment and economic activity. Against this backdrop, the Peoples’ Bank of China (PBOC) announced a raft of measures including a CNY300 billion lending program for unsold apartments and cutting the minimum deposit for both first and second-home purchases. In the first quarter of 2024, Japan's economy shrank due to issues in the automotive industry, but recent signs, including positive business sentiment and strong capital expenditure plans, suggest resilience.


Market review


The Australian equity market ended May higher, benefiting from the positive international market backdrop, although underperforming international equity markets largely due to a smaller exposure weighting to technology. Australian government bond yields ended the month broadly unchanged, with market participants remaining concerned about the prospects of interest rates remaining higher for longer, with these concerns also helping to support the Australian dollar (AUD) against currencies such as the US dollar (USD).



International equity markets rebounded higher in May with softer US employment data and slight easing in US inflation data helping to ease concerns around the outlook for US interest rates. International government bond markets also made gains, although contributions were mixed, with US government bond yields declining as inflation and interest rate concerns eased, whilst in Japan, government bond yields moved higher as the Bank of Japan reduced purchases of these securities.


Market Insights

Australia - Growth expected to remain weak

Domestically, we expect growth to remain weak with higher interest rates and cost-of-living pressures likely to keep consumption supressed. We expect core measures of inflation to ease albeit at slower pace than other developed economies, with pressures from the residential rental markets continuing in the near term. Recent inflation data has caused markets to push out its expectations for RBA interest rate cuts, with markets pricing the first rate cut in October 2025. Whilst the RBA has indicated that it will be vigilant against upside inflation risks, we believe that risks of a slowdown in activity are more likely than currently anticipated by markets.

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


International - Regional divergences expected 

We expect international economic growth to remain resilient but regionally divergent. We expect growth to gradually ease in the US, with the impact of higher interest rates to take their toll. The risks to growth are however tilted to the upside than the downside, particularly if labour markets remain strong and wage growth is maintained to support consumption. Meanwhile, economic conditions are to improve in the Eurozone, although Germany is likely to remain relatively weak.  China is anticipated to strengthen, driven by policy supports, including measures announced by the PBOC in May, whilst other emerging economies are expected to benefit from their central banks easing monetary policy.

We favour emerging markets over developed markets due to their more promising economic prospects and attractive valuations.

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