Market Commentary

Last updated: March 2024

Economic overview 

Australia - Resilient but softer signs emerging

Economic conditions have remained broadly resilient in Australia. There have however been some signs of softening emerging, more notably among discretionary components of household spending. Meanwhile, the Reserve Bank of Australia (RBA) kept interest rates unchanged at 4.35% p.a. The accompanying statement took on a more neutral tone with the comment from February’s statement that “a further increase in interest rates cannot be ruled out” replaced with the RBA is “not ruling anything in or out”.

International - Improving signs in China and Eurozone

Economic data releases continue to indicate differing conditions internationally, albeit with some encouraging signs for some regions. The data continued to suggest that activity in the US is holding up, with the services sector again performing well and manufacturing sector also showing signs of improvement. Its unemployment rate has however risen from its recent lows and retail sales have softened, notably in online sales. Elsewhere, business conditions in the Eurozone have shown sign of improvement, albeit growth overall remains subdued. Meanwhile, there have been some signs of a slowing in the pace of disinflation with the latest year-on-year reading US headline inflation even rising slightly. The US Federal Reserve (the Fed) nonetheless kept interest rates unchanged with Chair Powell noting that the recent higher inflation reading does not alter the downward trajectory of inflation. Similarly, the European Central Bank (ECB) also kept rates unchanged with its president Christine Lagarde continuing to hint at the possibility of a June rate cut.

There have also been signs of improving economic conditions in China, with both business survey and retail sales readings improving, led by the services sector. Pleasingly, the manufacturing sector also appears to be showing signs of improving, whilst property and housing construction remain notable drags. Meanwhile, there has been more positive signs in Japan with this year’s Shunto, the annual wage negotiations between unions and companies, pointing to the largest growth in wages since 1993. This appeared to give the Bank of Japan (BoJ) enough to raise interest rates for the first time in 17 years, from -0.1% p.a. to 0.0-0.1% p.a. whilst also terminating its Yield Curve Control (YCC) program, a program aimed at limiting the level of Japanese government bond yields. At the accompanying press conference, BoJ Governor Ueda noted that monetary policy will remain accommodative for some time, implying that any further rate increases will be slow.

Market review 

Australia

Australian equities ended the month higher supported by improving signs for economic growth and declining bond yields, with the strong performance of the real estate sector notable.

Australian government bond yields ended the month lower, following international government bond yields, with the shift in the RBA’s rhetoric adding to the decline.

International

International equities ended the month of March higher following some positive signs for growth and comments from Fed Chair Powell indicating that cuts to interest rates were still likely despite the recent higher inflation reading.

International government bond yields broadly ended the month lower, albeit not without volatility, after rising post the US Consumer Price Index (CPI) reading before retracing these movements later in the month as central banks maintained the rhetoric that the next moves in interest rates are likely to be cuts.

Commodity markets were broadly stronger for the month. Gold prices rose, reaching an all-time high, driven by speculation of near-term interest rate cuts, whilst oil prices also ended the month higher driven by the improving economic data momentum, raising expectations for greater demand. Meanwhile in industrial metals, copper prices rose following news of more supply disruptions, whilst iron ore ended the month lower with reports of a rise in inventories on Chinese ports.

Market insights

Australia- Potential downside risks ahead

We expect growth to slow as previous supportive factors such as population growth and (low) fixed rate mortgages fade and as the tighten monetary conditions take their toll. Inflation is also likely to slow, albeit less than other developed economies with pressures from the residential rental markets among the drivers. The risks of a more pronounced slowdown in activity however appears more likely than currently anticipated by markets, with markets currently pricing less than 2 interest rate cuts by the RBA this year.

For the asset classes, we have a favourable view on Australian Sovereign bonds over cash with signs growing that we have reached a peak in cash rates this cycle and with the risks tilted for more rate cuts.

International - Emerging markets favoured over developed markets

We expect growth internationally to remain resilient but regionally divergent. For the US, we expect it slow yet remain resilient as the impact of higher interest rates and tighter financial conditions take their toll. In contrast, we anticipate conditions to improve in the Eurozone from its current subdued pace as manufacturing activity picks up and as inflation slows. We also anticipate stronger growth in China, where growth has been also subdued by its historical standards, driven by the supportive policy backdrop and the recovery in the manufacturing inventory cycle. More broadly, we anticipate more supportive growth conditions for emerging economies with their central banks better positioned to lower interest rates having raised interest rates earlier and more aggressively than their developed economy counterparts this cycle.

From an asset class perspective, we favour emerging markets over developed markets in light of their more promising economic prospects and more attractive valuations.

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