Financial markets enjoyed another solid week of gains with both equity and bond markets higher. The week capped off another strong (March) month (and 1q24) for financial markets. The rally in growth assets over the last 6-12 months has been particularly noteworthy given the broader market backdrop of higher cash rates, divergent global economic growth, increased geopolitical risks, sticky inflationary pressures and ongoing war.
In our view this again highlights the dichotomy that can often occur between financial market performance and the broader macro backdrop. However, we would also argue that the performance of equity markets has not been unusual given that central banks have been on pause for an extended period, while the US economy continues to remain healthy, supported by a solid labor market and a moderate uptick in the outlook for corporate earnings. While we believe that the US equity market is at the upper end of its fair value range and across several metrics could be viewed as overvalued, we remain comfortable that should the current growth trajectory remain, with the potential for 2h24 rate cuts, the market has the ability to move higher.
This was highlighted by the better than forecast ISM Manufacturing (50.3 pts) and New Orders (51.4 pts) data, reflecting an ongoing expansion in these two areas of the economy. In addition, the release of Non-Farm payroll data (f’cst +203k) again points to a strong labor market with Un rate (Mar) f’cst to decline to 3.8% (-0.1% pcp) with the participation rate set to remain steady at 62.5%. Domestically, the focus this week will be on the release of the RBA Board minutes along with both Business and Consumer Confidence data. Building approval data (Feb) is f’cst to show a positive uptick (+3.0%) relative to Jan, although the m/m data continues to be volatile.
In China, the release of PMI data (Mar) is expected to point to further expansion across the Services (f’cst 52.5 pts) and Manufacturing sectors. The improving economic outlook further underscores increased stabilization across parts of the economy and with the Chinese government keen to reiterate that it remains ‘open’ to foreign investors, this will provide an important backdrop for ongoing economic growth and stronger financial markets (particularly emerging markets), through 2h24
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