Financial markets were generally stronger over the week, although global equities on an unhedged basis were slightly lower due to the ongoing rally in the A$ (+0.40%), while Aust bonds were also lower on the back of higher yields at the mid (+26bps) to long end (+23bps) of the curve. While it was a relatively quiet week on the domestic data front with the RBA keeping the cash rate at 4.35%, continued commentary on ‘higher-for-longer’ with the potential for no cuts in the cash rate through 2024 saw local bond markets sell off.
As previously discussed, we believe that the RBA will have scope to reduce the cash rate through 2024 as the economy continues to soften. This week sees monthly CPI data for May with expectations of a slight uptick from April (f’cst 3.8%, +0.2% pcp). Overall, we continue to see the same story domestically – rents, financial services, healthcare and energy prices continuing to rise and be the main impediments to lower inflation. While wage growth has moderated, it still remains elevated to history.
In the US, the market will be closely watching both the GDP data (1q24) and PCE inflation data for May. Annualised GDP is set to come in at 3.0% (1.4% q/q), which is broadly flat from the prior period. Overall, the US economy remains sound, although the momentum has softened in recent months. The PCE data is f’cst to show annualised inflation at 2.6% (-0.1% pcp), with PCE inflation flat for the May. In our view, this continues ongoing positive signs in the US regarding the inflationary outlook, and we continue to expect that the Fed will look to reduce cash rates through the 3q24 into 4q24.
In China, PMI data will provide a further gauge as to the strength of the economy. We expect the data to be relatively benign with both the manufacturing and non-manufacturing sides of the economy showing a relatively stagnant outlook. More recently, this has translated into weaker Chinese equity markets that continue to be an overhang for Asian/EM equities. However, Chinese bond markets have enjoyed a continued rally with yields falling sharply as the market prepares for increased fiscal and monetary intervention to support the economy. In Europe/UK, the focus continues to be on the upcoming elections, with both incumbent political parties struggling to gain traction, increasing market volatility.
Piers Bolger – Chief Investment Officer
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