Monthly Market Review - April 2024 (Australia)
Can you take me higher?
April was a tough month for both equity and fixed income investors, as expectations for rate cuts were pushed into the future or revised away completely. The progress on disinflation appeared to have stalled in many markets in the first quarter, while private demand remained resilient, fueling fears of ‘higher for longer’ or even a need to raise rates again. Stocks and bonds reacted badly to the change in sentiment. The MSCI World Index fell 3.2% over the month, and the Global Aggregate bond index was down 2.5%. Emerging market equities gained 1.7%, driven by strong performance in China and Hong Kong (all total returns in local currency).
Three stronger-than-expected U.S. inflation figures in a row constituted a trend and a stalling of progress on disinflation. This resulted in a change of tune by central bankers who are willing to be patient on cutting rates. The markets were quick to adjust with only one rate cut expected this year, down from three at the start of the month. Meanwhile, the Reserve Bank of Australia (RBA) pricing shows the potential for a further rate hike.
The shift in rate expectations was reflected in the sharp movement in currencies. The U.S. dollar gained another 1.6% on a trade weighted basis and is 4.8% higher this year. The Japanese yen (JPY) felt the greatest pressure and depreciated by 3.5% against U.S. dollar over the month. The U.S. dollar cross rate briefly touched 160, its weakest in 35 years, before recovering. A stronger U.S. dollar creates issues for small open economies that may be forced to defend currencies, and the performance of Emerging market (EM) assets more broadly.
Meanwhile, the expected rate cuts in economies with a weaker growth trajectory, such as Europe, may be paired back in response to a Federal Reserve cut that is on hold for longer. This could curb expectations for improving economic momentum and rising corporate earnings in that region.
April reinforced that inflation is the key risk to the market outlook, and has the potential to unwind the rally in risk assets. While a soft landing remains the modal view, investors should consider all potential scenarios—soft landing, no landing and recession—in managing portfolio risk. Equities can continue to move higher in a world with stronger nominal growth and earnings upside, but a shallower cutting cycle adds to the valuation challenge. Longer duration government bonds can add to returns in the event of a growth or deflationary shock. But with more clarity required on the path for inflation, and therefore rates, longer dated yields are likely to be range bound for the time being, which suggests positioning in shorter duration bonds.
Australian economy:
- Retail sales growth has become notoriously volatile and fell by 0.4% month-over-month for March, after gaining 0.2% in February. The trend in spending is not very clear given the impact of seasonality, and Taylor Swift, on the monthly data. However, year-over-year comparisons still show positive increase in retail spending, suggesting that consumption is slowing rather than collapsing.
- Consumer price index inflation for the first quarter was higher than expected at 3.6% and 4.0% year-over-year for core inflation. Services inflation continues to dominate pricing pressures along with rental prices. This makes the current set of RBA economic projections difficult to achieve. Compared to the U.S., inflation may be slower to fall, but it should be noted that inflation was never as high in Australia, nor is the policy rate, which suggests a more gradual return to the RBA’s target band.
(GTM AUS page 5) - The unemployment rate rose by 0.1% to 3.8%, and employment contracted by 7,000 jobs in March. Weaker domestic demand suggests that the unemployment rate should rise. The level of vacancies is only slowly falling and hiring intentions are steady, implying any rise in unemployment will be gradual.
(GTM AUS page 9) - House prices across the eight capital cities rose 0.6% month-over-month or 9.4% year-over-year in April. Auction clearance rates continue to rise, pointing towards underlying strength in the property market. However, expectations for a further rate hike may curb activity over the typically quieter winter months.
(GTM AUS page 10 and 11)
Equities:
- The ASX 200 fell 2.9% in April to be up 2.2% for the year. Australian small caps fell by a larger 3.1% for the month. The Australian equity market managed to outperform the U.S. S&P 500 for the month (-4.1%), but was beaten by Europe (-0.6%) and Japan (-0.9%) in local currency terms.
(GTM AUS page 32) - Speculation about a frothy U.S. equity market came to a head in April, as rising bond yields challenged the lofty valuations applied to the U.S. market. However, the economic backdrop remains supportive for earnings growth, and the first quarter U.S. earnings season has seen companies beat expectations, albeit against a low bar.
(GTM AUS page 33) - European markets are coming into focus given the relatively attractive valuations compared to other developed economies and the improving economic outlook for the region. Economic surveys suggest a pick- up in economic activity, while fading inflation should see the European Central Bank begin its easing cycle by mid-year.
(GTM AUS page 16) - In a reversal from prior months, EM equities were the outperformers as the MSCI EM index gained 1.4%, and Asia ex-Japan was 2.1% higher as low valued Chinese and Hong Kong markets gained attention from investors.
- At the sector level, only utilities (4.8%) and materials (0.6%) ended the month in the green. The changing rate environment was most visible on the rate sensitive sectors such as real estate investment trusts (-7.7%) and consumer discretionary (-5.1%). The energy sector (-4.7%) was also weaker despite supportive oil prices.
Fixed income:
- Government bond yields underwent large moves during the month. The Australian 10-year government bond yield rose 46 basis points (bps) to 4.42%. Meanwhile the U.S. 10-year Treasury was 48bps higher to 4.68%. The spread to the policy sensitive 2-year bond yield remains negative (-33bps) as the shorter duration end of the curve rose to 5.03% to reflect higher rate expectations.
(GTM AUS page 48) - The rise in government bond yields weighed on the performance of corporate credit, even as spreads remain tight. Global investment grade bonds fell 2.3%, while the higher yield mitigated loses on global high yield bonds to -0.7%.
(GTM AUS page 47)
Other assets:
- The resilient economic outlook and the rising risk of escalation in the Middle East boosted commodity prices in April. The Bloomberg Commodity Index was 2.2% higher over the month.
- Gold rallied to a new high of USD 2,330 during the month before falling back. The performance of gold continues to confound as the historical relationship to real yields fails to hold and the precious metal is up 11% year-to-date.
(GTM AUS page 66) - Other metals we also higher over the month, notably copper, which was 13.8% higher. The price of iron ore increased to USD 110 per ton.
(GTM AUS page 63) - The U.S. dollar index was 1.6% higher and gained 0.5% against the Australian dollar over the month.
(GTM AUS page 68)