Financial markets continued to gyrate over the quarter, although equities rallied strongly as the contagion risks around the US banking crisis subsided. With that, markets again began to refocus on the next moves by global central banks. Both the US Fed as well as the ECB indicated there was more to do on the rate front, despite some improvement in the inflationary outlook, particularly in the US. In addition, with credit conditions in the US tightening on the back of the recent banking crisis, this may alleviate how far the Fed will need to go in raising cash rates.

Our base case remains 5.25%-5.50% terminal rate on the Fed Funds Rate. However, across Europe, underlying inflation hit a record high in March underpinning ECB comments that interest rate increases are not over. This is against a backdrop of ongoing slowing growth in Europe, with rising German unemployment and general levels of economic activity that continue to point to a further contraction in manufacturing across the EU.

The clear positive for equity markets has been the policy pivot by Chinese authorities. This has seen China’s economic recovery gather pace, with both the manufacturing and the services side of the economy showing signs of expansion and flowed directly into the performance of emerging markets equities. So, despite the several challenges over the 1Q23, equity and bond markets were able to generate a positive return for the period.

Nevertheless, the ongoing volatility across financial markets continues to make asset allocation and strategy setting a challenging task. Domestically, the focus this week was on the RBA Board meeting. As expected, the RBA kept rates on hold (3.6%), although a further rate rise in May (0.25%) is likely, and possibly one further increase in the 2H23, which will see the cash rates peak at 4.1%. Despite MoM inflation moving lower, with domestic core inflation at 6.9%, the need for the RBA to remain vigilant on inflationary pressures remains. In the US, the latest jobs numbers will be released this week with expectation of a further +240k uptick in non-farm payrolls, with the jobless rate to remain steady at 3.6%.

Market Information

Leave a Reply