Market Key Points
- It was a challenging month with domestic and international markets experiencing a sell-off.
- Local markets finished the month 3.4% lower, while the S&P 500 Index was off by 5.6%.
- Fixed income markets adjusted to news about tariffs and their implications for inflation and growth.
Australian equities
The ASX 200 Accumulation Index finished July month up 4.2%, marking its strongest monthly performance this year and reaching a new all-time high in the process. Despite expectations for earnings contractions, the strong level of market sentiment and a wave of momentum pushed shares higher.
The market saw positive returns across a wide range of sectors, with eight out of eleven finishing higher. Consumer discretionary led the way with a gain of 9.1%, followed by Property (+6.6%), Financials (+6.3%), Industrials (+5.6%), and Communication Services (+5.3%). Conversely, the Utilities (-2.9%), Energy (-0.4%), and Materials (-0.1%) sectors weighed on the Index, ending the month with negative returns.
Despite June quarter inflation data remaining sticky, investors were encouraged by the slowing core inflation number. Positive data in a UBS survey on consumer spending, coupled with undemanding valuations and overall underperformance in the sector, helped drive Consumer Discretionary companies. Meanwhile, the ‘Big Four’ Banks again pushed the Financials sector up.
Weakening metals and brent crude oil prices led to Materials and Energy shares falling, which included losses of 11.9% from Fortescue (ASX: FMG), one of the largest iron ore miners in the Index.
Global Equities
The ASX 200 Accumulation Index fell a further 3.4% in March, marking the second consecutive month of losses. Concerns over impending tariffs from the Trump Administration were a major factor in the sell-off, as investors continued to derisk. Although the market recovered some losses mid-month due to soft employment and inflation data, which fuelled hopes for a rate cut in May, overall caution remained.
Utilities (+1.5%) was again the lone sector with positive returns, continuing to be a haven during market volatility. Meanwhile, Information Technology (-9.7%) was the biggest laggard for the second straight month, tracking the losses of the tech-heavy US Nasdaq Index. Other sectors with significant losses included Consumer Discretionary (-6.3%), Property (-4.9%), and Health Care (-4.6%).
While Materials (-0.3%) saw a slight downturn, gold mining stocks performed well. Increased demand for gold as a hedge against economic uncertainty boosted shares in companies such as Spartan Resources (ASX: SPR), which gained 45% over the month.
March was a challenging month for the ASX 200, with significant losses driven by tariff concerns and cautious investor sentiment.
Property
The S&P/ASX 200 A-REIT Accumulation Index TR continued to fall in March, finishing the month down 4.9%. The Index is in negative territory YTD, down 6.8%. Global real estate equities fell, decreasing by 2.5% (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)). Australian infrastructure bounced back after a negative month, with a return of 1.7%. The index has delivered a return of 2.2% YTD.
Against a global backdrop filled with uncertainty, March saw very little activity on the M&A front. The Hotel Property Investments (HPI) and Charter Hall Retail REIT (CQR) chapter has closed, with Charter Hall confirming compulsory acquisition of all outstanding ordinary securities on 25 March.
Goodman Group (GMG) notified the market of the successful completion of its Security Purchase Plan (SPP) and $4bn institutional placement, which was announced on 19 February. 152,057 securities will be issued under the SPP at the same price as issued to Institutional investors on 20 March.
The Australian residential property market experienced an increase of 0.4% Month on Month (as represented by CoreLogic’s five capital city aggregate). Growth was felt in all capitals outside of Hobart. After a negative month in February, Darwin was the biggest riser (+1.0%). Melbourne continues to rise but remains in negative territory over the previous 12-month period (+0.5%, -2.6% YoY).
Perth is moderating (+0.2%, 11.9% YoY), with most remaining capitals seeing monthly growth around the same.
Fixed Income
The Commonwealth Federal Budget revealed tax cuts and subsidies in the energy and health sectors. Coupled with slowing inflation and expectations of potential rate cuts, this led to an improvement in consumer sentiment. However, news of tariffs overseas caused concern among local investors, resulting in rising yields at the longer end of the yield curve while yields at the short end decreased, further steepening the curve.
This could indicate short-term uncertainty, with a flight to safety driving up demand for short term treasuries and, as a result, reducing yields. Meanwhile, future economic growth and inflation expectations are being priced into longer term treasuries. Amid this backdrop, the Australian 2-year Treasury decreased from 3.74% to 3.69%, representing a 5 basis point drop, while the Australian 10-year Treasury rose from 4.29% to 4.38%, reflecting a 9 basis point increase.
It's no surprise that the tariffs announced by the U.S. continued to dominate headlines, adding more uncertainty to the market. Investors were seeking clarity on Trump's tariff threats but were left dissatisfied, as more uncertainty was priced into the yield curve. Despite softer inflation data, with the headline rate dropping from 3.0% to 2.8%, consumer confidence weakened due to concerns about higher prices and the potential impact of future tariffs. The Fed maintained a neutral stance, keeping the cash rate unchanged and indicating that it would focus only on key inflation data.
The yield curve in the U.S. is the steepest it has been in recent years, with the yield on the U.S. 2-year Treasury decreasing from 4.01% to 3.90%, representing a 11 basis point drop, while the yield on the U.S. 10-year Treasury remained unchanged at 4.21%.
Currencies
The Australian dollar (AUD) appreciated over the month of March, closing 0.2% higher in trade weighted terms to 59.6, appreciating against the US Dollar (USD) and the Japanese Yen, whilst depreciating against the Pound Sterling (GBP) and the Euro (EUR).
The Australian dollar strengthened against the USD primarily due to a weakening USD, led by uncertain economic conditions globally. Capital flows shifted from the US towards the Eurozone, with their currencies also seeing a change in strength respectively. Australian economic data was improving relatively for the month of March, with the RBA expected to further cut interest rates in relation to further potential tariffs.
Relative to the AUD, the Euro was the highest performer of the month, appreciating in relative terms by 3.5% against the AUD. Year-on-year, the AUD remains behind the USD, EUR, GBP and the JPY by 4.3%, 4.4%, 6.3% and 5.1% respectively, in relative terms.
Economic key points
- Australian Q4 2024 GDP rose to 1.3%.
- Federal budget included $17bn tax cut over two years.
- The FED kept its cash interest rate at 4.25-4.5%.
Australia
Australia's Q4 GDP growth rose quarter-on-quarter, up from 0.3% in Q3, bringing the annual rate to 1.3% from 0.8%. The main contributor was household consumption, which rebounded 0.4% from the previous quarter’s flat result.
Discretionary spending growth climbed to 0.4% from 0.1%, driven by year-end promotions and income tax cuts that boosted disposable incomes, outpacing consumption. This GDP result supports the RBA’s view that consumption growth picked up in Q4, with recovery expected to continue into 2025, supporting GDP growth. However, the central bank remains cautious about the slow pace of disinflation in a tight labour market, which influenced its decision to limit further easing following February’s rate cut.
Mid-month, federal treasurer Jim Chalmers announced a wide range of fiscal stimulus initiatives in the leadup to the national election, including a $17 billion tax cut from reducing the lowest tax rate from 16% to 14% over two years. Efforts to ease the rising cost of living included the extension of energy rebates for households and small business, and lowering the cap on PBS drug pricing. Other notable changes included incremental spending on transport infrastructure around Sydney and Melbourne, a ban on purchase of existing homes by foreign buyers and a ban on non-compete clauses for workers earning up to $175,000.
Critics of the government’s proposals claimed that it locked in future budget deficits and growing debt without delivering meaningful financial impact in the tax cuts, and that it relied on overly optimistic economic forecasts. Headline inflation dropped to 2.4% over the year to February. The RBA’s preferred trimmed mean inflation rate dropped slightly to +2.7%. These results are within the bank’s target range of 2-3%.
The ABS Labour Force report for February showed the economy losing 53,000 jobs, a disappointment compared to expectations for an increase of 30,000 roles. However, the unemployment rate held at 4.1% due to a fall in the participation rate. Retail sales increased 0.2% in February, softer than the expected 0.3%. Annual sales increased 3.6% in February, down from the 3.8% increase in January.
The Westpac Consumer Confidence Index came rose to 95.9 in March, while the –NAB Business Confidence fell to -2 in March. ,.Composite PMI rose to 51.6 in March, driven by both a surge in services activity and a rebound in manufacturing output.
The trade surplus decreased to $2.97bn in February, well below the market expectations of $5.6bn.
US
Headline CPI inflation also eased to +2.8% for the 12 months to February, while the Core CPI slowed to +3.1%. Both results were a relief after a surprising acceleration of price gains in January. However, there is growing awareness that these historical datapoints don’t capture the impact of the new tariffs announced by the Trump administration, and the potential retaliation from other countries. The Federal Reserve kept its cash interest rate at 4.25-4.5%, as widely expected. However, accompanying commentary from Chairman Jerome Powell highlighted the increased uncertainty resulting from the spate of new policies from the Trump administration. An updated “dot plot” trajectory, representing the central banks’ economic forecasts, showed that the median policymaker’s now expects lower GDP growth for the next three years, and higher inflation for the next two, compared to December projections. The board members continue to anticipate two more 0.25% interest rate cuts by the end of 2025, and a further two in 2026.
Non-farm payroll added 228,000 jobs in March, well above the revised February number of 117,000 and the forecast 135,000. The unemployment rate rose to 4.2% in March, above the market expectation of 4.1% In March, the Conference Board’s consumer confidence indicator fell to its lowest level in 4 years, with future expectations at a 12 year low. This data follows the University of Michigan’s own consumer sentiment indicator which at is at a two and a half year low of 57. Key concerns for respondents to the latest survey were the risk of a US recession and potential for new tariffs to exacerbate inflation. Composite PMI rose to 53.5 in March, with growth driven by services activity.
The trade deficit narrowed to $122.7bn in February, below the expected $123.5bn shortfall.
Tariffs continued to dominate as Commerce Secretary Lutnick flagged partial tariff relief for Canada and Mexico. Lutnick said he believes Trump will work out a longer-term compromise with tariffs on goods covered by USMCA likely settling "somewhere in the middle." Latest twist follows ramp in trade war concerns after Canada, Mexico and China announced plans to retaliate against Trump's tariffs. Still, Trump’s unpredictability remains a factor after the president later said there was no room left for compromise on tariffs, taking aim at what he believes are insufficient efforts by Canada and Mexico to stem flow of fentanyl into US. This unpredictability was shown when a 25% tariff on cars was announced in late March, with everyone waiting for the so called ‘Liberation Day’ announcement of further tariffs due on 2 April.
Eurozone
Annual inflation eased to 2.2% in March, slightly below the market expectation of 2.3%. Services inflation slowed to a 33-month low (3.4% vs. 3.7% in February), while energy costs declined (-0.7% vs. 0.2%). Core inflation felt to 204%, below the forecast 2.5%.
Retail sales grew 0.3% in February, while annual sales exceeded market expectations of a 1.8%, coming in at 2.3%. Consumer confidence fell 0.9 points to -14.5 in March as consumers became more pessimistic about the economy. The unemployment came in at 6.1% in January, below the anticipated 6.2%.
The Composite PMI rose to 50.9 in March, with goods production increasing for the first time in two years.
UK
The Bank of England kept interest rates at 4.5% during its March meeting with policymakers adopting a wait-and-see approach to stubbornly high inflation and global economic uncertainties. The bank highlighted that, given the medium-term inflation outlook, a gradual and cautious approach to further withdrawal of monetary policy restraint remains appropriate. Inflation came in at 2.8 in February, below market forecasts but in line with the Bank of England forecast. The largest downward contribution came from prices of clothing which declined for the first time since October 2021.
The unemployment rate was steady at 4.4% for the three months to January, meeting market expectations of.
Consumer confidence increased by two points to -20 in February as consumers benefited from lower borrowing costs. Retail sales increased 1% in February, well ahead of the predicted 0.3% fall, with sales of household goods surging 6.8%.
Composite PMI increased to 51.5 in March, driven by an increase in services activity.
China
The National People’s Congress was held in early March, unveiling its economic plans for 2025, with the growth target unchanged. China’s economy continues to face substantial headwinds from the property sector downturn, subdued domestic demand, demographic decline and growing trade barriers.
In mid-March, China’s State Council unveiled a 30-point plan to boost consumption. While there are some positive sentiments in this proposal, it remains unclear how this plan will actually be implemented and there is a risk that it could further expand the existing imbalances in China’s economy. Consumer prices dropped 0.1% for the year to March, below the expected +0.1% as the ongoing trade dispute with the US threatens to further dampen process.
Composite PMI increased to 51.8 in March, driven by strong expansion in manufacturing and a three month peak in services output. The unemployment rate rose to 5.4% in February, up from 5.2% in January and above the expected 5.1%..
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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