Market Key Points
- The Australian market had a strong month in March, finishing 3.3% higher. Property, energy, and utilities led the market higher. The only sector finishing the month lower was Communications.
- Overseas markets also finished the month materially higher, with strong gains in the US, Europe, and the UK.
Australian equities
The ASX 200 rose 3.3% in March, with the strong month punctuated by gains seen in ten of the eleven sectors.
Property delivered the highest returns (+9.7%), while Energy (+5.3%) and Utilities (+4.8%) were the other market leaders. Despite only a minor retraction (-0.6%), Communications finished as the only sector in the red.
Despite mixed macro data releases, Property benefited from stabilising bond yields, slowing inflation, and a more dovish tone from the RBA. The market sentiment pointing toward a rate cut in late 2024 was a positive factor for the rate-sensitive sector.
Energy stocks clawed back some of the losses from February, with a few factors contributing to the uptick. Perhaps most importantly, OPEC+ members extended production cuts, contributing to rebounding oil prices.
In the first quarter of 2024, the ASX 200 5.3% gain was outpaced by major global indices, with the Japanese Nikkei up 18.1%, the S&P 500 up 10.6%, and European stocks up 8.4%.
Global Equities
Global equity markets continued to rally, finishing Q1 on record highs. In March, emerging markets underperformed developed markets, returning 2.28% (MSCI Emerging Markets Index (AUD)) versus a 3.02% return (MSCI World Ex-Australia Index (AUD)).
US indices continued to beat all-time highs as market momentum boosted investor confidence, and the Fed reiterated its commitment to three rate cuts in 2024. The Nasdaq Composite gained 1.8% for the month and 9.3% for the quarter (in local currency terms), while the S&P 500 gained 3.2% for the month and 10.6% for the quarter (in local currency terms), up 26.1% over five straight months of gains.
Japan continued to extend its all-time high, with the Nikkei 225 Index gaining 3.78% for the month (in local currency terms). Continued low interest rates and a weaker Yen drove growth.
The CSI 300 and Hang Seng gained 0.61% and 0.64% (in local currency), respectively. Strong Lunar New Year demand turned headline inflation positive, and the annual National People's Congress revealed a 5% growth target for 2024. This all comes despite the continued slowdown in the property sector and a 10-month low in the iron ore price.
Property
The S&P/ASX 200 A-REIT Accumulation index continued the solid start for the year in March, rallying 9.7%. Global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) finished 3.5% higher.
The AREIT index outperformed the broader markets, buoyed by a fall in the Australian 10-year bond rate, continued M&A activity, and the opening of transaction markets.
Fixed Income
Retaining a hawkish stance, the RBA has held the cash rate at 4.35% for the third straight meeting this year. Australian bond markets remained relatively unchanged, with 10—and 2-year Bond yields falling 5 and 4 basis points, respectively, over the course of the month. The Australian economy continues showing progress, with the market anticipating rate cuts by the end of 2024. Against this backdrop, the Bloomberg AusBond Composite 0+ Yr Index returned 1.12% over the course of the month.
Globally, the US economy has remained resilient despite the Fed's efforts to cool inflation by keeping interest rates at their 23-year high following their March meeting. US 2-Year Treasury Note yields were unchanged from month-end to month-end, while 10-year Treasury yields rose 29 basis points. The sell-off comes as investors become less optimistic about expected rate cuts.
In the UK, the Bank of England board is determined to meet the 2% inflation target and has voted to maintain the Bank Rate at 5.25%. UK 2- and 10- Year Gilt yields fell 41 and 28 basis points respectively. This follows the announcement of a historic gilt issuance, with the UK to sell £265bn of gilts.
Currencies & Commodities
The Australian dollar (AUD) appreciated in March, closing 0.7% higher in trade-weighted terms to 61.5. It appreciated against the Japanese Yen (JPY), US Dollar (USD), Pound Sterling (GBP), and Euro (EUR).
The AUD emerged as the top performer among G10 currencies in March, propelled by robust market sentiment that pushed global equities to record highs. Following the release of a strong Australian February employment report, the AUD surged to its highest point in two months. Despite a discernible downtrend in the latter part of the month, the AUD secured its first monthly gain against the USD for 2024.
Relative to the AUD, the GBP depreciated the least during the month, closing 0.3% lower. The laggard of the month was the JPY, depreciating in relative terms against the AUD by 1.2%. Year-on-year, the AUD remains behind the GBP, EUR, and USD by -4.8%, -2.1% and -2.5%, respectively, whilst ahead of the JPY by 11.1%.
Economic key points
- Australian inflation was flat at 3.4% in February.
- Major central banks left rates on hold, continuing with the wait-and-see approach to inflation.
- The RBA left rates at 4.35%, with markets anticipating a 0.25% rate cut in November.
Australia
The RBA left the cash rate at 4.35%, as widely expected. Still, the accompanying commentary suggested that the Bank's previous bias towards further rate hikes had moderated to a more neutral stance. Governor Michele Bullock stated that " the Board is not ruling anything in or out." Financial markets now anticipate a first 0.25% rate cut in November this year. In response, the currency fell to a two-week low, and the policy-sensitive three-year government bond yield dropped to 3.67%.
Annual inflation remained at 3.4% in February. This result was slightly below expectations of 3.5%, but economists have mixed views on the implications for RBA policy. Financial markets continue to price in a first interest rate cut in November this year for Australia, later than expectations for the other major Western economies.
The unemployment rate fell to 3.7% in February, below the anticipated 4.0%. Commentators suggest the labour market's topsy-turvy nature better reflects changes to how and when we work throughout the year.
The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 84.4 in March amid renewed concerns about the economy and family finances. Retail sales rose 0.3% in February, matching market estimates but slowly sharply from January'sJanuary's +1.1%. The annual rate increased 1.6%.
The composite PMI rose to 53.3 in March, driven by strong growth in the services sector. The NAB business confidence index dropped back to 0 in February, with the retail sector being the major drag amid high borrowing costs and elevated inflation.
The trade surplus fell to $7.3 billion in January, below the market forecast of $9.9 billion.
US
The Federal Reserve maintained interest rates at 5.25%- 5.5% but upgraded its expectations for US economic growth in 2024 from +1.4% to +2.1%. Financial markets were relieved that Fed policymakers maintained their expectation for three interest rate cuts in 2024.
Headline inflation growth was 3.5% for the year to March, above the expected 3.4%, primarily due to shelter and gasoline costs.
The economy added 303,000 jobs in March, well above the anticipated 200,000. The unemployment fell to 3.8%, against an expected 3.9%.
Retail sales rose 0.6% in February, below the anticipated 0.8% gain. Such a modest increase suggests a potential slowdown in consumer spending. Annual retail sales grew 1.5% for the year to February, ahead of the anticipated 1% increase.
Composite PMI fell marginally to 52.1 in March, just below the anticipated 52.2, and despite this fall, it represents an uptick in factory activity. Consumer sentiment increased to 79.4 in February, reflecting a rosier outlook on inflation and business conditions.
The trade deficit widened to US$68.9 billion in February, above the anticipated US$67.3 billion.
Eurozone
The European Central Bank (ECB) maintained its interest rates at 4.5% during its March meeting as policymakers try to balance concerns over a looming recession with elevated underlying inflationary pressures.
The March inflation rate was 0.8%, below market expectations of 0.9%. This kept the annual rate steady at 2.4% (versus the expected 2.6%) as food, energy, and industrial goods prices all pulled the headline figure lower. The ECB has projected inflation to average 2.3% in 2024, 2.0% in 2025, and 1.9% in 2026.
The unemployment rate printed at 6.5% in January, just above the market forecast of 6.4%.
Retail sales fell 0.5% in February, just above the expected -0.4%. Annual retail sales fell 0.7%% better than the anticipated -1.3%. Consumer confidence rose to -14.9 in March as consumers gradually brighten their views on personal and general economic situations.
The Composite PMI rose to 49.9 in March, the highest in nine months, indicating a near-stabilisation of business activity.
UK
The Bank of England maintained the bank rate at 5.25% in its March meeting as policymakers wait on more precise signals that the country's persistent inflationary pressures have subsided.
The annual CPI fell to 3.4% in February, the lowest level in 2.5 years. The Bank projects inflation to fall below 2% in Q2 2024.
Composite PMI edged down to 52.9 in March, from 53 in February and just below the expected 53.1. Even so, this was the fifth month of expansion in the private sector thanks to a solid rate of increase in output. Service sector growth was quicker than that seen in the manufacturing sector despite losing momentum in March.
Consumer confidence remained unchanged at -21 in March, below the expected -19, as cost-of-living concerns continued to dampen sentiment.
China
China's unemployment rate increased to 5.3% in February, higher than the previous month but below the government target of 5.5%.
The composite PMI was 52.7 in March, the highest reading in ten months, and both manufacturing and services activity expanded. Business sentiment has improved for both manufacturers and services providers, and the measures introduced earlier in the year to stabilise growth are gradually having an effect.
Annual retail sales grew 5.5% in the January -February period, above the market expectation of 5.2%. Profits from industrial firms rose 10.2% for the first two months of 2024 compared to last year. Coupled with better-than-expected growth in retail sales, exports and factory output for the same period, suggesting that, aside from the still-struggling property sector, the Chinese economy is gradually recovering.
Japan
The Bank of Japan (BOJ) raised its cash interest rate, which had been negative 0.10% since 2016, to a target range between zero and +0.10%. The BOJ also officially ended its "Yield Curve Control" policy of buying government bonds to maintain yields below a cap of 1.00%. Financial markets generally anticipated these moves, and the accompanying commentary was at the "dovish" end of expectations, particularly assurances that "accommodative financial conditions would be maintained for the time being".
The Japanese equity market rose, and the yen fell on the news, suggesting that more substantial monetary tightening measures had previously been priced in.
Producer inflation increased by 0.8% over the year to March, meeting expectations and marking the strongest reading since October 2023.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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