Market Key Points
- The Australian market was weaker in April, finishing the month 2.9% lower.
- Leading the market lower were Property, Consumer Discretionary and Communications sectors. The only sectors finishing the month in the black were Utilities and Materials.
- Most developed markets, including the U.S. and Europe, fell during the month, though U.K. and Asian markets finished the month higher.
Australian equities
Following a run of gains, the ASX 200 finished April down 2.9%, the the first negative month since October 2023. Losses were felt broadly at the sector level, with Property (-7.8%), Consumer Discretionary (- 5.1%), Communications (-4.9%) and Energy (-4.7%) seeing the largest declines.
Utilities (+4.8%) and Materials (+0.6%) were the only sectors which had positive months.
The evolving interest rate environment significantly contributed to the market losses, as domestic and global data releases pointed towards fewer rate cuts this year.
The effect of ''higher for longer'' was most obvious in the rate-sensitive sectors, with Property and Consumer Discretionary being the most notable. The Energy sector also had a weak month despite accommodating oil prices.
As market volatility and geopolitical uncertainty were amplified in April, the market flocked to Utilities, as the defensive sector became a haven for investors.
Global Equities
Developed equity markets finished lower, ending the five-month rally, while Emerging markets continued to gain. Developed markets returned -3.26% (MSCI WorldEx-Australia Index (AUD)) in April versus a 0.92% return from Emerging Markets (MSCI Emerging Markets Index (AUD)).
U.S. indices declined for the first time since October as the likelihood of a Federal Reserve rate cut declined. Market sentiment has shifted to expectations of a 25-basis point rate cut by the end of the year as the Fed searches for clearer signs of further deflation.
The Nasdaq 100 dropped -4.4% for the month (in local currency terms), while the S&P 500 lost -4.08% for the month (in local currency terms).
However, despite the macro outlook, corporate earnings were generally positive, with a higher-than-expected growth rate.
Japan similarly lost hard-fought gains as the market mirrored Wall Street and the tech sector lost favour. The Nikkei 225 Index dropped 4.86% for the month (in local currency terms).
The CSI 300 and Hang Seng gained 2.01%and 7.45% (in local currency terms), continuing to rebound from a tumultuous beginning of the year, boosted by strong GDP growth and PMI expansion.
Property
The S&P/ASX 200 A-REIT Accumulation index regressed for the first time this year in April, finishing the month 7.8% lower. Global real estate equities (represented by the FTSE EPR/NAREIT Developed Ex Australia Index (AUD Hedged)) also performed poorly, falling 5.1% for the month.
Australian infrastructure continued its slight negative trend through April, with the S&P/ASX Infrastructure Index TR index returning -0.1% for the month and -0.1% YTD.
The Australian residential property market experienced an increase of +0.6% Month on Month (as represented by CoreLogic's five capital city aggregate). Perth was the biggest riser (+2%), followed by Adelaide (+1.3%) and Brisbane (+0.9%). In contrast, Melbourne (-0.1%) was the worst performer during April.
Fixed Income
April was a tough month for bond markets, both locally and internationally. Yields were back at levels last seen in December 2023.
Over the month, price pressures remained stubborn, with CPI printing higher than expected and house prices continuing to rise.
Against this backdrop, Australian 2—and 10-year bond yields rose 33 and 41 basis points, respectively, over the course of the month, and the Australian bond market, as measured by BloombCoreLogic's Composite 0+ Yr Index, fell 1.98%.
Globally, bond markets exhibited a similar story. U.S. inflation remained sticky, and markets shifted their stance on any near-term rate cuts from the Fed. UU.S. 2- and 10-year bond yields rose 42 and 77 basis points, respectively, over April, and the Bloomberg Global Aggregate Index was down 2.07%.
The latest batch of U.S. economic data exhibited strong evidence that inflation remains hot. Markets priced in only one rate cut in 2024 from the Fed, with expectations that a much tougher stance on inflation will be taken.
Currencies & Commodities
The Australian dollar (USD) weakened against the U.S. dollar (USD) in April, marking its third monthly decline in four months. Initially, the AUD saw gains due to soft U.S. economic data and dovish remarks from Fed Chair Jerome Powell. However, it slid as US CPI inflation and geopolitical tensions rose.
Despite weakness against the USD, the AUD strengthened against the G10 currency basket and closed 1.1% higher in trade-weighted terms to 62.2. The laggard of the month was the JPY, which depreciated against the AUD by 3.6%.
Year-on-year, the AUD remains behind the GBP and USD by -1.5% and -1.9%, respectively, while ahead of the JPY and EUR by 13.3% and 1.2%, respectively.
Economic key points
- Australian annual inflation was 3.6% in the March quarter.
- Major central banks left rates on hold, continuing with the wait-and-see approach to inflation.
Australia
Annual inflation was 3.6% for the March quarter, down from 4.1% in the December quarter but above market expectations of 3.4%, stoking the possibility of further interest rate increases.
Most concerning for the RBA was the strength in the trimmed mean inflation rate, which was higher than both market expectations and the December quarter figure, with inflation particularly sticky across the services and housing sectors.
Retail sales figures for March were weaker than expected. They declined 0.4% from February's levels and gained only 0.8% compared to March 2023, which represents a decline in sales volume once adjusted for inflation over that period.
These retail sales figures and other recent indications of a weakening domestic economy have complicated the RBA's deliberations. The financial markets now anticipate that the local cash rate could finish the year higher than the current 4.35%.
The unemployment rate rose to 3.8% in March, below the anticipated 3.9% The Westpac-Melbourne Institute Index of Consumer Sentiment fell to 82.4 in April as persistent inflation and high interest rates weighed on Australian households.
The composite PMI decreased to 53 in April, indicating a slightly lower pace of growth than previous months. The NAB business confidence index rose to 1 in March, and while this is below the long-run average, sentiment has improved in retail, construction, and transport.
The trade surplus fell to $5.0 billion in March, well below the market forecast of $7.3 billion.
US
The U.S. Federal Reserve kept interest rates on hold, as widely expected. Annual inflation growth was 3.6% in March, above the expected 3.4%, largely due to energy and transport costs. Chairman Jerome Powell noted that policymakers may take longer than expected to become comfortable that inflation was on track towards the Fed's 2% target.
Larger than expected increases in labour costs also added to concerns about persistent inflation. The U.S.Labor Department's employment cost index rose 1.2% in the first quarter of 2024, an acceleration from the +0.9% rate in the three months to December.
Private sector wages also accelerated to +1.1% in the March quarter. The economy added 175,000 jobs in April, well short of the anticipated 243,000, underscoring a significant job market slowdown. The unemployment rate rose to 3.9%, against an expected 3.8%.
Retail sales rose 0.7% in March, well above the anticipated 0.3% gain, suggesting consumer spending remains robust. Annual retail sales grew 4.0% for the year to March, ahead of the expected 2.5% increase.
Consumer sentiment dropped to 77.2 in April from 79.4 in March, reflecting concerns about the economy's future pending the outcome of the upcoming presidential election.
Composite PMI eased to 51.3 in April, just below the anticipated 52.2, and despite this fall, it represents an uptick in factory activity.
The trade deficit was US$ 69.4 billion in March, above the anticipated US$ 69.1 billion.
Eurozone
Headline CPI inflation remained at +2.4% for the 12 months to April, while Core inflation decelerated slightly to +2.7%. Both rates were higher than anticipated.
GDP growth in the region for the March quarter was also better than expected at +0.3%, helped by Germany's return to growth.
The European Central Bank (ECB) maintained its interest rates at 4.5% during its April meeting and despite the previously mentioned sticky inflation, recent comments from policymakers still suggest that a rate cut is likely in June.
The unemployment rate remained at a record low of 6.5% in March, which was in line with market forecasts.
Retail sales jumped 0.8% in March, reversing the 0.3% fall in February and ahead of the anticipated 0.6%.
Annual retail sales grew 0.7%, well above the anticipated -0.3%, and consumer confidence rose to -14.7 % in April. While encouraging, this figure remains well below the long-term average.
The Composite PMI rose to 51.7 in April, driven by the uptick in services activity.
UK
U.K.Inflation rose by 0.6% in April, with the annual rate falling to 3.2%, both driven by a slowdownin increases in food prices.
Consumer confidence rose to -19 in April,improving for the first time in three months and coming in above market expectations of -20. The index has been between -24 and -19 for the last six months, indicating slow progress as economic uncertainties weigh heavily on households.
Retail sales were flat in March, compared to the expected 0.3% increase, while annual sales increased 0.8%, just above the anticipated 0.7%. Conditions remain delicate, as price rises have been blamed for many retailers' difficult start to the year. The expected uptick in spending from lower inflation and January's cut to National Insurance has yet to materialise. Composite PMI rose to 54.1 in April,driven by the robust and accelerated upturn in services activity.
China
Inflation in China dropped 1% month on month in March, compared to the market estimate of -0.5%. Annual inflation rose 0.1% for the year to March, below the expected 0.4% rise, as the effects of Lunar New Year spending waned. China's unemployment rate dropped marginally to 5.2% in March, per market expectations.
The composite PMI edged up to 52.8 in April, as the manufacturing sector grew the most in 14 months, and services activity included its long run of expansion.
Business sentiment remained unchanged from MJanuary'sual retail sales grew 3.1% in March,well short of the expected 4.5%. Consumer confidence remained subdued at 89.1 in February, well below the long-term average of 109.85.
Japan
The Bank of Japan (BOJ) maintained the cash rate at the 0% to 0.1% range at its April meeting, having raised it for the first time in 16 years in March. The Yen fell to near record lows following the March deChina'sand remains weak, puttingadditional cost pressureson both businesses and households. Retail sales declined 1.2% in March, missing market expectations for 0.6% growth. Annual sales grew 1.2%, slowing from 4.7% in February and well below the anticipated 2.5%. Composite PMI rose to 52.3 in April with services activity expanding and factory activitystabilizing following declines in the last ten months.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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