Global financial markets finished lower (-3.4%) in April, breaking a five-month winning streak that started in November and ended in March. Consecutive readings of higher-than-expected inflation in the United States, as well as elevated geopolitical conflict, curbed investor enthusiasm during the month.
Inflation in the United States has been 0.10-0.20% higher than expected for the past four months, most recently printing at 3.80% year-on-year in March (excluding volatile items such as food and energy), relative to consensus forecasts of 3.70%. At the time of writing, the market anticipates the first 0.25% rate cut by the US Federal Reserve (Fed) will occur in November, out from June not that long ago, implying interest rates will need to stay higher for longer while inflation remains above the Fed’s inflation target of 2.00%.
This view was reinforced following the Fed’s two-day meeting ending on 1 May, where it kept interest rates steady at 5.25-5.50% and acknowledged the recent setback in its inflation fight. Chair Jerome Powell said the Fed was more likely to keep interest rates at their current level for longer however, rather than to raise them again.
Inflation in Australia also came in higher than expected for the March quarter, printing at 1.00% quarter-on-quarter compared to consensus forecasts of 0.80%. Over the 12 months ending March, inflation rose by 3.60%, above the Reserve Bank of Australia’s (RBA) inflation target of 2.00-3.00%. Similar to the United States, this resulted in expectations for interest rate cuts being priced out of the market, with the RBA now expected to hold interest rates steady at 4.35% for the next 12 months.
Geopolitical tensions also rose between Israel and Iran during April, although the price of oil experienced a decline (-1.5%) despite this conflict. This escalation led to an increase in investor risk aversion, resulting in a rise in the value of gold (+2.9%) and the CBOE Volatility Index (VIX), an indicator of market volatility (+20.3%).
Interestingly, and in contrast to what happened elsewhere in global financial markets during April, Chinese stock markets rose (+3.1%) following signs of economic stabilisation. The economy grew at 5.30% year-on-year in the March quarter, comfortably above expectations of 4.60% and further improving on the 5.20% recorded in the December quarter. Additionally, manufacturing activity, as measured by the Purchasing Managers Index (PMI) survey, has shown a positive trend, entering expansion territory in recent months. These favourable economic indicators led to a rise in the price of iron ore (+8.7%).
Despite the challenges, we remain cautiously optimistic for the year ahead, considering the progress achieved. While inflation remains above central bank targets, it has fallen considerably and continues to trend lower. Thus, we believe 2024 presents a favourable market environment as the path towards lower interest rates comes into view.