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A positive session to end a tough month for markets with the ASX dipping 2.95% during April, offsetting much of the strong move in March. That said, the ASX 200 remains only 3% below its all-time high despite some significant changes from a macro perspective during the month as inflation remains ‘stickier’. At Market Matters, we’ve remained bullish equities and we continue to believe that’s the right medium-term approach, albeit in a three-step forward, two-back sort of trend.
Investors are rapidly losing confidence that some major central banks will cut interest rates in 2024, while the local futures markets are becoming increasingly confident that the RBA will actually hike before Christmas. At MM, we believe the rate cuts will come, but investors may need to be patient as it wasn’t that long ago that central banks read the inflation picture incorrectly, which led to the aggressive rate hiking cycle through 2021/2 in an attempt to put the “inflation genie back in the lamp” a goal that hasn’t yet been fully achieved. The point is they don’t want to get it wrong again and cut too early only to have to hike soon after as strong economic activity reignites inflation.
A very strong bounce-back from the ASX today, particularly in the rate-sensitive sectors that were hit hard last week on changing interest rate expectations; Real-Estate and IT in particular having a day in the sun, although more than 90% of the market closed higher, recouping nearly half of Fridays aggressive sell-off.
Excuse today’s title; blame Shawn as we contemplated Michelle Bullock’s first move with interest rates since becoming the Governor of the RBA in September. The new head of the RBA has remained cautious towards both inflation and interest rates through 2023/4, and we see no reason for this to change. The RBA got it totally wrong on Philip Lowe’s watch, believing inflation was only temporary after COVID, a view which resulted in the dramatic rate hikes witnessed through 2022 and 2023. Bullock should and is adopting a cautionary stance until, hopefully, she is confident that inflation will return to its 2-3% target band.
The ASX200 experienced a news-packed, volatile week, closing down 107 points on Friday. It might surprise some subscribers to know that the ASX200 ended the week slightly higher; it certainly didn’t feel like it on Friday. Wednesday’s strong CPI print cast a long cloud over the rate-sensitive stocks/sectors. Australian credit markets are now factoring in the very real risks of a rate hike in 2024 after looking for two cuts only two months ago.
The local market dropped ~100 points on the open, failing to see any reprieve following two weaker sessions out in the US since our close on Wednesday. After dropping back below 7600 the index traded in a reasonably tight 30-point range for the rest of the session, failing to join in on the rally across the region and what’s showing on the US Futures ahead of their Friday session. BHP managed to take 31pts off the market alone today, weakness coming after they lobbed an all scrip bid for Anglo American (AAL LN). Despite the soggy end to the week, the ASX200 finished marginally higher, +8pts / +0.11%.
The ASX consumer discretionary (retail) stocks have demonstrated their need for a strong bond market. In the short term, we remain concerned they’ve disconnected slightly from the influential credit markets. Futures markets are starting to price in the risk of rate hikes in 2024, with some well-respected economists becoming increasingly hawkish. Judo Bank’s Warren Hogan is calling for three hikes to 5.1%; previously, he was looking for cuts in 2025, but the recent hot inflation data has seen him reverse this outlook. We feel the call for rates to hit 5.1% in 2024 is too aggressive, but we cannot see Michele Bullock considering rate cuts until the inflation genie is firmly back in the bottle.
Equities followed the US market higher this morning, also adding a little premium thanks to a handful of positive quarterly reports that were announced after the North American markets closed. That all took a back seat as inflation data printed late morning, CPI coming in hotter than expected which sent the market into a spin, falling ~0.6% at the time before finding some relief. In the end, the index closed little changed, a good result given the circumstances though largely thanks to support from the Big 4 banks.
Bond markets have struggled over recent weeks as inflation appeared increasingly “sticky,” but it hardly registers on the chart compared to their weakness through 2021/2 and mid-2023. We believe the local credit markets have come back to realistic levels as the RBA awaits further economic data to deliver clarity on the underlying strength and direction of the local economy. Traders have gone from being far too optimistic on rate cuts into Christmas to becoming almost pessimistic; the US futures markets have gone from pricing in three cuts to 1.77 cuts, or one definitely, and probably two.
Investors continued the 180-degree about-face from last week’s sentiment, happy to take on risk for the second consecutive day to start this week seeing the ASX200 through a 200pt gain from Friday’s panic lows early in today’s session. Tech was the standout as US 2yr yields retreated (marginally) from the spike above 5% last week while Healthcare and Financials also joined in the rebound. Energy and Gold were the main areas finding it tough again today, for the same geopolitical reasons as Monday’s session.
