Global markets – week in review
Global stocks continued to rally last week – leaving April’s mini-pullback well behind – on the back of a lower-than-expected US CPI and the prospect of eventual US rate cuts.
As alluded to above, the two key global highlights last week were the US CPI and the Fed meeting. The good news was that the US CPI was better than expected, with core prices up only 0.2% (market expectation 0.3%). Also surprising on the downside were producer prices later in the week. Both of these results bode well for benign PCE inflation (the Fed’s preferred inflation measure) later this month.
All up, there is encouraging news to suggest the upside US inflation surprises earlier this year are now behind us, which hopefully also could be reflective of local inflation trends.
More mixed news came from the Fed meeting, with the dot plot of expected future policy changes suggesting only one rate cut this year – down from an expected three rate cuts previously. Markets (and myself) were hoping for the Fed to still pencil in two rate cuts this year, but the disappointment was partly offset by the Fed now anticipating four rate cuts in 2025 instead of only three.
What’s more, the Fed released fairly conservative inflation forecasts which did not seem to factor in recent good inflation news (annual core PCE inflation, for example, is expected to end this year at the current annual rate of 2.8%) – so there appears ample room for downward inflation revisions later this year and potentially more than one US rate cut.
The week ahead
There’s more second tier global data this week, with the highlight likely being US May retail sales on Tuesday (US time). US retail spending has slowed in recent months and more evidence of this on Tuesday would likely be warmly greeted by the market – consistent with the ‘soft landing’ scenario.
Chinese industrial production and retail spending is released today, which are both likely to show an ongoing subdued economic rebound.
In New Zealand, the Q1 GDP report on Thursday (NZ time) is likely to show the economy continues to splutter along with near-zero to negative economic growth – just as the RBNZ wants to see, given still high inflation.
Global equity trends
Looking at global equity trends, the equity rebound and ongoing AI infatuation is now clearly favouring growth and quality over value, and as a result exposures such as the Nasdaq 100 and the Betashares (ASX:BBUS) global quality ETFs (QLTY and HQLT).
Japan is enduring a relative performance correction after earlier strong gains while Australia and global small caps continue to underperform. European stocks also slumped last week following France’s decision to hold a snap election in the face of far right political gains in EU voting. Emerging market relative performance is meandering in a sideways range.
Australian markets
The S&P/ASX 200 dropped back 1.7% last week, with ongoing local concern over the growth and earnings outlook given sticky inflation and the RBA’s lingering mild tightening bias. What’s missing is some encouraging news on inflation as seen in the US of late.
The highlight last week was a further solid labour market report, with employment up almost 40k and the unemployment rate edging back down to 4.0% from 4.1%. Judging by the underlying trend in the unemployment rate, labour market tightness is easing, but it remains glacially slow.
In other news, the NAB indices of business conditions and confidence continued to ease – with both now modestly below long-run average levels. Despite pockets of economic strength in tourism and non-residential construction, the ongoing weakness in consumer spending (and to a degree residential construction) appears to be gradually wearing down business sentiment.
Turning to the week ahead, the highlight will be Tuesday’s RBA meeting. While no change in rates is expected, interest will focus on the extent to which the Bank continues to harbour a mild tightening bias. Given recent firm inflation reports, it seems likely that the Bank will keep a rate hike – along with no move – as the two policy options before the Board, and Governor Bullock will stick to the line of ruling “nothing in or out”.
Local markets are likely to remain sluggish – at least in a relative sense – until such time as the inflation news turns for the better.
Have a great week!