Creeping central bank divergence
Here is a look at the macro factors that drove markets in May.
May was a good month for returns as investor optimism about the global economy supported equities, while the expectation for rate cuts from central banks led to falling bond yields. The MSCI World rose 4.0%, while the emerging market benchmark gained 0.5%. Global bonds also generated positive performance and the Bloomberg Barclays Global Agg rose by 1.3%.
However, there is increasing divergence between central banks on the timing of rate cuts and core rates of inflation are looking increasingly sticky.
The Australian Government 2024/25 Budget added to inflation concerns given the front loading of spending and the cost-of-living support for households. This comes at a time when household incomes will get a boost from income tax changes at mid-year. However, the inflationary consequences are still uncertain as it’s not known whether additional income will be spent, saved or used to pay down debt.
Meanwhile, inflation in the eurozone rose in May complicating the path for policy easing by the European Central Bank (ECB). Economic data for the region came in better than expected, as business surveys pointed towards a pick-up in economic momentum and growth expectations were revised higher.
A policy put is in play in China as further actions were taken to steady the economy, and particularly the housing market, as economic data has been slow to improve. However, tariff announcements by the U.S. against a limited number of Chinese imports did take some shine off the market rally. The CSI 300 fell 0.5% over the month.
Turning to the U.S., the return of the soft-landing narrative was in full effect as Federal Reserve Chair Powell struck a dovish tone at the May meeting. Economic data surprised the downside as concerns around the health of the consumer rose. However, several Fed committee members have become more vocal on the need to cut interest rates this year until there is more clarity that inflation has been beaten. Market expectations shifted to pricing just one rate cut in December.
Economic data released in May tempered many of the concerns around an overheating U.S. economy and showed further signs of a rebalancing in economic momentum. The next move for policy rates across major developed market central banks is likely to be lower, even as there is greater divergence in the pace of easing. These factors are supportive for risk assets, and for investors to hunt further afield for better returns and regionally diversified exposures.
For more see the full write-up on the website.
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Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.
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Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.
Expertise
Kerry Craig, Executive Director, is a Global Market Strategist. Based in Melbourne, Kerry is responsible for communicating the latest market and economic views from our Global Market Insights Strategy Team.
Expertise
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