Key Events in April 2023
Off and racing
April brings the full suite of economic data to assess how the global economy did in the first quarter. ‘Resilient’ is an apt description of the current situation but we anticipate a fading in the economic momentum in the coming quarters for most economies, given the lagged impact of policy tightening and the mixed picture presented by some key economic data.
The closely watched composite Purchasing Managers’ Indices (PMI) continued to rise in April across most developed markets. The improvement in this key business survey was driven by a pick-up in expectations surrounding the services side of the economy as the manufacturing sector weakens as pressure on the global goods cycle remains. This supports a view that many developed markets are still being supported by consumer spending for services over goods, and the overhang of elevated household savings from the pandemic.
The better economic picture has been a headwind to bonds but somewhat supportive of equities. The European markets continue to do well given the upgraded growth outlook. Meanwhile, the rally in the U.S. equity market has been relatively narrow driven by technology names and AI-related companies where earnings beats have been strong. This contrasts the still lingering concerns in the U.S. regional banks and the flow-on effect into the commercial real estate market. We expected credit conditions and lending standards to continue to tighten but the economic impact may be a slow burn.
The slow pace of decline in core rates of inflation outside the U.S., and notably Australia, the UK and the Eurozone, means that central banks are likely to keep tightening rates in the second quarter. Central banks may become less hawkish, but unlikely to be outright dovish anytime soon.
China’s economy is a bright spot, However, Chinese equities were rattled by a view that too much growth would stub out the need for further government policy support. The economy expanded by 4.5% year-over-year (y/y) in the first quarter and the March economic data was stronger than expected. However, the consumer-led recovery will fade and necessitate further official support to reinvigorate the private sector and stability in the housing market.
Economy:
- The Reserve Bank of Australia (RBA) paused on rate hikes in April and is likely to remain on hold in May. The downshift in inflation in combination with concerns on global growth and the lagged impact of tightening on the housing market may be enough for a ‘wait and see’ RBA. However, it’s too soon to call an end to the hiking cycle.
(GTM AUS page 55) - The review of the RBA was released with 51 recommendations that were agreed to in principle by the RBA. The heart of the recommendations goes towards improved communication and governance through a broader spread of powers away from the Governor. However, the interpretation of some recommendations remains open and will not be implemented until mid-2024.
- There were few surprises in the March quarter inflation figures for Australia. The headline rate fell to 7.0% from 7.8%y/y and the core rate of inflation came down to 6.6%. While goods inflation has rolled over, services inflation is still strong and suggests a gradual path back towards the RBA’s target band by 2024.
(GTM AUS page 7) - March’s labour market data was stronger than expected as the unemployment rate remained at 3.5% and another 53,000 jobs were added. Further job gains may be harder to come by as forward labour market indicators (job ads and business surveys) have started to soften.
(GTM AUS page 8)
Equities:
- The ASX 200 performance improved in April (+1.8%) after the weak performance of the prior two months. This takes the year-to-date (YTD) return to 5.4%. Small caps did better with a 2.8% gain on the month.
- European equity leadership continued and the MSCI Europe index gained 2.6% on the month (11.6% YTD). Even with the rally in U.S. technology stocks, the U.S S&P 500 lagged at 1.6% for the month (9.2% YTD). EM equities underperformed developed peers as the broad EM index fell 0.7%, while weakness across Asia and notably China meant the Asian ex-Japan index was down by more than twice as much (-1.6%).
(GTM AUS page 35) - Nearly every sector in the ASX 200 was in the green for the month. At the top end were technology (4.8%) and industrials (4.4%), with healthcare (3.6%), telecoms (3.6%) and financials (3.3%) not far behind. Lagging by some margin was materials (-3.1%) which was the only sector in the red, as resource names weighed on the sector.
- The U.S. earnings season for the first quarter is just past the halfway point, with 53% of the S&P 500 by market capitalization having reported. Blended earnings are tracking 4.2% y/y for the first quarter with 72% of companies beating on earnings and 65% on revenues. Earnings surprise is running at an elevated level, driven by the very low expectations heading into quarterly reporting rather than exceptionally good earnings.
- Equity valuations have moved higher in 2023 but with some regional variation. The U.S. S&P 500 traded at a price-to-earnings multiple of 18.2x, well above average, and the MSCI World index is now at 16.4x. The Australian market is trading in line with the long-run average at 14.8x. Meanwhile, European equities still look relatively cheap at 12.9x.
(GTM AUS page 36)
Fixed income:
- The Australian 10-year government bond yield was relatively unchanged, only moving up 4bps on the month to 3.34%. It was a similar small move for the U.S. 10-year Treasury, however, the yield fell 5bps to 3.45%.
(GTM AUS page 51) - Higher quality fixed income performed well in April as spreads remain tight despite concerns on the economic outlook. Global investment grade bonds gained 1.2%, while global high-yield debt was up 0.6%. Risks around the credit outlook are rising given the expected tightening in U.S. lending conditions and risks of a credit event.
(GTM AUS page 49)
Other assets:
- OPEC+ oil producers announced a further cut to production in April, however, this only temporarily supported oil prices. The broader concerns on global growth and weaker demand kept a lid on oil prices. Brent crude ended the month at US$78 per barrel, just under where it was at the end of March.
(GTM AUS page 63) - The price of gold rose by another US$3 to US$1,982/oz and above the highs in 2020. The precious metal is being supported by both the risk diversification of investors and perhaps central banks that are diversifying currency holdings away from the U.S. dollar.
(GTM AUS page 66) - The U.S. dollar index fell 0.8% in April and is well off of recent peaks. The AUD index was also down 0.8% but fell by a larger 1.3% against the greenback. The best-performing currencies against the U.S. dollar were the Euro (1.6%) and Swiss Franc (2.6%).
(GTM AUS page 68)
